Yes, I wanted to do it, just to demonstrate that BitCoin is just as susceptible to problems of money supply as any other currency.

The basic idea is to allow people to deposit BitCoins, but then issue a BitCoin derivative subject to fractional banking rules and charge interest. This should in theory give rise to the same problems current banks have, where the debt is never fully repayable (unless you create more money to pay the interest), and requires a banking system to continually generate debt.

Interesting. Must be a scheme based on infinite supply of the said derivatives and, thus, the ability to create a lender of last resort with a printing press, right?

Won't work, as far as I can see (one of the reasons being the absence of legal tender law for your derivatives). If your derivatives are redeemable in bitcoins, bank run is still possible (and easy). If it's not, then you can't really affect the money supply of bitcoins.

Or is it some other kind of scheme?

Bitcoins still need to be securedly stored, and this is beyond the capability of 95% of the world. In the end you'll have a consortium of "guards" who will offer storage services. If humans in the future are like humans of the past, then fractional banking is assured. If there is an economic boom, then I can assure you that these new "banks" will offer letters of credit, which is essentially a derivative.

That's not enough for FRB to work. However big your consortium, bank run is still a very real possibility (the history of Bank of England has some insightful examples, Nixon closing the gold window is another recent one [and it wasn't even redeemable dollar! it was a restricted bullion standard.]).

FRB can exist long-term only if bank runs are impossible. The only way to make bank run impossible is to have lenders of last resort which are able to redeem all the notes in circulation.

With gold-backed notes, you can't issue more notes than you have gold (all the attempts to do so historically ended with bank runs pretty quickly). With purely fiat currencies, it's not a problem (you can print as much as you need to cover whatever derivatives are afloat).

Bitcoin (or vanilla gold-backed money) does not prevent FRB per se. It just makes sure that FRB will be very limited and will usually go down with a bang fairly soon.

> Bitcoin (or vanilla gold-backed money) does not > prevent FRB per se. It just makes sure that FRB > will be very limited and will usually go down with > a bang fairly soon.

What you say makes sense. Since Bitcoin has the same properties/faults as gold insofar as FRB is concerned, why is bitcoin interesting?

Gold is susceptible to global adversary (government) attacks. You can't have instant payments over internet with physical gold -- you need some kind of virtual banknotes to change hands instead, and to be redeemable in physical gold sometime later. That would be perfectly fine in a world with small, reasonable governments, but in the real world we live in, it's not. Two problems arise:

1. Sending physical gold for payment clearance, especially though state borders, is problematic (just plain illegal in some countries, may be taxable, etc). Doing it often and in small portions is also economically unfeasible [you need economy of scale to lower security costs, logistics, etc]. The usual market solution for that is creating big clearinghouses, with branches everywhere, etc. But:

2. Running a big clearinghouse for gold makes you effectively a bank. Running an unregistered unregulated bank is a crime in most countries. So you have to register, get all the licenses, keep all government requirements fulfilled, you can be subjected to all kinds of inspections, etc. On top of that, in some countries gold payments violate legal tender laws or something else, and since you are already on gov radar, it's a non-starter. After E-gold crackdown, we know these are not purely theoretical concerns.

Bitcoin is free from these limitations. Instantly redeemable, no vulnerable physical storage, distributed, no need for high profile points of failure, etc. Bitcoin still lacks one of the standard requirements for commodity money, though ("must have some non-monetary use/value"). How critical is it? We'll see :)

OK, I take it that from government attacks you are referring to gold seizure in E-Gold and during the Roosevelt era.

I don't know if this can be avoided. Governments could coerce the release of private keys so that the BitCoins could be reassigned to another party. (by the way, what happens if the private key is lost?)

During the Roosevelt era, it is simply outlawed, and gold has to be exchanged for fiat currency. I'm not sure if BitCoin can circumvent that.

To seize noticeable amount of bitcoins, you have to work through individual bitcoins holders. Bear in mind that bitcoin transactions are not channeled through any central points under gov control, nor are they automatically personalized -- so the gov must first somehow find out where to look. The whole process will take months, and the borders are effectively transparent for coins all the time. If you know the seizures are underway, you may as well arrange for your coins to stay out of your access and U.S. jurisdiction for a while.

To seize noticeable amount of gold in gold-backed paper money system, you have to issue one order to all registered banks. It takes a day or two.

But that's besides the point. Nothing will circumvent the confiscation scheme in which the attacker has power to do anything they want to you, and you can't do anything to protect yourself. It's simply not the problem to be solved by monetary system.

Hardly. Bitcoin is somewhat of an improvement on gold, since you don't have to dig it out of the ground, only to bury it again and put guards around it.

However, the monetary system is already hacked. I'm just hoping other hackers have some insight so that we can have a more effective, secure currency.

How is it hacked?

By hacked, I suggest that there are loopholes which allow some body/some group to have undue influence on the creation, destruction and distribution of money. In responsible hands, this level of undue influence doesn't lead to negative outcomes, but in irresponsible hands it is disaster.

For instance, where we see hyperinflation in Zimbabwe, it is really about the government gaining "root" access on their Reserve Bank, and "creating" money, while diluting what others already have.

On the other hand, when business confidence is low, people will store their "money" away for a rainy day, but that can lead to people sitting on the sidelines rather than engaging in production. i.e. people are poorer for it.

The other thing about money is it is reputationless. Although governments have a notion of tainted money, or money which has to be "laundered" to become legitimate - when white collar crimes are committed, let us say Enron-style, the CEOs still have money that they can spend and lead a good life. Contrast this with some aboriginal cultures which were moneyless, reputation is very important, and reputation is currency in its own right.

Perhaps the side effect of Bitcoin tracking transactions is that money no longer becomes reputationless. Society can choose to shun money that has a tainted reputation.

I don't really know of any solutions. I'm just bringing this up for discussion.

Your portrayal of hyperinflation in Zimbabwe is questionable.

To understand Zimbabwe, you first have to understand that it suffered from a destruction of supply capacity due to a stupid land reform that had nothing to do with money. The motivation for reform was part good (white farmers who had profited from colonialism were disowned) and part bad (land was given to political cronies who had neither the knowledge nor inclination for farming). Once the supply capacity went to hell, price increases were a simple matter of supply and demand.

Add to that that Zimbabwe had to start importing food, affecting its current account and causing their currency to drop w.r.t. foreign currencies.

Add to that that Zimbabwe had significant US$-denominated debts at the IMF, and the required sum flow of US$ for debt payment plus imports out of the country simply overwhelmed the amount of US$ they could possibly hope to have flow into the country from exports - their exports basically collapsed, because the productive capacity of the economy was largely destroyed.

At that point, instead of doing the only reasonable thing and defaulting on their debt, the Zimbabwe government decided to start the printing presses and print Zimbabwe currency, largely for the purpose of directly exchanging it against US$. Needless to say, supply and demand caused the Zimbabwe dollar to drop in value, which - via increased import prices - caused domestic inflation.

The important lesson here is that initially, it was the hyperinflation that caused the printing of money, not vice versa as people usually assume. Of course, the fact that the government kept adding to demand helped the hyperinflation to continue. But given the desolate state of the economy, simply not adding to the demand wouldn't have fixed anything either.

I agree that sanctions exacerbated production problems.

However, it doesn't detract from the point that money is hackable. I don't know if it is solvable though, because governments have coercive power over what constitutes legal tender.

e-gold primarily failed in the marketplace, like all the other gold currencies. This was really of a piece with PGP and the other cypherpunk notions: they didn't take off because people were not yet invested enough in their digital lives to care. It was largely experience with this that brought me to the conclusion that the end of privacy is inevitable.

I wrote the software behind two of e-gold's "major" competitors, and contracted for e-gold as well very briefly, so I'm not exactly unbiased, by the way. I don't know much about BitCoin, though.

This already exists: http://bitcoinusa.com Easy-to-use web service, from a legitimate company that complies with all laws.