As Bitcoin gains wider acceptance, monetary officials will face increasing competition both directly from Bitcoin and from the way in which Bitcoin tears down the barriers between the fiats themselves.
Functionally, Bitcoin is very much like cash. But instead of a leather wallet, Bitcoins are stored on hardware like smartphones, laptops, or servers in the cloud.
Unlike fiat money, no central authority controls the supply of Bitcoins. The currency is governed by an open source code which dictates the rules governing the currency. In place of a central ledger to record transfers, the system distributes the process of verifying and recording transactions across the entirety of the user network. The distributed nature of the system means there's no master server to attack, so physically taking down the network would be something like trying to decapitate a starfish.
This decentralized architecture and freedom from third-party intermediaries is what insulates the system from unilateral control; it's also what makes it problematic for governments to regulate it and open to competition. And out of all the inflation-happy governments out there, Argentina may be the first to feel the Bitcoin constraint.
Argentina has a storied history of monetary dysfunction. In 2001, the government froze USD-denominated bank accounts and prohibited the purchase of dollars during what became known as the Corralito. At the time, authorities had been inflating away the value of the peso and had to resort to capital controls in order to stave off a flight to the dollar.
Sadly, history is repeating itself. Although the Kirchner administration likes to deny it, inflation is somewhere in the neighborhood of 25%.
Argentines, well versed in peso-crisis management, have started dumping the currency. Besides fleeing to traditional safe havens like the dollar or gold, they're also turning to Bitcoin ... and with some success.
Mercadolibre, Ebay's affiliate in Latin America, has begun supporting Bitcoin transactions, which is no small thing considering the site has 49 million registered users. And as you can see below, some Argentines are looking to Bitcoin as a longer term solution to a faulty peso.
While Argentines are well on their way to becoming a nation of early adopters (and perhaps disciplining their government in the process) other countries could also be poised to take advantage of Bitcoin.
In China, citizens already have experience with a digital currency called Q Coin.These online credits were issued by the internet company Tencent to customers who traded in points earned via online gaming. The Q Coins were then used to upgrade avatars and could be transferred between user accounts; from there they quickly became a standard for black-market trade in real-world goods.
The Chinese government eventually forced Tencent to disable transfers between user accounts, but it's easy to see how a distributed system like Bitcoin might fulfill the same function without giving authorities any central point of control to attack. And because currency controls make it difficult for Chinese to access the hard currency needed to buy foreign products, there's almost certainly pent-up demand for an alternative with Bitcoin's international reach.
Europeans may be another group ready to start taking Bitcoin seriously. Talk of a Spanish corralito is making Spaniards even warier of their banks. And in Greece, the capital saunter has finally turned into full fledged capital flight. Greeks fearing their local deposits could be turned into drachma at any time have been sprinting to relocate their savings.
If the situation continues to deteriorate — and especially if capital controls go into effect — both these countries could be primed for a flight either to Bitcoin or at least through it on the way to safer currencies.
Bitcoin skeptics like to point out its volatility as evidence that the project is doomed to failure; what they fail to recognize is Bitcoin's potential as a global payment platform.
As a system for settlement, price volatility doesn't matter all that much. Buyers can acquire Bitcoins as needed to make payment and sellers can immediately convert back to a local currency on the other end, all in less than an hour.
The short time frame minimizes exposure to exchange rate volatility and the process as a whole is both faster and cheaper than existing wire services. This means Bitcoin is already a useful tool for international funds transfer with the added bonus of being able to duck those pesky capital controls.
This usefulness as a payment and transfer platform is what will drive wider, less speculative adoption, which is exactly what Bitcoin needs to reduce its volatility.
On the one hand, Bitcoin provides an alternative to a system people couldn't otherwise walk away from. If governments try to stamp it out, they'll likely just drive it into the black markets. But it also changes the nature of the current system as well. By undermining the ability of states to implement effective capital controls, Bitcoin may turn a world of state-issued currency into one of competing currencies — whether government issuers like it or not.
This article is part one of a four part series exploring the political, economic, and social implications of Bitcoin. Part four will be a live blog of "Bitcoin 2013: The Future of Payments" in San Jose, Ca, May 17-19.