[ewoodrich]

I've thought that Bitcoin (or more likely, a future crypto currency) might be better served as a transaction backbone for payment processors, banks, and the like. It could still be used for transactions between two individuals, but the bulk of transactions would be for routine inter-bank processing.

This would have an effect of stabilizing the exchange rate, and could replace Fedwire/ACH for a large portion of transactions. However, I'm not convinced the current mining structure is optimal, and would certainly not be suitable for this usage.

I'm sure many Bitcoin advocates would disagree with me, but I believe that there should be some mechanism a la the federal reserve to stabilize the market and allow for reasonable inflation. I have no idea how this would be implemented from a technical standpoint, but I believe with some refinements, cryptocurrencies can serve a place in the economy, but I do not see them replacing the "fiat" by any means.

[Retric]

The USD is already a digital currency. The Fed keeps a ledger of how much USD every bank has and transactions between banks, which enables banks to go back and forth between hard cash and digital currency. Note the Fed does not know how much each account has but that's the banks job.

From a banks perspective there is no reason to change things. They can trust checks from random people as long as the Fed clears the transaction between them and Bank X at the end of the day there in the clear.

[dllthomas]

It's partly digitized. There's still quite a bit of shipping dollars around.

[Retric]

There are also physical Bitcoin's: https://www.casascius.com/

You could argue that the physical bitcoins simply represent digital ones but the same can be said for USD as they are numbered. Coins are not currently numbered but represent a small fraction of the overall money supply.

http://www.wheresgeorge.com/wild.php

[dllthomas]

You don't ever need to ship physical bitcoins, though. You can just digitize and transfer them. Which is preferred can be decided on the fly, which is quite a different situation than USD.

Personally, I'm not very convinced that physical bitcoins will really be meaningful: 1) cost of production is probably large compared to transaction fees, 2) counterfeiting issues. But I could easily be wrong there.

[Retric]

Ahh, this is the important point USD start as digital currency. When the fed 'makes money' they are not talking about physical objects. (There are other views of the money supply that include IOU's as money but that's something of a side issue and can also apply to bit-coins or stocks when someone shorts it.)

More importantly the physical dollars only go into circulation after removing a digital dollar that already exists.

[dllthomas]

None of that changes the fact that there is substantially more need to ship around physical stores of value with USD than with BTC. It's not just banks, it's every merchant accepting cash.

[gnopgnip]

Bitcoin works great as a system where you cannot trust anyone, with a proportional resource cost. In a closed system like that the extra cost would not outweigh the benefits.