Neal Stephenson’s novel The Diamond Age takes place in a future where encrypted currencies and e-commerce have moved most economic transactions into “darknets” beyond government’s capability of monitoring and regulation, causing tax bases around the world to implode and bringing on the collapse of most nation-states.

Encrypted currencies and darknet economies have been promoted by such thinkers as David de Ugarte and John Robb as a real-world model for resilient communities in the impending age of hollow states. So you can imagine my reaction to recent news of Bitcoin, “a Peer-to-Peer Electronic Cash System.”

Jason Calacanis and his colleagues at LAUNCH describe Bitcoin as “The Most Dangerous Project We’ve Ever Seen” (May 15, 2011).  Not only is it “the most dangerous open-source project ever created,” but “possibly the most dangerous technological project since the Internet itself.”  It “could topple governments, destabilize economies and create uncontrollable global bazaars for contraband.”

The beauty of Bitcoin is that there’s no central server network to shut down. Bitcoin is traded from one desktop or mobile device to another via public key encryption. Short of catching and prosecuting end-users with harsh punishments — and we all know how well that’s worked out for proprietary content companies versus file sharers — there’s no way to stop it.

There are currently 6 million Bitcoins in circulation, with a total value of $40 million. Bitcoins are generated by a complicated algorithm, with the total to top out at 21 million. After that, increases in exchange of goods and services will be offset by appreciation of Bitcoins in value and deflation of Bitcoin-denominated prices.

This fixed upper limit and requirement for price deflation thereafter is one ground on which Bitcoin has been criticized. Another is that, since it’s not denominated in a familiar unit of measure like dollars, it’s confusing as an instrument of exchange for the average person.

As an alternative currency geek, I’d add the criticism that you can only engage in Bitcoin-denominated exchange if you’ve already obtained Bitcoins from previous transactions. This is definitely a downside, compared with the kinds of “mutual credit clearing networks” proposed by Tom Greco.  Greco’s mutual credit isn’t a store of value from past transactions — just a measure of value for denominating exchanges of present or future goods and services.  The backing comes entirely from the goods and services themselves.  Like the many local barter networks that flourished during the Depression, mutual credit is a system for facilitating exchange even when there’s “no money.”

Despite my reservations, I consider Bitcoin grounds for enormous excitement.  Pirate Party founder Rick Falkvinge calls it “the Napster of Banking” (Falkvinge.net, May 11, 2011).

As Falkvinge argued, it’s usually not the most feature-rich version of a new technology that achieves popular acceptance.  Rather, it’s the most user-friendly.  “… [I]t takes about ten years from conception of a technology, or an application of technology, until somebody hits the magic recipe in how to make that technology easy enough to use that it catches on.”

Technologies for sharing digitized music had been around for ten years when Fanning came up with Napster.  Geeks had been sharing videos for ten years when YouTube came along.  Falkvinge thinks Bitcoin will do the same for encrypted e-currency.  It’ll do to banking what BitTorrent’s doing to the music industry.

Here’s how Falkvinge describes the ramifications:

“The governments of the world are on the brink of losing the ability to look into the economy of their citizens. They stand to lose the ability to seize assets, they stand to lose the ability to collect debts. … All the world’s weapons in all the world’s police hands are useless against the public’s ability to keep their cryptographic economy to themselves. … The decentralized, uncontrollable economy where one lifetime employment is no longer central to every human being is something I’ve called the swarm economy, and I predict it will redefine society to an immensely larger extent than the ability to get rap music for free.”

This is vitally important to a central theme in my work: The emergence of non-state spaces within which the low-overhead informal and household economy can function, outside the state’s ability to impose artificial scarcities  and entry barriers and collect tribute for the usurers, landlords and proprietary content owners.

Bitcoin is monumentally important.  Encrypted currency has been at the Altair stage of development. If Bitcoin isn’t actually the Apple II — and it may not be — we’re still just around the corner from that level of popular adoption.