In the most interesting piece I’ve seen so far on Ezra Klein’s new site, Vox, Tim Lee explains quite clearly why Bitcoin could be a very big deal — but not quite for the reason you may have heard. It’s as simple as this:
Bitcoin’s detractors are making the same mistake as many Bitcoin fans: thinking about Bitcoin as a new kind of currency. That obscures what makes Bitcoin potentially revolutionary: it’s the world’s first completely open financial network.
History suggests that open platforms like Bitcoin often become fertile soil for innovation. Think about the internet. It didn’t seem like a very practical technology in the 1980s. But it was an open platform that anyone could build on, and in the long run it proved to be really useful. . . .
The Bitcoin network serves the same purpose as mainstream payment networks such as Visa or Western Union. But there’s an important difference. The Visa and Western Union networks are owned and operated by for-profit companies. If you want to build a business based on one of those networks, you have to get permission from the owner.
And that’s not always easy. To use the Visa network, for example, you have to comply with hundreds of pages of regulations. The Visa network also has high fees, and there are some things Visa won’t let you do on its network at all.
Bitcoin is different. Because no one owns or controls the network, there are no limits on how people can use it. Some people have used that freedom to do illegal things like buying drugs or gambling online. But it also means there’s a low barrier to entry for building new Bitcoin-based financial services.
There’s an obvious parallel to the internet. Before the internet became mainstream, the leading online services were commercial networks like Compuserve and Prodigy. The companies that ran the network decided what services would be available on them.
In contrast, the internet was designed for anyone to create new services. Tim Berners-Lee didn’t need to ask anyone’s permission to create the world wide web. He simply wrote the first web browser and web server and posted them online for others to download. Soon thousands of people were using the software and the web was born.
I’m actually somewhat surprised to see the praise Lee’s piece has gotten — not because it isn’t good, but because it seemed relatively obvious. Bitcoin isn’t about to replace the U.S. dollar, but has already begun to be used in a variety of interesting and innovative ways, including, as he mentions, affordable international money transfers.
Why the confusion? In part, maybe, the media (or maybe just the media I, and Vox writers, follow) likes exciting political stories more than it does dense technology ones, and the political narrative about Bitcoin became overly ambitious. The idea of its becoming a functional private currency plays into the libertarian dream of free banking — replacing a government-issued currency with private currencies. Bitcoin is a very long way from being able to immanetize minarchism. The idea of an open financial network, which certain technological innovations of Bitcoin make much easier, is a good bit more feasible, but less thrilling politically. Yet one of the problems facing a product like Bitcoin is drawing in enough users to make it useful, and perhaps some of the political controversy and/or idealism surrounding the currency has helped create the network effects necessary to get it off the ground.
So in terms of Bitcoin’s future, it’s more useful to think of it as an open-source and liberalized alternative to traditional financial providers and payment systems than an upending of our entire financial system. A deregulated payment system will create problems all its own, for sure, but it and imitators will be able to unlock tremendous opportunities, as investor Marc Andreesen argued in a useful though denser explication in the Times in January. (His firm isn’t exposed to Bitcoin’s value per se but has invested almost $50 million in Bitcoin-related start-ups.)
One last note: Lee’s piece is an interesting example of what Vox can be expected to do — the lucid explanation requires taking a side, and deciding what arguments about something are more or less worth dismissing in order to get the useful information across. It’s about more than “providing context” or “explaining the news,” but it’s going to be useful nonetheless.