It has been a bad couple of months for Bitcoin. Mt Gox., a large exchange in Japan, went bankrupt under shrouded and shady circumstances. Later, the IRS announced that it would treat Bitcoins as property, not as currency. As Georgetown law professor Adam Levitin explained, this tax treatment struck a devastating blow because it took away Bitcoin’s fungibility. It does not matter which one hundred dollar or one hundred yuan note you pull out of your wallet to use; they are all the same. The IRS ruling means that each Bitcoin is a little different, depending on the when it entered or left your possession; “the price at which a particular Bitcoin was acquired (and this is traceable) determines the capital gains on that particular Bitcoin when spent. If I spend Bitcoin A, which I bought at $10, but is now worth $400, I’ve got a very different tax treatment than if I spend Bitcoin B, which I bought at $390.” This makes Bitcoin as a currency unworkable. Finally, in China, the People’s Bank took steps that prevented banks from providing services to any Bitcoin exchanges.
Many advocates of Bitcoin stress its borderless, decentralized nature, outside the control of governments. It is a currency immune from debasements. That may be true, but as the last several months demonstrate, Bitcoin hardly beyond the reach of states.
Another, perhaps more interesting, angle is to look at Bitcoin simply as an additional step in the separation of money from the physical world. Like other online payments system, Bitcoin is ultimately an abstraction. Thanks to a series of technological innovations, it is now possible, at least in certain places, to stop using cash and coins altogether. David Wolman, went a year without using cash and wrote a book about it: The End of Money. Predictions about demise of physical money abound. The removal of money from the physical world is an event of great historical importance if only because so much of traditional governance revolved around regulating the actual process of making money.
For an example, lets examine a brief episode in coinage reform from the late Qing dynasty. The Qing Dynasty (1644-1911), like its imperial predecessors, minted copper with a hole in the middle so that could be strung together. Two mints in Beijing, one under the Board of Revenue and one under the Board of Works, supplied money for the area around the capital and various construction projects while provincial mints made copper cash for local use. Copper coins, paired silver ingots, made up part of the Chinese monetary system. Silver coins from foreign countries were another type of monetary medium.
Up until the late Qing dynasty, the government did not mint silver coins. Instead, foreign silver coins entered China through trade. Granted, there had been two brief attempts at it by Lin Zexu, of Opium War fame, and later in Jilin province but it was not until the late 1880s that the Qing government began producing silver coins, dragon dollars. In the late 1880s Zhang Zhidong, then governor General of Guangdong and Guangxi ,suggested the measure as one way to combat the money famine (qianhuang 錢荒) in much of the country. For many years and due to a variety of reasons it had been unprofitable to mint copper coins.
Zhang thought minting silver coins would solve three problems. First, it would alleviate the money famine. Next, it would provide new coins to replace worn-out (lan 爛) and broken down (pocui 破碎) foreign silver coins then in circulation. Finally, and most importantly, it would plug the leaky wine cup (zhilou 漏卮). : the loss of economic rights that the Qing gave up by importing foreign silver coins. Zhang proposal was approved and he did not do things on a small scale. He imported steam-powered minting equipment and created one of the biggest facilities for coin production in the world.
Other provinces got into the profitable business of minting silver dollars until, in 1899, the Qing closed down all but two mints, but then backed down and allowed three others to open. At the same time as shutting down these mints, the Qing decided to set one up in Beijing, in the hopes of alleviate the cash famine around the capital. One of Zhang Zhidong’s assistants was ordered the city to help set up the mint but begged off because of a sick family member. Instead, Zhang forwarded the mint plans to Beijing.
The first requirement for building a mint, the briefing argued, was that it must be near water, in order to facilitate the transport of raw materials to the facility. Finding such a location would be a problem in Beijing. Next, the facility should be located at a high elevation so that in case it rained the mint would not flood, ruining the equipment. It also needed to be in a flat and broad space in case the plant needed to be expanded.
The particulars of the facility were just as important as the location. Within the facility there should be a series of pools and a small railroad to help the transfer of materials. In order to guard against fires at night, the mint should use light bulbs instead of candles. Most interesting of all, the facility should have as few gates as possible, the better to ensure that no materials or coins left the facility surreptitiously.
Zhang Zhidong sent these plans to Beijing at the beginning of 1900. By the beginning of June, the Boxers had arrived in Beijing and by the end of the month the Empress Dowager supported them and declared war on the foreign powers. The plans for the mint understandably got delayed.
For much of history, regulating who made money, how they made it and where they made it was a central part of governance. The process and the product—the coins themselves—were very much based in the physical world. Bitcoin might take production of money out of the physical world but not beyond the reach of governments.
*Discussion of plans for Beijing Mint come from First Historical Archives of China 03-688-057, 03-688-063, 03-668-064