Justin Wolfers on Bitcoin: There Are Smart Kinds of Money and Dumb Kinds of Money

Bitcoin is a digital currency introduced in 2009 that is “mined” by computers solving complex mathematical problems. The currency is not issued by any government in the world, yet has been used for both legitimate and illegal activities. The European Union has warned on the use of bitcoins, and after the FBI took down the online marketplace “Silk Road” this fall, where many illegal services were sold using bitcoin, the Senate Homeland Security Committee held a hearing.

What is bitcoin and what do experts say about it? Appearing on BBC’s “In the Balance” podcast, Justin Wolfers, senior fellow and co-editor of the Brookings Papers on Economic Activity, joined an expert panel to discuss the nature, uses and possible future of bitcoin.

The panelists jumped off from Milton Friedman’s metaphor of the stone currency of the Island of Yap (pdf).

Is Bitcoin like regular currency?

“What the Island of Yap tells us,” Wolfers said, is that,

there are really smart kinds of money and really dumb kinds of money. So, carrying around 3-meter rocks is just incredibly inconvenient. That’s a really dumb kind of money. Carrying around certificates that promise you that you own a rock at the bottom of the ocean is at least a whole heck of a lot more efficient [like dollars and pounds] …

Wolfers offered an anecdote about buying a bagel and the act of faith involved in the paper money transaction. Would the shop’s proprietor accept bitcoin in payment instead of dollars? “He insisted,” Wolfers said, “on U.S. dollars.”

Wolfers joined host Justin Rowlatt, David Birch of Consult Hyperion, and Bobby Lee, CEO and co-founder of BTC China, one of the world’s largest bitcoin exchanges. After discussion about how Bitcoin is created and distributed, Wolfers observed that, “… for a currency to be useful, it’s got to be transparent.” Bitcoin is “not feeling so transparent at this point, is it?” he asked.

Will Bitcoin last?

In answer to this key question, Wolfers answered:

I think it’s a brilliant technical solution looking for a problem. I think money isn’t the problem. It turns out U.S. dollars, euros and pounds work pretty darn well and there’s almost no setting in which I can think bitcoins work better. But there’s a whole lot of smart guys in the background who maybe can harness the technology for something socially useful.

Listen to the discussion here.