Will a non-government-issued, virtual unit of value soon compete with national currencies?  Bitcoins, a virtual currency now accepted by a limited number of merchants have no sponsor or central bank.

One disadvantage of Bitcoins is that no national entity stands behind them — or is that an advantage? There are plenty of currencies that, at various times, would not have compared favorably with Bitcoins. Bitcoins has the advantage of allowing international transactions without the complication and cost of currency exchange. It trades on an exchange and over-the-counter order book This network advantage would be supplemented by the elimination the threat of being devalued through government action.

The U.S. cannot prevent increasing relative strength of foreign ¬†currencies from eroding US dollar’s hegemony in world financial markets, but what should its position be as to currencies that no traditional political unit stands behind and that may be created, distributed and controlled by non-governments and/or U.S. persons? One commenter describes it as the “most dangerous open-source project ever created.”

The constitution specifically authorizes Congress to coin money and prohibits states from doing so, but it says nothing about privately organized units of value being used in commerce. What legal issues are raised by transactions in non-US, non-national currencies? While frequent flyer miles, Facebook Credits (Facebook already fancies itself a country) and Microsoft Points might not pose a practical threat, how would US authorities respond to Walmart Bits?

Update: Bitcoin to Burn a Hole in Your Pocket

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