This article is mainly to introduce the emerging economic concept of digital gold; it connects to the Iran sanctions only briefly at the end.
What makes gold a natural form of money? Is it just the fact that the metal is so rare? Can’t be, because your dental records are also rare; no one has a set of bites exactly like yours, but dental records are of no value except to dentists, the police, and plane crash investigators. Is it that gold is so useful? Not really, there are better substitutes for gold in almost any application except in symbolic ways, say, on a Shah's crown. Gold has historically been popular as a form of money because of the combination of its being rare, hard to destroy, impossible to fake, and easy to break into small pieces so that we can carry it on our person, buy variously priced items, and make change. But these days the same properties can be reproduced digitally. Hence digital gold--or bitcoin as it is properly called (BTC).
Like gold, bitcoins are mined. Prospectors with picks and shovels become wealthy if they work hard and strike gold. Similarly you can set your computer‘s math processor working day and night to solve for the right digital signature for a bitcoin. Wrong solutions are worthless, but the right solution passes the “gold” test of every other computer in the bitcoin economy. This coin is rare like gold because the software makes sure that only 21 million coins will ever exist and that only about 6 coins are found every hour worldwide. The bitcoin can be broken up into extremely small piece and with cellphone technology it can certainly be carried around. Add the virtual indestructibility of the data and you get all the attributes that makes gold a popular form of money! Well, all but one: your currency is worthless if no one accepts it.
Turns out that one bitcoin is traded these days for about $26, so someone is accepting them! Internet shops have noticed the gold-like qualities of bitcoins and are starting to accept them as payment. For example, you can go through this bitcoin dealer to order pizza from Domino,s or Pizza Hut—Papa John’s coming soon.
OK, let’s move on to raising some hackles. By now the reader may have noticed another common characteristic between gold and bitcoins. Central banks have nothing to do with creating them. Governments can’t just create bitcoins to finance wars with “Let There Be Money” fiats the way U.S. Dollars are called into existence. And bitcoins are no one’s business except the buyer’s and the seller’s—so called “peer to peer” transaction. There can be no effective sanctions in a bitcoin global economy, and accounts cannot be frozen because any merchant can deal directly with his/her trading partner anywhere in the world without the need to go through banks.
Are bitcoins a way for Iranians to get around sanctions? A few are tyring. Business weeks says: "Iranians working or living abroad can send bitcoins to their families, who can use one of the online currency matchmaking services to find someone willing to exchange bitcoins for euros, rials, or dollars. Bitcoins are useful to Iranians wishing to move their money abroad, either to children studying in Europe or America or simply to stash cash in a safe place."
You can even download a song by Iranian artist Mohammad Rafigh for about 0.04 BTC and risk the wrath of the FBI. Reality is that the bitcoin economy is still mainly in the pizza/video-game/song-download league. By 2140 A.D. however, when all 21 million bitcoins are in circulations and all other currencies have become extinct, one bitcoin can buy the entire Iranian pistachio harvest (I think!). Though by then these sanctions may have been lifted.
Dear Ari: Thanks for this informative piece. I am wondering if the FBI/CIA/MI6 people would not be able to trace the bitcoin senders' IPs in the US, Canada, UK and other European countries.
Fascinating! It won't have a significant impact on the Iranin economy or sanctions, but it's so interesting how value is generated. We're getting closer to a cashless, electronic economy, and alternatives to current official currencies will emrge. Let's make our own. What should we call it?
Good question,JJ. Here is my suggestion: Touman + Digital = Toumital (تومیتال). Why not, eh? :-)
Thanks folks.
Azadeh, yes bitcoin transactions can be traced through IP address. Some money transfers between Iran and US, however, are legal if you can find a bank to perform them. Problem is, banks don't want to risk it in case they misinterpreted the vague sanction laws.
JJ, I believe the correct prononciation of Bayt al-Māl in Islam has alwasys been Bit-al-Māl The world is just catching up with the prophetic wisdom of the True Religion.
No monetary system that relies on digital money is going to remain incorruptible for long. In the 21st century humanity is still very much dependent on physical gold as monetary base and this is not going to change any time soon, bitcoin or no bitcoin. The biggest hoarders of physical gold are the world's central banks which says about all one needs to know about the critical importance of physical gold to human economic existence. Moreover, we know with an infinitely larger degree of certainty that we are past peak gold because gold deposits have been increasingly difficult to find and mine. There is absolutely no certainty that bitcoin supply will not increase out of proportion to economic output. This is simply not true of physical gold. We do not even know who Satoshi Nakamoto is and what his/her/their motivations may be outside of the readily observable. We must entertain the idea among others that bitcoin was hatched by banking cartels to cope with the end game that is currently at play against them and their enablers, the central banks. Bitcoin has certain advantages over fiat money, but does not even come close to being a substitute for one the most enduring brands of nature. Technology rocks, but is not a fundamental game changer in the larger scheme of things.
Interesting take, Eski. In a way mathematics is also an aspect of nature. The mathematical process by which bitcoins are discovered and verified can be likened to finding triangles in a heap of shapes. If you try to sell me a square, I can tell by noting that the angles don't add up to 180. The sum of the angles in a triangle is like the bitcoin's digital signature--except bitocins are a lot more complicated. As for acceptablility, your online credit card purchases are verified by a similar digital signature process. So there's already universal trust in the math.
I guess the key point is that bitcoins are eventually going to be no different than fiat money because of the cited reasons, not the security of transactions made with them. In this context, it doesn't matter whether transactions using bitcoins, Dollars, Euros, or cow pies are secure, because none of these have adequate armor as a monetary base, no matter how unbreakable the encryption technologies that allow trading in them. They are all defective as money, because their supply can be manipulated. Having said all this, I think your intuition is right about gold. There are cyclical reasons why gold should now be entering a declining phase and general deflation is about to intensify until 2017 and perhaps 2022. A rough ride waits directly ahead.