Copyright John T. Reed 2015

The 1/24/15 Wall Street Journal had a long feature article on Bitcoin. I think it was irresponsible of them to run it. It’s in the review section. It is “adapted from” the brand new book The Age of Cryptocurrency.

Essentially, it is a self book review.

To their credit, they finish the first paragraph with Warren Buffet’s advice on bitcoin: “Stay away.”

I do not care for bitcoin generally, but I think Buffett’s “Stay away” advice goes too far.

The basic rule of business is “Find a need and fill it.”

So what need might a digital currency fill?

Transferring money electronically costs too much and takes too long

An international SWIFT wire costs about $45 in my experience. Those transfer money across international borders. Also, they are not very swift—taking days in many cases. There is a need for a faster and/or cheaper way.

Credit card payments are also electronic. How long does it take for money to go from the buyer’s bank account to the seller’s? Two to three days says this Journal article. And the merchant card processor takes 2% to 3% off the top. That’s also too slow and too expensive.

Debit card payments are not too slow. But they typically charge a fee to the user—$3 is currently common when you get cash from a bank where you do not have an account albeit reimbursed by many banks. Some gas companies give a discount for using a debit card or sell gas cheap and will not take credit cards—only cash or debit card.

If you are transferring money to a trusted person to whom you often transfer money, like a relative or regular supplier, you could just have a joint bank account for that purpose. The only money ever in it would be the payment in question. You put the money in and tell them. They take it out, even in another country, presumably free of additional charge.

So what we’re looking for is a debit card that costs little or nothing to use.

Is bitcoin that? Why not just find the cheapest debit card? For example, those of Charles Schwab bank and State Farm bank do not charge a percentage fee when foreign currency is converted—like withdrawing foreign cash from an ATM in a foreign country.

Anonymous payments

Another need is for anonymous payments other than face-to-face. You can use regular cash like U.S. dollars for anonymous face-to-face or face-to-machine transactions. Those could be improved and enabled to handle larger amounts. Typically there is no listed charge although someone has to pay for the machine that accepts cash so it’s presumably in the overall price of the good or service like a parking garage or Coke machine.

I am dubious that law-abiding people need anonymous payments. If more than $10,000 were involved, I think it would be illegal because of anti-terrorism and money-laundering laws.

The problems with bitcoin compared to a debit card include:

• possible hacking that no institution is guaranteeing—if your debit card gets hacked, banks typically have to absorb the losses above $50 or some such; with bitcoin, there is no such protection. People wonder why it’s taking so long to make voting electronic after the hanging chads disaster in 2000. Because electronic voting machines can be hacked and there is no ability to do a recount if you do not have paper or cardboard ballots. That’s also a reason why it’s taking so long to create electronic money.

• loss or malfunction of the computer in which the bitcoins reside—bitcoin boosters say bitcoin is digital, no physical presence. Not so. The computer (IP address) in which your bitcoins reside is physical. If it is lost or won’t work, your bitcoins are lost.

• If bitcoins you hold disappear mysteriously from your computer, there is no protection. Ditto if you send or are due to receive them in return for goods or a service and they do not arrive at the distant person for unknown reasons, there is no protection.

I’m just talking about transactions here. Those are momentary. You could switch from U.S. dollars (USD) to bitcoin, do the transaction, then immediately convert back to USD. That minimizes risk of hacking.

But storing savings in bitcoin is a whole other thing and I would say Warren Buffett is right about bitcoin in that context. No way you leave money there. The value fluctuates wildly and places where people have stored it have lost it, like Mount Gox. I was amused to see those who lost money demanding the governnment restore it. The government? I thought you were trying to get away from all that. You succeeded, including getting away from government protections for normal financial transations.

What the advocates of bitcoin brag about is telling.

They say it’s open source. Did I say there was a need for open-source money? No. Is there? Not that I know of. Open source can be a virtue in some things like the Unix operating system, but that comes nowhere near meaning that open source is great for everything. It may be a disaster for money.

They say it’s copyright-free. Who cares other than counterfeiters? No one has a need for copyright-free money.

They brag of military-grade encryption. I see. Like the German Enigma code and the Japanese Purple code? The acronym SNAFU was invented to describe the military.

They incessantly dismiss all the problems of bitcoin as “being resolved.” You have my number, call me after they are all resolved.

They incessantly extol the privacy of bitcoin. Well, you probably have to disclose it if subpoenaed. The whole world know how much each IP has and knows about the date and time and other side of each and every transaction. If they know your IP address, so much for privacy. And isn’t privacy just anonymity which we already have to a large extent with cash.

Another virtue of bitcoin that is incessantly trumpeted is it is decentralized. Like “open source,” that is a virtue is some situations but not others. I wish records of who comes into the U.S. and who leaves were centralized so the movements of terrorists and illegal aliens could be tracked. They should be and probably will be. But centralized planning of an economy is terrible and makes everyone poorer, e.g., Cuba. Decentralization per se is not a virtue.

Bitcoin pushers also cite celebrity endorsements. Marc Andreesen is putting money into bitcoin and are other famous people. Famous people put a whole lot of money into a whole lot of stupid stuff like Obama and Solyndra and Warren Buffett being the biggest owner of S&P bond ratings during the build-up of the subprime crisis. The Internet especially is full of idiotic businesses than attracted hundreds of millions then went bust like Bitcoin is an Internet business.

There seems to be a belief on the part of many—like some state governments—that anything new on the Internet is “the next new thing” and must be accommodated and adopted lest the person or state in question be left behind. So many other things have moved to the Internet, so wouldn’t money do the same? It’ll move to the net, but not in the form of some anonymous wiki operation where no one is in charge, no one is responsible. Like I said, voting has not moved to the Net after many years of talk about it. A key issue is trust and chain of custody—in voting and money.

One category of things that is taking a long time is verifying the identity of the person on the other end of the Internet transaction. I recently got NEXUS and GOES cards. Those let me go through the express line when going into Canada or returning to the U.S.

The GOES card requires a record of my face and finger prints of four fingers on one of my hands. When I return to the U.S., I go to a kiosk which has a glass for my four fingers and tells me to look into a window. Facial recognition software verifies my face and fingerprint software, my fingers. When I go into Canada, they have me look into another glass where I have to align my eyes with two dots. That verifies my retina.

Probably some variation on those technologies will be needed to create more trust for electronic signatures and faster, cheaper money transfers.

Will we get digital solutions to moving money faster and cheaper? Absolutely. Will bitcoin be one of them? Probably not, but if it is, only as a momentary, money-transfer mechanism. Will open source and no one responsible be a part of future digital money? I do not think so. It goes against the very idea of money as far as trust is concerned. Also, when you have a complaint about not getting your money, you need proof that you and the other person or entity did the transaction and that you did not get your money. That requires positive ID of each end of the transaction and a trustworthy record of it. For such things, the chain of custody of Internet transations is scary. Like it goes all over the world and you have no idea who might be getting into it.

John T. Reed