The acceptance by market participants is the ultimate question, obviously. This is a complicated topic, because competition between payment systems is unusual. The economic term is “two-sided market”. Also the possibility of hybrid solutions (economic term “multihoming”), such as Bit-Pay allowing the merchant to receive fiat instead of bitcoin, can lead to piggybacking/hijacking.

I still think the bottom line is that if the general market retail system for products and services is established to accept bitcoins directly, it will go a long way toward preventing any kind of attempt at centralization no matter what system of banking is used.

So far, it looks like retailers are progressing along this track, which is obviously a good thing.

Putting it together: if there is a general demand for money substitutes, this leads to FRB (unless it’s illegal, then it might not). Solution: have money which does not lead to the creation of money substitutes. Bitcoin shows that at least hypothetically, this is possible. I might even go a bit further and make this statement: if on a free market money substitutes do not develop even though there is no legal or technical obstacle for them, it means that the choice of money is pareto-optimal (since no change in the monetary system leads to an increase in utility). I hope it does not sound too technocratic

That would be difficult for them to do considering that Bitcoin is an international currency. I would simply exchange my coins for another currency and then trade those against the dollar if I really wanted to.

I’m not saying that the government could, at this time, seize control of the Bitcoin economy. I’m just pointing out that fractional reserve banking leads down the path toward centralization. I agree that all sorts of laws and regulations would need to be imposed in order to make this happen. The question is whether people could easily by-pass those laws making centralization impossible.

I analyse Bitcoin FRB in my upcoming paper about Bitcoin. I don’t want to paste it all here, so just a brief summary.

In order for FRB to expand the money supply, the claims to Bitcoin need to act as as a medium of exchange. I was able to determine three possible ways this can be achieved:

- reduction of transaction costs
- payment of interest
- government intervention (or other use of force)

First two can be achieved natively, without a claim to Bitcoin being a medium of exchange. Bitcoin already has low transaction costs, and there are methods of transacting it outside of the blockchain without a debt instrument. Like Casascius coins. Digitally, this can be done (if I understand it right) with OpenTransactions. There are also methods like the green-address approach, or hybrid solutions like the Bit-Pay merchant tools. With respect to interest, Bitcoinica already provides interest without offsetting it by loans: they use the deposit balance for hedging the trades. The hedging positions can be liquidated immediately, so there is no maturity mismatch. Obviously, in the end these two points are empirical and we can’t predict them completely, but at least they conceptually they present obstacles for expansion of the money supply, unlike with gold/fiat.

The last one is unclear. You argue that the government can monopolise Bitcoin banks. There is a second approach possible too: government fixes the exchange ratio between Bitcoin and claims on Bitcoin, fuelling the outflow of Bitcoin from the economy (Gresham’s law). In my opinion, it is difficult to do either effectively unless Bitcoin is a legal tender or at least a widely deployed medium of exchange, AND these claims on Bitcoin are already used as a medium of exchange. Otherwise, the result could simply be that people start a new blockchain and the whole effort of government would end up pointless (also the market price of the old blockchain would drop and the monopolised banks would go bankrupt). This is similar to forking of open source projects, and we see that historically it can happen despite the network effect favouring the encumbents (e.g. libreoffice vs. openoffice). Again, this is an empirical question, of unclear consequences.

So while on one hand I am a bit more pessimistic than your prior positions on Bitcoin FRB, I am also more optimistic than your current one.

We think we have a chance of persuading the municipal authority to accept the points in part payment for local taxes.

The holy grail is instantaneous confirmation in a distributed ledger.  In my opinion, the development of Bitcoin should proceed in such a way as to minimize the chances of the currency being replaced by bank substitutes.  Obviously bank substitutes are highly dangerous.