EVERY informed person needs to know about Bitcoin because it might be one of the world’s most important developments. As so little is known about it and by so few, here’s a dummy’s guide to the Bitcoin revolution. Bitcoin might revolutionise more than money or economics. It could transform the role and nature of government. Optimists expect it to promote liberty by eroding government power. Pessimists see it as a "pure bubble" that will implode and vanish.

It is too soon to say which, or whether Bitcoin is a new kind of money that will endure alongside traditional currencies.

Bitcoin’s potential effects arise from its extraordinary characteristics. Bitcoin is "virtual" money not produced or issued by a central authority. It is quick, cheap and easy for everyone to acquire, own, spend or transfer anywhere at any time, and can be highly anonymous. It is essentially impossible for governments to track or tax Bitcoin transactions if the owners of bitcoins rebel and anonymise their bitcoins.

If Bitcoin progresses, as it seems to be doing, from being something geeks and money launderers use to being a common currency for common folk, it could spur one of history’s liberating paradigm shifts.

In 2009, a mysterious person or people called "Satoshi Nakamoto" made open-source software available to anyone who wants it. With it, anyone can transact or even create, or "mine", money. The programme generates verified accounting ledgers, the reward for an operator being some bitcoins.

The formula makes it increasingly difficult to make coins and ensures that there will be no more than 21-million, of which nearly 12-million have been mined. The wildly fluctuating value of bitcoins has risen from zero to more than R2,000. Their total value is a paltry $2bn.

The reason Bitcoin could be historically dramatic — and therefore worth watching — is clear from the colourful narrative of modern money. People initially swapped what they had for what they preferred in "barter" transactions. When someone took what they did not want themselves because a third person who did have what they wanted would accept it, the "means of exchange" or "specie" was called "money". Virtually everything has been money, from sharks’ teeth and cigarettes to stones and slaves.

Because of its phenomenal properties, gold triumphed, hence the "gold standard". To avoid carrying gold, people deposited it with banks, which issued receipts called "bank notes". Cheques became an additional means of transferring people’s deposits or credit. Modern technology also allows payments to be made by credit card or electronic transfer.

"Fractional reserve banking" arose when depositors agreed to banks paying them a share of interest earned by lending their "reserves" to borrowers.

That banks "borrow short and lend long" means they "fail" if depositors, in a "run on the bank", withdraw more than the amount of gold or other assets held in reserve. Modern monopolistic currencies are issued by "central banks" and mandated by "legal tender laws".

Bitcoin is not the first cybermoney or cryptocurrency, but it is the first taken seriously. The German government declared a bitcoin to be a "unit of account" and the Royal Canadian Mint launched its own version of Bitcoin, called "MintChip".

All governments, including ours, and especially the US’s, use the 9/11 terrorist attacks in 2001 as an excuse for reversing gains in human liberty achieved over many decades of struggle. In the name of fighting terrorism and other "organised crime", jurisdictions, banks and companies that used to respect privacy must now reveal all. Under what the Constitutional Court called "draconian" powers, anyone’s assets can be seized by unbridled bureaucrats.

Bitcoin enables ordinary people to fight back, to avoid and evade snooping governments, which enact, use and abuse laws that allow them, without due process, to investigate, tax, control and seize privately owned assets. The problem is that it also shields common criminals.

Louw is executive director of the Free Market Foundation.

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