The idea of “backing” Bitcoin with some kind of tangible commodity or asset is back in the news again due to a recent statement from Senator Rand Paul. The Senator from Kentucky stated that he’d like to see Bitcoin backed by a basket of stocks because he believes that a currency should be “backed up by [something tangible]”. While the idea of combining gold and Bitcoin has already been floated by Jim Rickards and others, it completely misses the point of what Bitcoin is supposed to be. Bitcoin is the digital equivalent to gold, and backing it with anything tangible would add a dab of centralization into the mix.
[dropcap size=small]O[/dropcap]ne of the main reasons that the bitcoin has real value on its own is that it’s censorship resistant and not subject to counterparty risk. In the past, virtual currencies have always derived their value from some real world asset. In the case of PayPal, you’re sending dollars to PayPal that they then hold them for you like a bank. Those aren’t actual dollars or euros in your PayPal account. Your account on PayPal is simply a promise to eventually allow you to withdraw fiat currency to your real bank account. In fact, the numbers next to “account balance” on your bank’s website aren’t even real dollars because the bank or a local government can make changes to your account too. At the end of the day, you have to get permission to send someone else money through dollar-denominated digital payment systems, and you can’t be certain if an individual could eventually reverse a payment sent to you in the future after they’ve changed their mind. The same concept applies to the various digital gold currencies that have popped up over the years. Unless you have physical cash or gold in your home, you’re not the only one who’s in control of your money.
Now you could say that we’re now talking about a completely different argument due to the fact that PayPal, e-gold, and other virtual currency providers didn’t have access to the Bitcoin payment network in the past. Once we add the blockchain’s decentralized method of transacting value to a gold-backed digital currency, we would have the perfect combination of digital payments and tangible value! Actually, there’s another problem here. If you’re going to back a digital currency with gold, stocks, or any other asset, then someone is going to have to store those assets in a vault somewhere. This situation opens up the currency to counterparty risk. You could try to fix the price of a bitcoin to a gram of gold, but what happens if the local government decides they don’t want any competition in the currency market? They’ll just go collect the gold and throw the company behind the private currency in jail. What happens if the person or company storing the gold decides to sell it all without telling the users of the digital currency? What if they only sell a little bit of the gold to setup a fractional reserve system? This is a key advantage that Bitcoin has over all other forms of digital payment. Liberty Reserve, e-gold, and Liberty Dollars were all shutdown because they had that central point of failure.
In reality, the idea of backing Bitcoin with some other asset is actually the opposite of what should be done. It would be more practical to back another currency, such as Evergreen, with bitcoins instead of trying to back Bitcoin with something else. Attempting to back Bitcoin with gold would be like trying to back gold with silver. The bitcoin doesn’t need any help in the value department. It’s the first censorship resistant digital asset to exist. Bitcoin is the one who knocks.
Last modified (UTC): May 2, 2014 07:45