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Bitcoin: Destroyer of Central Banks?

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St. Louis Fed's VP calls Bitcoins a "threat" to central banks. How realistic is that claim?

Are Bitcoins, and other e-coins, ready to take over the U.S. Dollar?
Are Bitcoins, and other e-coins, ready to take over the U.S. Dollar?
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A currency comprises three market demands: (1) as medium of exchange, or substitute for simple barter; (2) as a divisible and fungible, or consistent, medium of exchange, e.g., five $1 bills always equal one $5 bill; and (3) as a store of value so that its value fluctuates minimally.

E-currencies like Bitcoin, Litecoin, Dogecoin, and Reddcoin beat the U.S. Dollar in the first requirement because they are divisible into several decimal places. Because the currencies are mined, or created, through blocks, or cooperative mining algorithms, the currency's safety is ensured through a public tender ledger and, on a micro-scale certainly, surmounts the threat of potentially counterfeit U.S. Dollars, thus beating the second requirement. It is the third requirement, which is basically price stability, that the St. Louis Federal Reserve's Vice President tells Business Insider may mean e-currencies giving central banks a run for their money, both figuratively and literally.

Bitcoin's "existence as a threat is very good: It will discipline the Fed and other central banks to continue to run responsible policies -- if they don't, people could switch to something else," David Andolfatto says. He continues: "The purpose of currency controls is to stimulate demand for domestic currency, because the central bank and the central government want to exploit the people by inflating excessively, so the threat of currency competition -- if a central bank, a government knew people could stop using domestic currency and flock to alternative, that would force the government to behave more responsibly."

The Internal Revenue Service recently ruled that Bitcoin is property, which, being a tax, undermines any non-inflationary advantage against the USD by double-digit percentage points. Not that Bitcoin has stabilized to the point that it can be considered a stable store of value, despite historical upward trends. E-currencies are nowhere near the stability or popularity to even contest central banks.

But e-coins can be purchased and transferred easily and quickly between buyers-and-sellers, which curbs most price fluctuations of the medium. And there the greater gravity lies in the potential for e-currencies to sew the seeds of agorist counter-economics, or the proliferation of innately anti-state market activity. When that, and its broad implications, is spotlighted by the national media, the voluntaryist principles buttressing e-currencies will rise and potentially reach some political mainstream. And that invites discussion of heterodox ideologies from anarcho-capitalism to invite-only socialism.

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Bitcoin: Destroyer of Central Banks?

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