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Can Bitcoin Offer Hope to Skidding Local and National Economies?

by Morgen E. Peck

Hang for a while around a crowd of Bitcoin developers and you’re guaranteed to hear some serious talk about changing the world.

Amir Taaki said it most appropriately in a welcoming speech at last month’s Bitcoin conference in London—an event he organized. “In 100 years, Bitcoin, or a system like it, may form the basis of a globalized monetary web stretched from Washington to Tehran, the world embraced in seamless economic union,” he dreamed aloud.

Bitcoins are electronic currency. They are exchanged through a peer-to-peer open-source software protocol that assigns data as transferable property. The system is independent from national currencies and derives its value entirely from what people in the market are willing to pay for Bitcoin units on a currency exchange.

Once people own Bitcoins, they can send them anonymously to anyone who is running the software. Every feature of the system—the Bitcoin transfer mechanism, the rate at which new currency enters the economy and the validation of payment—is controlled by software operating over a vast network of computers, rather than by the decisions of a central authority.

Big dreams

Many Bitcoin proponents envision a future in which we are all using the same digital cryptocurrency, sidestepping banks and credit cards to directly exchange money with others online, and gradually asphyxiating the financial powers that be. It’s a grand scheme.

But it’s not the only vision. Others who spoke in London voiced a need for smaller, regional currencies that would enable transactions to occur across counties rather than across oceans. And there’s nothing stopping Bitcoin from serving local economies, even as it struggles to grow as a global currency. The same open-source software that spawned Bitcoin can spawn as many clones as the world finds a need for.

Hard times open doors for new ideas

New currencies are in high demand these days, especially in those communities most paralyzed by the financial crisis. Spaniards, who face a 25 percent unemployment rate in their country, have become particularly adventurous. In Barcelona, people have begun to join a local time bank that pays for their services in hours rather than euros. In southern Spain, they are accepting a new virtual currency called Malaga Común.

Other projects have a more political hue. In late 2008, the Bolivarian Alliance for the People of our Americas (ALBA), a trade council formed between countries in Latin America and the Caribbean that includes Venezuela and Ecuador, signed a treaty to establish a new currency called SUCRE to move away from dependence on the U.S. dollar. Last month, the Wall Street Journal reported the countries had used SUCRE to pay for $420 million worth of products so far in 2012.

One of the most successful alternative currency projects began in the United States and now serves a small community in the Berkshires. In 2006, Susan Witt, the education director at the New Economics Institute in Cambridge, Mass., co-founded a currency called Berkshares, which go into circulation any time someone decides to exchange dollars at a local bank. Ninety dollars buys 100 Berkshares. There are now about 140,000 in circulation, according to Witt.

She created the project to provide a new source of credit in the region, with the hope that people issuing loans in Berkshares would be more informed about the businesses they invested in. She sees local currencies as one way for communities to reclaim economic power.

“International concern about the long-term stability of the federal dollar and the euro has drawn attention to the potential of regional currencies to help stabilize regional economies,” Witt explains in a written response to Txchnologist’s questions. “Many people are seeking to understand how regional currencies could supplement or, in some settings, substitute for large-scale currencies. What is the appropriate blend between transnational, nation-state and regional currencies? Who should issue currencies and for what purpose? Local and regional currencies offer a potential answer to these questions.”

Bitcoin could be a powerful tool for communities that want to replicate the success of the Berkshares. The software running Bitcoin tracks the currency by building a chain of transactions. Bitcoin is really just a huge record that takes note every time the money has been sent or received. All that is required to introduce a new Bitcoin clone is to start fresh with the first transaction.

“That is all that is necessary. Start your own independent chain,” says Jeff Garzik, one of the core developers of the Bitcoin software. “We call these alt-coins, short for alternative currencies based on Bitcoin software.” If the code were kept the same, new versions could also benefit from any new features that get plugged into the Bitcoin protocol, developments that are occurring all the time.

There are already some clones out there. Most people who started them seem to be chasing financial gain. Due to the way Bitcoin works and how new coins are issued, the system heavily rewards people who adopt the currency early on. Other projects seek to improve on the system. One clone, called Litecoin, slightly redesigned Bitcoin in an attempt to speed up the time it takes for money to move between accounts.

A few speakers at the conference in London indicated a new interest in the micro rather than the macro. When asked whether she imagined Bitcoin as a world currency or as a tool to create smaller, regional currencies, Birgitta Jonsdottir, a member of the Icelandic parliament said, “I think we need many different types of currencies. I really want to work with downsizing all systems.”

The jury is still out on whether Bitcoin will attract enough users to become a global, Internet currency. In the right hands, it could also change the world by reshaping regional economies.

Top Image: Courtesy Flickr user Adam Crowe.

Morgen E. Peck is a contributor to IEEE Spectrum, Innovation News Daily and Scientific American.

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