You probably stopped paying attention to Bitcoin (if you ever paid attention to it) several weeks ago, after the soaring price of the virtual currency fell back to Earth and we all moved on to talking about Gwyneth Paltrow’s diet.
But if you tuned out back then, you’ve missed a bunch of dramatic turns in Bitcoin-land. Basically, after a brief period in which right-thinking people (including me) speculated that it could one day be a viable substitute for government-issued fiat money, the entire Bitcoin economy is collapsing in spectacular fashion.
This week has been especially bad for Bitcoiners. Yesterday, payment processor Dwolla (which was used to shuttle money back and forth to Mt. Gox, the world’s largest Bitcoin exchange) had its assets seized by the Department of Homeland Security because of some improperly filed forms by its owner. Mt. Gox itself has been warring in court with a rival exchange, and today the site went down, presumably in relation to the DHS probe. It looks increasingly likely that Mark Karpeles, the CEO of Mt. Gox, ran afoul of some laws governing currency exchanges and will be prosecuted. And on the heels of the Instawallet hack, more instability and chaos is not what the Bitcoin world needs right now.
It’s not surprising that a currency with anarchist roots would run afoul of the feds. (Indeed, most Bitcoin diehards have been predicting a government crackdown for months.) But it does cripple Bitcoin’s near-term ambitions. Now, if you’re considering buying a Bitcoin, you’re not only betting that the currency itself will stay relatively stable, you’re betting that the infrastructure around the currency — the Bitcoin “wallet” sites, payment processors, and exchanges used to buy and sell Bitcoins — will remain legal and open and that your assets won’t be seized as part of a government investigation. It’s a bet few people who aren’t committed hackers will be willing to make.
Some Bitcoiners want to fight back against the government’s microscope. Jerry Brito, one Bitcoin proponent, told the Washington Post he thinks that Bitcoin enthusiasts should “start lobbying,” which would be an interesting pivot for a decentralized, leader-less movement that started as a rebellion against the monetary establishment. Other Bitcoiners are opposed to getting involved in the messy business of legislative affairs and think the best way to deal with government impingement is simply to move big exchanges and services overseas to lightly regulated countries where they can’t be as easily cracked down on.
The Post calls what’s happening to Bitcoin a “war,” but it’s rather one-sided at the moment. There are no Bitcoin trade groups, no high-profile backers who are willing to stand up for the currency in court, and no lawmakers on Bitcoin’s side. Regulators have now committed to treating Bitcoin like any other medium of financial exchange, and with no central authority, the Bitcoin community can’t really fight back in any organized manner.
As I’ve been saying for weeks, there is a paradox at the heart of the Bitcoin movement. For many early adopters, the appeal of Bitcoin was its illegitimacy — the anonymous, untraceable nature of transactions, the lack of a central planning authority. And yet, Bitcoin is attempting to legitimize itself as a mainstream alternative to fiat currency. And in order to do that, it needs a solid, dependable infrastructure that isn’t in constant danger of being broken up by a government, which means that it needs to engage with the very system it seeks to subvert. For Bitcoin to succeed, it needs to give up the values that created it.
If Bitcoin enthusiasts are smart, they’ll scale back their immediate ambitions for a global crypto-currency and focus on a few of the more benign ways in which Bitcoin can be used in conjunction with more conventional modes of payment — becoming a payment option with PayPal, for example. Then, when the Bitcoin infrastructure has been made sufficiently dependable and regulators have had time to get used to the idea of Bitcoin and decide how to regulate it, it can try to enter its world-domination phase.
Of course, it may be too late for that. The massive price swings last month have already turned currency investors and the mainstream masses off Bitcoin. The flood of legal challenges and technical problems have caused even some Bitcoin diehards to question the movement’s future. And if Mt. Gox is shut down altogether, I think it’s likely the end for Bitcoin, at least as an alternative currency with any chance of breaking into the mainstream.
That would be a shame — Bitcoin is an amazing technological achievement, and it could be genuinely useful in the right applications. But the infrastructure is a mess, technically and legally, in ways that may keep it from truly taking off. From the disasters we’ve seen this week, it’s clear that the currency of the future isn’t yet ready for the limelight.