Let's think of a hypothetical scenario if Bitcoin becomes the world's major (most used + highest market cap) currency one day. How will it change the world? The obvious point is cheaper money transfers, but what about its impact on the global economy? Is a "deflationary" currency better for the world? Is quantitative easing really that bad?
I like this question1 - we don't get many big picture questions.
How could Bitcoin change the world?
A mature digital cryptocurrency could reduce trade barriers and thus increase the rate of productivity dispersion throughout society. As money is a form of fungible authenticated information2, non-proprietary digital money gets to take advantage of the information age to rapidly democratise trade with lower transactional friction.
It could encourage governments to move towards a more rational global currency or currency basket for sovereign wealth reserves, trade imbalances and protection from commodity price shocks. In effect the phenomena of democratised digital currencies, if not Bitcoin specifically, could accelerate global cooperation and democracy in macroeconomic practices badly in need of an overhaul.
It could provide an excellent educational opportunity for teaching and learning macroeconomics. As the cryptocurrencies are moving though the stages of currency development so fast as to eliminate most of the confounding factors of studying more mature currencies that evolved over several centuries of political and socio-economic change.
It could enrich a very small minority of early adopters. Depending on what these early adopters do with their new found wealth, they could bootstrap other social improvements.
It will probably not result in increased (effective) tax evasion due to the wide range of levers available to collect tax revenue. Although an increased informal sector may result in governments shifting towards regressive taxation such as consumption taxes to offset the evasion of progressive taxation.
It will probably not result in a cap on the money supply due to the ability to establish fractional reserve banking on top on any specie currency if legally permitted. Off-block chain Bitcoin clearing houses may evolve into fractional reserve banks to avoid on-block chain costs. In either case, it will not provide an economic solution to a political problem (deficit spending).
It will not create a libertarian or objectivist paradise. Such a shift in socio-economic paradigm will require both economic and social consensus. Cyptocurrencies can provide an economic consensus only.
What about its impact on the global economy?
Probable impact: Low to Medium. Possible impact: High.
It really depends on how willing various cryptocurrencies are to absorb certain "bad" aspects of fiat currencies in order to grow into a major currency with global volume. At current, I don't know what level of actual impact is likely - since you have to predict not just technology but the behaviour of people: Both of those that use or might use Bitcoin and the adaptations of its traditional and contemporary competitors and their mindshare.
Is a "deflationary" currency better for the world?
A qualified no3.
Is quantitative easing really that bad?
A qualified no3.
1. In case people think I'm a curmudgeon.
2. Each coin I have is information that the world currently owes me X amount of goods and services.
3. I can't do these questions justice in an answer primarily about how Bitcoin might change the world. Suffice to say we are currently trapped within a "growth" orientated socio-economic model which is incompatible with non-inflating money supply. The lack of true democratic control over the objectives and priorities of these federalised economic levers is a problem.
This is a great question and it's something I spend a lot of time thinking about. In general, I'd say no one really knows at this point and it is difficult to make more than a few guesses.
So let me have a try at that:
- Banks would lose much of their ability to control the monetary supply, interest rates and exchange rate.
- The financial sector would shrink and become less profitable. Probably a good thing.
- It would become more difficult for the government to collect taxes.
- Loans would be taken out more rarely.
- Leverage would mostly disappear from the financial system.
- Economic and financial transaction would not be restricted by national borders.
- Individuals would gain more control over their own finances and money.
- Governments would lose the ability to finance their expenses through increased debt. They'd have to run more or less balanced budgets instead.
- There would be enormous redistributions of wealth as the shift to bitcoin occurs.
These are some of the things that come to my mind, but this list could be continued for a long time. I think it's save to say that these would be revolutionary changes and we would end up with a radically different world.
Will this actually happen? I don't know but I think it's possible.
Will the changes overall be positive? Impossible to know, but I'm optimistic.