I have found that technological structures give a very good handle on understanding a much more messy reality. One of my favorite uses of this is to help geeks understand politics and the legal system. Laying out a world of Lawyers = Hackers, Politicians = Programmers, Judges = Debuggers, etc can be an interesting exercise that leads to some insights for those that have a very heavy technical understanding, but have avoided politics.

I have not tried yet, but I suspect a similar analysis and analogy to the financial system would be enlightening.

Great article, I look forward to seeing more!

All software has inherent weakness. As it so happens, crypto-currencies such as Bitcoin are open source and the code has been examined by countless coders, cryptographers and hackers and it is considered extremely secure. Moreover, the code is run by a distributed network with unimaginable computing power, so there is no one party controlling it. The main vulnerabilities of Bitcoin code is in upgrades to the system (which could cause a fork), or a very unlikely 51% attack. Both of these are rare and/or extremely unlikely and would be spotted almost instantaneously (hence the abuser will have very little time to abuse the system and wouldn’t be able to do too much harm anyway).

Now to make one thing very clear – fiat currency is not governed by ‘code’ (unless you’re talking in the most abstract sense). The Federal Reserve creates one-sided accounting entries in its books (thus ‘creating’ money out of thin air) but that is not abusing a bug in the code. That is the very intention of the system itself! Governments rely on inflation for their very existence (see parts III and IV of this series in the Bitcoin blog). You mention the LIBOR and the ‘London Whale’ scandals as the fiat currency scandals. Those are only inconsequentially related to the fiat currency system. A century of money printing (including current Quantitative Easing measures) and the fact that money is created out of nowhere at the whim of a small group of individuals is the true scandal nobody seems to care about. Bitcoin is in no way, shape or form equivalent to what characterizes fiat currency (again, see part IV of this series).

I will concede that there are ways to manipulate the value of Bitcoin, much like there is a way to manipulate the rate of LIBOR or the unintended consequences of Wall Street glitches which caused the flash crash (assuming that’s what you’re referring to) which manipulated the value of certain stocks. If there is an agency (say an exchange like Mt. Gox) which has a substantial impact on the volume of exchanges between Bitcoin (BTC) and fiat currencies (say, USD) and say that exchange was subject to bullying by the financial regulator/government or even to denial-of-service attacks, that could have an impact on transactions between BTC and USD and therefore would have an impact on the value of BTC in USD. But this has no impact on Bitcoin as a currency, namely that the currency is still fundamentally sound. Any commodity’s value can be manipulated. That is a weakness one can extend to Bitcoin. The difference is that a fiat currency’s value is determined by legal decree and forced upon everyone whether they want it or not, whereas a free market currency’s value is determined by what people are willing to offer for it in a voluntary market. This is where Bitcoin, gold and silver differ from all national currencies in the starkest of ways.

The Bitcoin chain in a P2P environment is pretty good protection against fraud and forgery, and should also serve as a quick detection system for the day that someone “breaks the code”, thanks to the duplicate files that are in “the cloud”. All crypto-currencies, and fiat currencies share the weakness inherent in their software: that whomever breaks the “code” used by banks, governments, servers or P2P systems will be able to abuse the system until detection/correction takes place. In the fiat currency/banking world, the LIBOR and WHALE scandals (not to mention Wall Street software “glitches”) should serve as warning signals, and I suggest we remember that this weakness extends to Bitcoins, too.

The value of Bitcoins and other currencies lies in their usefulness and reliability. Once Bitcoin Exchanges comply with worldwide anti-money laundering requirements then “tech-savvy” individuals and small businesses can freely use the Bitcoin as a financial instrument and currency for investment and commercial purposes. Bitcoin will be attractive because of its pseudo-anonymity/privacy as well as the intrinsic fraud protection the “chain” represents.