The Canadian Mint recently declared that they can do better than BitCoins:
“The system we would bring in would be backed by a fund. Bitcoin may work for the small group of people that believe in its value, but that could change very suddenly.” – Marc Brule, Chief Financial Officer, Royal Canadian Mint
The Canadian Mint’s currency is called MintChips. They will be produced by the Mint, which can control inflation. MintChip transactions are superficially anonymous, but it’s not clear how well they’d stand up to law enforcement.
Instead of a cryptographic algorithm, MintChip security will be based on trusted hardware. Using hardware means that the system is not just decentralized but distributed and can be used with no Internet connection (although that’s becoming less of a problem any day). The hardware will be hackable by someone with sufficient resources. The government is used to policing paper counterfeiting, but it will likely be impossible to trace counterfeit MintChips to their source.
Although MintChips appear to be a competitor to BitCoins, there doesn’t seem to be a compelling reason for a BitCoin early adopter to switch. Instead, MintChips are probably competition for credit card companies, PayPal and iTunes. The transaction fees charged by those companies add friction to the economy, so the Mint is fulfilling its mandate to make the economy more efficient. Plus, instead of those companies getting transaction fees, the Mint will make money selling MintChip hardware.
MintChips won’t have chargebacks, which vendors will like, and they’ll be accessible to more people than credit cards. The mathematics behind BitCoins are too complicated for almost anyone to verify (although complexity doesn’t seem to stop anybody from accepting fractional reserve banking) and there are a number of doomsday scenarios since BitCoins seem too good to be true. With the backing of the Canadian Mint, far more people will trust MintChips.
BitCoins are a secure, decentralized, anonymous, non-inflationary digital currency.
Just like the market for Canadian dollars is built on the group of people who believe that dollars are valid currency, the market for BitCoins is built around a distributed network of computers that “believe” in BitCoins. Each transaction, including minting new coins, requires the network to do heavy algorithmic calculations. The network is immune to attack by any group of malicious processors that is less powerful than the good group. The algorithm stops producing new coins once there are 21 million in circulation, so inflation will stop.
BitCoins themselves have no id, like the serial number on a bill. Instead, the transactions have cryptographic proofs. So you can verify that Alice gave 100 coins to Bob, but then Bob can change his name to Bruce and give 50 coins to Carol. Carol can determine that Bruce has 50 coins but not where they came from. Bruce can’t then give 75 coins to Dave because he can’t prove that he has that many – BitCoins are immune to the double-spending problem.
Like items in massively multiplayer online roleplaying games, BitCoins can be converted to and from real world currencies. BitCoins are of interest for tax evasion, including the tax called inflation collected by fractional reserve banking. At the moment their killer app is buying drugs online, but an untaxable currency holds a lot of potential.
Although they are cryptographically secure, the BitCoin market is probably susceptible to a coordinated political attack like the one that crippled WikiLeaks. Because they’re non-inflationary, there is a concern that people may stop spending them once their value is guaranteed to increase relative to inflationary currency. Because the market is small and unregulated, they may also be susceptible to market manipulation.
The Mint supposedly wants devs to help it build a national e-currency. Unfortunately they’re suggesting it be used for oldbad ideas from the 90s, like paying for news stories with microtransactions:
Here’s the challenge. The prize? $50k in gold bullion (y’know — because e-currency can’t be trusted).
They’re doing it right now as you read this article! Even money in your pocket is being stolen! They’re stealing it with inflation.
The concept that inflation is a tax belongs to the Austrian School of economics, which is the favorite school of cranks and has little-to-no influence on orthodox economics. But I believe the Austrians are not wrong about inflation being a tax. Where they’re wrong is claiming that this is an unreasonable tax.
Money is not a natural thing that the government shouldn’t be meddling with: money is an abstraction created by the government that they allow people to use; inflation can be seen as a fee for that use. Inflation only steals your money, not your wealth (the reason there is no safe place to horde your wealth is that technology decreases the value of every resource over time).
Inflation is harder to evade than other taxes. And unlike many taxes, inflation has side benefits. One of the most interesting benefits is debt relief: by increasing inflation, the relative size of outstanding debts decreases. This review of Margaret Atwood’s Massey Lectures predicts that central banks will increase inflation to transfer wealth from rich people to banks, which is a lot better than the current plan of transferring wealth from the middle class to banks to their rich shareholders.