The MtGox website, the most famous portal for Bitcoin trading in the world of exchanges, has closed. It disappeared into nowhere. The head of the exchange, Mark Karpeles, has quit and now American and Japanese authorities are investigating MtGox. There is talk that of 380 million dollars having disappeared (that is, 750,000 Bitcoins have disappeared, the value of which depends on the Bitcoin, which has decreased by more than half in a very short time).
Just a few days ago Bitcoin was being celebrated as one of the most important phenomenon on the wave of digitized payment and financial services. But, already on January 27th, Charlie Shrem, vice chairman of the Bitcoin Foundation, had been arrested for money laundering. The currency’s proponents had dreamed of a global digital currency, beyond the reach of government regulations and financial subjects: the currency of the Internet – social, P2P, digital, managed by the users themselves, privately.
Has the dream ended?
Other six Bitcoin operators (Coinbase, Kraken, Bitstamp, BTC China, Blockchain and Circle) have immediately distanced themselves from MtGox, the entire Bitcoin Foundation community has also distanced itself and made note, correctly so, that the global management system of Bitcoin continues to function regularly. So? What is the truth? What should we expect? This reminds me of the crash of the Linden Dollar in the summer of 2007, which took Second Life down along with it. It was another attempt at virtual money. Another incredible internet phenomenon ending dramatically in just one summer due to a virtual bank failure for the Linden Dollar, the virtual money of Second Life. Will Bitcoin, which was created one and a half years after the demise of the Linden Dollar, have the same end?
Bitcoin is a much more advanced system than that of the Linden Dollar; it is truly created to be global and used as an alternative, transnational tool for digital payments, completely outside of traditional models. It is not a true currency; it does not belong to any country (which is not an insignificant problem for authorities) but of the community that it is made up of. It uses an advanced cryptographic system that determines the rules and exchange with mathematics. There is no regulation. In order to use it, software must be installed in order to connect to the P2P network that supports Bitcoin. Its nature, therefore, is to bypass traditional financial systems, banking and inter-bank circuits, those used for payments. The trading portals guarantee a link to the real world, the convertibility into currency. Hence, Central Banks are completely cut out. And this is the great digital dream. The new currency, child of a new world.
But the truth is that its weak point is in the system’s own premise. In Bitcoin’s guidelines, enunciated by its (virtual) creator Satoshi Nakamoto, in its introduction, there is a virus. Bitcoin’s premise states, “What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party”. No trust??? There is no currency or payment system in the world, no matter how digital it is, that can hold up without being based on trust. The digital economy itself, e-commerce, is based on trust.
From the moment in which international monetary and economic systems are based on rules, controls, and Central Banks and no longer on the convertibility of currency into gold, it is all just a question of trust. Just look at what happened when Lehman Brothers failed. Or what happens each time a bank, even in Europe, fails or gets close to it.
And this is the point; it just took the failure of an exchange hub to put Bitcoin into doubt. Why? Because there is not enough trust. And a good thing at that, I’d say. Because, for now, Bitcoin is fortunately still small. For all of the international fame it has received, only about 12 million Bitcoins are in circulation. Even at a value of 1,000 dollars per bitcoin – a value that is long gone at this point – the dimension is ridiculous for the global economy (and it should be a point of reflection the fact that 14 months ago one bitcoin was worth only 12 dollars – too unstable, speculative). Just think if it had expanded to much larger areas, possibly concentrating in a super-digitized country, like a Scandinavian country, for example. A crisis of this sort would have knocked it to its knees. A “healthy” country would have been destroyed economically by an anarchic and out of control payment system.
As Franco Cimatti of the Italian Bitcoin Foundation correctly pointed out, “Bitcoin is a new technology, that opens unexplored horizons. It offers great opportunities but hides numerous risks”. It is an experiment, an advanced one, definitely better than that of the Linden Dollar, necessary to open new panoramas but I believe, not sufficient. Not definitive. What is missing is a way to inject trust.
The dream, the idea, can possibly be maintained, that of a new global system, a platform that bypasses and simplifies the current system, keeping it prevalently P2P, but it must be made secure. In some way digital money must be monitored, overseen, and watched by Central Banks. There is no other way. Trust is needed. A global digital currency is not impossible. We are getting close. The system must be perfected, by rewriting its premises.