Digital Currency: Wealth Confiscation Made Easy

Are digital currencies worth the risk?

As a professional guitarist, I’m immersed in an ongoing debate about technology. We guitarists debate thousands of little issues in online forums, on Facebook and in person. What strings provide the best value for money? Are U.S.-made guitars still superior to those made in Mexico? Which “stomp-box” will make me sound just like Jimi Hendrix? You name the issue, there’ll be multiple opinions, all held passionately.

But there’s one overarching divide between the “purists” and the rest. I maintain that it’s preferable to have several guitars and amplifiers to get different sounds — one rig for blues, another for jazz, one more for country, and so on. The modernists say you can just use any old guitar and amp along with a fancy piece of digital “modelling” equipment that will make them sound like anything you want.

More than once I’ve done shows with such “modern” players, only to watch in amusement as their fancy digital toolkit broke down, leaving them stranded. My old-fashioned Fender Telecaster and Deluxe Reverb amp then steal the show.

There’s a profound lesson in there … one that you must take to heart when it comes to your money.

What If the Power Goes Off?

The modern world is a kaleidoscope of electronic gadgets and systems that make possible things we only dreamed about as kids. Thanks to our electronic world, you can buy a house from your cellphone, see what the night sky looks like in real time on the other side of the world, or profit from nanosecond differences in trading times in the stock market. All before you get out of bed.

Just like my “modern” guitar friends, many people seem to take it for granted that the digital systems that underlie these miracles — the Internet, for example — are eternal. So when I hear someone make plans that assume uninterrupted connectivity, I think to myself: “What if the power goes off?”

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Which brings me to one of the most frightening ideas I’ve come across in a while.

U.S. tech giant IBM is reportedly working on a software platform based on the infamous digital currency “Bitcoin.” The idea is to make it possible for major currencies like the dollar or euro to operate like Bitcoins. Anyone could transact with anyone else in the world directly, bypassing banks and other archaic transmission mechanisms like Western Union or MoneyGram. Just log on, send your money and you’re done.

This promises a world with no banks, no fees and no hassles … but lots of danger.

Digital Counterfeiting

Everyone knows that counterfeiting is a risk with paper money. That’s why individual bills have serial numbers on them. But the same applies to digital currencies. Unlike physical money, the electronic files that represent digital currency can be duplicated exactly, with no trace. Since spending a digital dollar doesn’t delete the electronic data that represents it, and in the absence of banks and their accounting systems, some other way is needed to prevent that dollar from being used again by the same person — so-called “double-spending.”

Bitcoin accomplishes this by means of a “block chain.” Every few minutes, a group of all recent Bitcoin transactions is created, called a block. This block is then quickly distributed across the Bitcoin system, where it is added to the ongoing chain of all Bitcoin transactions (hence the name). That way, if someone who has already spent a given Bitcoin (and has not received it back legitimately from a third party) tries to spend it again, the system will reject it as “counterfeit.”

Bitcoin accomplishes this by using a distributed system of anonymous “nodes” that keep track of the block chain. But the same thing could be accomplished by a central server. IBM has therefore floated the idea of turning dollars and other currencies into digital form — with the central server controlled by central banks like the Federal Reserve.

What Could Possibly Go Wrong?

I don’t need to tell you what would happen under IBM’s system if the power goes out: No moolah. Of course, the same thing can and does happen now, with so much of our transacting done by credit or debit cards. But at least we have the option of keeping and using cash.

I am paranoid in thinking that, no matter what the advantages of digital currencies — and bypassing banks is really tempting — the real danger isn’t power outages, but rather giving the Fed the power to turn our money on and off? The dangers of digital currency aren’t small. After all, imagine the opportunities for monetary mayhem: digital wealth confiscation … automatic taxation … courts issuing warrants to seize your digital money …

Nope. I’m a realist. I know that if governments have the power to do that, they will use it.

Yet another reason to stock up on gold, my friends … the ultimate store of value. So far, at least, nobody’s come up with a way to turn off its power.

Kind regards,
Ted Baumann Sovereign Investor
Ted Baumann
Offshore and Asset Protection Editor