The Chinese Way

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Marco Polo liked them, Level 42 asked, “Who knows what they know?” and Antiques Roadshow loves the pottery. These days, though, the Chinese are on everyone’s mind as driving the global economy, hacking the global network and maintaining the world’s only successful Communist authoritarian regime.

So it follows that if the Chinese start getting very interested in cryptocurrencies, everyone gets very interested indeed. And this seems to be happening, with the Middle Kingdom accounting for the majority of bitcoin client downloads of late.

The Chinese media is alive with bitcoin tutorials and although there’s some doubt whether the government is in favour or against the idea, it does at least tolerate it – which is tacit approval from a state that sees little problem in shutting down anything it dislikes. There are at least two forces in play: the Chinese ruling class is often intensely pragmatic and has often found it advisable to like how its people make their money regardless of the details; It is also curious about what its people get up to, having installed a country-wide Golden Shield Internet monitoring and control system that does publicly what Western governments pretend they don’t do privately.

And bitcoin has the potential to be a very rich source of information indeed.

Yes, bitcoin is anonymous; there is no way to directly find out who owns or spends the stuff. But like so many anonymous systems, it is very far from private. When you give someone a bitcoin, you have to know their bitcoin address and it is then possible to spot other transactions that use that address. With some work, you can build up quite a detailed picture of cash flow through that address, which is a powerful forensic tool for working out what the owner of that address is up to – and who they are.

As of now, cash remains the best way to fund activities in ways invisible to the State. Bitcoin removes a lot of that invisibility: if John Law was a country that didn’t trust its people, he’d be very interested in that side of things indeed.

He isn’t. China is. And as for the Western democracies – you’ll just have to ask them.

Fair exchange

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A hat-tip to Coindesk’s own Danny Bradbury and his admirably lucid explanation of how the regulators and the bitcoin exchanges are beginning to understand each other. If you haven’t read it yet, go now. Got it? Good.

If you want the best possible guidance on bitcoin’s durability and future, watch the regulators. Still smarting from their role in the recent global economic meltdown, and driven by the fact that the most effective way to track and kill major crime and terrorism is to follow the money and close it down, they are becoming increasingly active in slapping down the dodgy and laying down the rules for cryptocurrency exchanges. What they do is the best guide to official thinking.

And the exchanges themselves, as you now know, are responding by being more responsible both in following the rules and by forming robust networks among themselves to ensure liquidity and stability. All these are good signs.

John Law tries to avoid prophecies: this damn Internet never forgets, and the future is famously a difficult thing to predict. But here goes.

Expect national exchange networks to build up quite quickly: local knowledge and contacts are big competitive advantages in finance, and once a few pathfinder exchanges are established it’s much easier to know what to do. There’ll be a burst of failures and amalgamations, leaving a few major players that have some heft.

That’ll give them and their investors a voice in creating a more fluid global cryptocurrency environment, which looks and feels as safe and established as our existing systems. It’ll probably share some of the same people; when today’s copper-bottomed bankers and CEOs are comfortable sitting on the boards of headline bitcoin exchanges.

At that point, you can write off anyone saying that the bitcoin sky will fall. It may, of course, but from the same outside factors that can ravage any of humanity’s pet schemes.

What to make of this? Well, if you’re thinking of investing in the future, either in money or the time needed to become an expert, the safest bet will be in the systems and technologies that will build that infrastructure. Now is the time of the new and the nimble, the far-sighted and fleet of foot, and it is the backroom boys who’ll inherit the earth. Get larnin’.

Bank jobs

Apple Store

One company that has been very sniffy about bitcoins is Apple, which has decreed that its iPhones and iPads will have nothing to do with it. You cannot download an app for that; Apple’s killed them all.

Apple, of course, is most publicly disparaging of things that it secretly wants for itself. So it’s no great surprise that it is now trying to patent its own electronic currency system, designed to promote an Apple world where Apple customers spend Apple iMoney with Apple sitting in the middle setting the rules and taking its iCut.

But iPatents patents are slippery things. A quick glance through the patent itself shows little that seems innovatory – although the US patent office is in one of its ‘grant first, let the courts sort it out later’ moods that pleases lawyers and infuriates inventors. Even if it’s granted, it’ll put Apple up against some very powerful entrenched competition among the banks and credit card companies; the most likely reason for the patent is defensive, with it being intended to give Apple some legal firepower in case someone tries to pull a patent case on them.

In any case, Apple’s antipathy towards bitcoin will not last (yes, another prophecy; it’s addictive). If bitcoin does establish itself, then it’ll be another competitive advantage to Android for as long as Apple refuses to play. With the Google-based mobile operating system now beginning to pull ahead in the smartphone market, Apple is discovering that it can no longer set the rules and damn the consequences. And American patents may not be quite as powerful as once they were with the fastest growing markets elsewhere in the world.

There may indeed be iMoney at some point – but it won’t be iWay robbery.

John Law is an 18th century Scottish entrepreneur, financial engineer and gambler. Having reformed the French economy, invented paper currency, state banks, the Mississippi Bubble and other ideas essential to modern economics, he took three hundred years off in a small cottage outside Bude. He has returned to write for CoinDesk on the foibles of digital currency.

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