Bitcoin Box

A magazine dedicated to all things Bitcoin


Expanding the Bitcoin Economy - Legitimate Businesses and Food

author: Vitalik Buterin
published: 2011-04-23 03:41:40 UTC

The value of Bitcoin has recently shot up by over 50%, surpassing its previous high of $1.10 USD in February and bringing to an end the period of decline that has dominated for the past two months. Hopefully, the value of the currency will continue to rise, reaching new highs of $2 or even $3 USD, and then going up even further. For this to happen, however, the Bitcoin economy needs to become, rather than a mere adjunct to the fiat-currency based economy we have now, an economy in its own right.

There are currently many services and products being offered in exchange for Bitcoin, however there are two critical weaknesses in this list: first, aside from charities, there is nothing mainstream on the list and, second, there is no way to directly buy food, the consequences of which I will discuss later. In order to overcome the first, the most practical short term option is to get existing businesses to accept Bitcoin. There is a considerable effort to do so, but there are obstacles limiting its success. When asked about the possibility of Thinkgeek accepting bitcoin, an employee replied that they cannot because they are a public company and accounting rules force them to deal in only USD. An issue mentioned by another poster in that thread is that the value of Bitcoin is far too unstable for businesses to set their prices in it. This is a serious issue, and one unique to Bitcoin: unlike other currencies, which tend to maintain their value or slowly lose it as the currency's controlling government decides to print out more, Bitcoin is intended to be in a long-term, if not permanent, deflationary spiral.

Fortunately, these two problems, regulatory requirements and volatility, are in fact very similar and can potentially be solved with the same solution: Bitcoin banks. Bitcoin banks are institutions that allow customers to store their Bitcoins in an account with them to facilitate and speed up transactions, which now can take as much as 10 minutes to validate. These banks could keep track of Bitcoin/USD exchange rates, so for example a customer could pay $25.00 USD to the store, the bank would see the current 1.2 exchange rate, and automatically remove 30 BTC from the customer's account. Indeed, MyBitcoin already has this type of functionality; it and services like it need to be promoted and become more mainstream in the Bitcoin community. With Bitcoin banks, the issues regarding the instability of bitcoin would be dealt with by the customer and the bank, not by USD-based businesses, and USD-based businesses could then maintain a fixed price for their products in USD, allowing them to fulfill the accounting requirement that they run their business on one currency, while accepting Bitcoin. If necessary, the businesses can even exchange the Bitcoins for USD immediately after receiving them. This is not a perfect solution; it does have the weakness that it further increases Bitcoin's dependence on the USD. However, there is no lock-in; if necessary, stores can switch their prices from being in USD to being in Canadian dollars, rupees, gold or Bitcoin immediately, and if this is what is necessary to get businesses to accept Bitcoin it is still a net positive.

There are other regulatory and administrative issues that could impede Bitcoin's use., which offers customers access to a shell account on their servers in exchange for a monthly fee, is one example. Although it accepts bitcoin, requires that the first payment be made with a verified Paypal account for identification purposes. If this is motivated by regulatory data collection requirements, it does not seem to be too serious a problem for this particular case since other hosting services have popped up that make no attempts to establish physical identity, so this might only be an issue with specific countries. If it is motivated by trust, then there are alternatives to physical identity for establishing trust - online identities backed by public key cryptography. The Bitcoin-OTC web of trust is one such system, which allows people to rate others based on how successful their transactions were with them, and people can prove they are trustworthy by using public key cryptography to sign their messages so people can verify that those messages were written by someone with a specific identity on the OTC web, and look at how others have reviewed them.

The second issue is that of food. It is controversial whether or not this is a significant problem with Bitcoin at all, however I would like to make some arguments as to why it is. Currently, it is only possible to buy internet services and a limited array of goods with Bitcoin directly. Looking at the "consumables" section of the list of products that can be bought for Bitcoin, one sees a conspicuous absence of food products. Food products are a necessary part of a complete economy; one cannot live on T-shirts and illegal drugs alone. It is thus currently mandatory for someone seeking to earn a living on the Bitcoin economy to convert to USD or another conventional currency as part of the economic process. This is a problem in multiple ways: first, it compromises the currency's anonymity. It may be possible to receive bitcoin anonymously, but conversion between Bitcoin and USD is not anonymous at all - conventional financial systems are heavily watched by governments. Agorists would like to see bitcoin act as a currency that can be used underground, even if it is outlawed by government, but if it is necessary to regularly convert bitcoin directly to US dollars, then that will be the chokepoint used for enforcement. Some argue that it is possible to anonymously exchange bitcoin for cash or prepaid credit cards. However, cash is rapidly disappearing and one can foresee a future where governments outlaw its use in favor of systems that are linked to physical identity. This is thus a more long-term issue, but it is nonetheless an issue.

The second issue is that the main product currently bought and sold for Bitcoin is the US dollar. There is a general split between two classes in the Bitcoin economy: the producers, who earn bitcoin for services and sell the bitcoin for USD, and the consumers, who buy bitcoin for USD and use it to buy services. To the producers, the value of bitcoin is the USD that it can be sold for. If the US dollar enters hyperinflation, a threat which becomes more and more worrying as gold hits $1500 an ounce - or, rather, the dollar falls to 0.00067 ounces of gold per unit, this will cause great instability as the US dollar keeps falling and the USD-Bitcoin exchange rate struggles to keep up. Other conventional currencies will not prevent this; CAD and rupees do not have any use in the US aside from that of exchanging them for USD, so exchanging Bitcoin for foreign money will have the same result, but indirectly. There is a third class, however: those who both earn and use bitcoin in significant quantities, and it is this class that gives Bitcoin intrinsic value; without this class, Bitcoin is nothing more than a useless intermediary. It is this class that will ultimately give Bitcoin the stability that businesses need. I will reiterate that these are both long-term issues, and as I explain below, fortunately, the long-term solutions are those that will naturally arise from a larger Bitcoin economy.

As for why it is the case that food cannot be bought for Bitcoin, it is tempting to once again blame government regulation. However, it is unlikely that this is the problem. There are special regulations that deal with food businesses, for example in the UK and in the US, but these regulations all deal with food safety, not the financial spect of the transaction. The real cause of the problem is likely practical issues: unlike T-shirts and tea, which can survive extended journeys, food products have a very limited shelf life, so a small food business can probably only support the city that it is based in. There are simply too few Bitcoin users within range of each other for accepting Bitcoin to be worth the hassle. Thus, the problem will ultimately only be solved by Bitcoin's increasing popularity.

There are efforts to kickstart the process. One individual, Plato, intends to cross the entire United States spending nothing but Bitcoin. He intends to convince people that Bitcoin is a legitimate currency on the spot, and is making elevator pitches and presentations about Bitcoin on the way. You can read about updates to his trip here. There are other efforts to get local farmers to support Bitcoin, and the operation to grow the Bitcoin economy continues behind the scenes. Finally, it is important not to get too focused on food as a singular issue. Bitcoin's popularity rests on the internet, so, if Bitcoin ever takes over the world economy, hyper-local applications such as paying for gas or the local Starbucks will be the last places to convert to it. It is thus necessary to focus on less local applications first, closing in on more local ones as Bitcoin's penetration increases enough to allow them. Growing Bitcoin's economy requires that we study all possible directions and niches we can expand into.

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