Sleeping with the enemy – should central banks adopt bitcoin?

Hands up anyone who hasn’t heard of Bitcoin. No takers of course. So far it has been a qualified failure. Its most faithful users are the wrong kind of people who use if for money laundering and criminal activities. Yet bitcoin has many good uses and there are even legitimate companies that are starting to use it.

But there is a use for bitcoin which no-one ever predicted. That is the use of its underlying technology, blockchain. Blockchain is really a distributed ledger which allows you to keep track of every individual financial transaction, no matter who uses it, no matter where or for what purpose.

Blockchain was originally developed for controlling transactions using bitcoins. But now it’s becoming clear that it can be used for a wide variety of tasks that were never predicted.  One of them is the Internet of Things (IoT).  Another more obvious application is in supply chains. So blockchain is now starting to be used in activities far from the original purposes of digital currency accounting.

But what about bitcoin itself? The jury is still out. We don’t know what will happen. The idea of a digital currency has huge appeal. But there are multiple major problems:

• Governments don’t like it because it interferes with their control over the economy
• Criminals love it for all the many obvious reasons and some that are not so obvious
• Great for tax dodgers, especially now that the Panama Papers have put a crimp in things
• Legitimate companies love it too; makes a great counter if the feds totally ban tax inversions
• And so on

For all of these reasons we don’t know if bitcoin will survive or not. But there may yet be important accidental uses of bitcoin which any government would want to encourage. Let’s look at one in particular.

One of the many innovations in bitcoin is that it requires that users who want to generate bitcoins need to “mine” them, that is spend a lot of effort to “dig” them out of the digital Earth.

In bitcoin the mining part consists of running special mathematical routines that are very difficult and time consuming on powerful computers. As this activity proceeds, it generates bitcoins in proportion to the successful computations conducted. Mining bitcoins in this way means it is difficult to create bitcoins. That means you can’t make too many of them so that the level of bitcoins can never get too large. If you’re a bean-counter or a government regulator, that’s big.

In principle, mining bitcoins can comprise any activity that is difficult and computationally intensive. So it would be conceivable for example to require that instead of minting bitcoins by “mining”, you could generate them by some other difficult activity, for example climbing mountains. It would be possible to establish that activity as the basic activity of mining so that, for example, after climbing one particular mountain of a prescribed height and difficulty, you could generate another quantum of bitcoins.

What if, instead of climbing a mountain, you could generate bitcoins by losing weight? Let’s say you had a way of proving that the weight was actually lost by some check that could not be faked, and that this was then attached to a computer activity that itself was computationally intensive that resulted in the creation of bitcoins?

In principle you could make this activity anything at all that was difficult and could be tied to difficult and lengthy computations. Losing weight could be one. Quitting smoking could be another. Another could be doing enough work to get you out of prison if you were a prisoner who had the option to work instead. Or it could be serving probation following a prison sentence. Or it could be doing enough work for the community to pay back debts. You get the general idea.

So the mining activity in fact could be anything that was socially beneficial and possibly profitable that was linked to the computations that would generate bitcoins. Instead of calling them bitcoins we could call them goodcoins, for example. It’s got a do-gooder ring to it that might even capture some philanthropists with nothing better to do with their loot than to use it to make even more (in goodcoins of course).

Let’s say that someone started up a company to mint goodcoins. It would be possible for the government to decide to accept goodcoins instead of normal money. Maybe you could pay taxes with goodcoins. Or pay off debts. Or you could use them to meet certain targets like reducing pollution or reducing CO2 in the air.

If you can get the feds involved, that's another huge ballgame.

And now, since the government mandated that these goodcoins could be used legally, the goodcoins wouldn’t be seen as being dangerous or disruptive, they would be seen as safe, beneficial and socially advantageous instead (well, relatively so).

At the moment no-one has used the bitcoin mechanism to create goodcoins and to do socially good deeds. But I predict that it is one of the accidental byproducts of bitcoin that will emerge sooner or later.

As I have mentioned, there are many governments which disapprove of bitcoins because of their potential to be used for criminal purposes, as well as to reduce their ability to manage the economy.

But what if a government decided that it would allow bitcoins as long as they were mined only by the government itself? Then you could have a new subsidiary currency. In the US these would be called noodollars, or neuros in the EU. What if bitcoins became the basis for a new gaggle of fiat currencies?

If a government did that it would have new ways to create money and to manage the economy. It would have new powers that could be financially and socially beneficial.

Once you start to do all of these things entrepreneurs and companies are going to start up a new type of bank using digital currencies; these would use goodcoins and noodollars inter alia. These new banks would start up new types of banking services. In turn this would create demand for yet even more new types of goods and services.

In effect these accidental banks would be startups in a new digital economy. It would be like a new kind of digital Silicon Valley distributed globally.

This would in effect give rise to new approaches to macroeconomic management and to the achievement of global financial stability. So why not use existing institutions like the IMF, BIS, World Bank and the whole panoply of central banks and so on to take up the cause? Give them something useful to do, like getting the world out of its current financial rut. How about fixing deflation and negative interest rates for starters?

At first, bitcoin looked like it could be a problem. But, used in the right way, bitcoin is also an accident waiting to happen. Not just one but numerous accidents. Many of these will go nowhere. Some of them might even be dangerous and have to be prevented or forestalled.

But some of these accidents would also be good, even great, and even world-shattering. They could well include other types of goodcoins and digital currencies. I haven’t even thought of the other huge number of possibilities, and nor has anyone else right now to the best of my knowledge.

There’s an emerging argument that the central banks and national monetary authorities have become obsolete with no real new ideas and that need they need to be broken up like any other monopoly. Just like any old industry they need to be disrupted. Are goodcoins and noodollars going to do the job for us? Will the central banks be part of the solution or part of the problem?

What’s sauce for the goose is sauce for the gander. The regulatory and monetary authorities everywhere want private sector financial organizations not to be too big to fail. So shouldn’t we be applying the same approach to the central banks and other international monetary bodies too? Wouldn’t that inspire the same sorts of disruptive thinking that private sector organizations have to deal with every day?

Sounds to me like you could do worse than adopt goodcoins and noodollars to get the ball rolling.