A new money model

ONE of the most bizarre events in the information technology industry in the recent past has been the surprising success of Bitcoin, the unaffiliated digital currency. Who, you would think, would invest in a currency not backed by any government? It turns out, quite a lot of people.

Having said that, Bitcoin suffered its first crash last week, because of events associated with the Cyprus crisis. Bitcoin exploded to trade at $266 last week, and then collapsed back to $54 in three days.

Bitcoin’s history and design are fascinating. It’s a form of “e-money” that can be “mined” on any computer, but the process is designed to become increasingly complex so that there will eventually be only 21million coins. Once “mined”, they are stored in a digital wallet and can be anonymously exchanged.

If this sounds to you a bit like a Ponzi scheme, you would be in good company; the European Central Bank issued a warning about Bitcoin last year already. Money laundering was also mentioned, which Bitcoin advocates claim is a warning motivated by a desire to maintain the monopoly on currency issuance.

What interests me, though, is that in some ways, Bitcoin could herald a new kind of currency, because the history and current location of every Bitcoin is known at all times, even though the identity of the owner is not. Could this eventually become the model for money generally, with the addition of a known, registered owner?