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I think ultimately it will serve the role of "specie gold"

I agree with this. (I don't understand the blinded token idea.)

I think it is quite easy to imagine that banking services are build on top of BTC. These would be account receivables against banks, much like current accounts and CDs in USD or EUR work today.

The transaction features of bitcoin are amazing, in my opinion, if you compare them with gold bullion. Granted it can take up to hours for a payment to become fully confirmed, but this is the cryptographic specie being transfered from one individual party to the other. It is a lot more direct on this account than even a fast bank transfer, because in that you still only have a receivable against your bank, much like equivalent ones in todays credit system denominating in USD, etc.

Plus you have the safety that no-one can inflate much value out of the currency, because it is specie-based. At least not for a very long time.

(Unless the "closing of the bitcoin window" trick is pulled again. "Closing of the gold window" was the language the was used euphemistically, when redeemability of USD into gold was ended in 1973.)

If you wanted instant transactions, that is just as easy as today, with a lot more pressure on banks to make transfers real-time, because one main business model would be to beat transaction speed. And that has an upper bound of max. a few hours in plain BTC.

Blinded tokens are basically a form of public key operation where an issuer of currency (mint or issuer) signs a unique "coin" (random string) essentially through a sealed envelope with carbon paper. The end user can remove the envelope and the coin then isn't linkable by the issuer of currency to the original signing transaction, except that he can check that the signature is valid. So there's real, cryptographic anonymity.

The system has a central entity issuing the currency initially AND reissuing it on every change of ownership (to make sure your trading counterparty didn't keep a copy). But, this can be a purely automatic action, and there are technical ways to keep it operational even if there is serious effort put into shutting it down (it doesn't have to be an identifiable business entity, it could be a bot which sees coins posted to a pool somewhere, operates on them, and returns them; or goes over a tor hidden service, or whatever.

The advantage is you have real anonymity on each transaction and you can issue arbitrary currencies (e.g. I could do an rdl-issued-USD currency, which is $10k in tokens issued against a pile of $100 bills I have proven I control on camera, and where there are multiple independent audits to prove I still have the $10k. Or a corporate/personal debt or equity currency, like offering 1% of a startup...you can do arbitrary instruments, just like paper; all this does is make it easy to exchange shares of those agreements.)

The interesting thing to me is currency's role in providing certainty. In this case, about the total amount of something, and whether what you're encountering is a valid instance of it. Check out some examples and how Bitcoin compares:

Gold has chemical properties that ensure its finite scarcity (though supplies can fluctuate) and allow you to identify it as ture gold (through, e.g. density measurements). Gold-backed paper currency has a scarcity determined by the trustworthiness of its issuer and a validity linked to the difficulty of its reproduction. Fiat paper currency has a feature of allowing a fractional reserve system, which allows a central body to control its scarcity (and perceptions thereof), with validity again linked to difficulty of reproduction. Open-source cryptographic currencies have a well-defined scarcity and easily verifiable validity.

Cryptography provides certainty better than a physical alternative like gold or paper, but governments traditionally have had control over currency and don't have control over Bitcoin. I think it's unlikely they'll give this up without a fight. I'm not sure that the token system you propose really gives them back that control unless it supports fiat: the arbitrary issuance or discontinuation of currency. But, the idea of Bitcoin as specie is a great one. If it is adopted it as such it becomes open to confiscation like FDR did with gold in 1933, which is an interesting prospect: http://en.wikipedia.org/wiki/Executive_Order_6102

I wonder confiscation is even possible? If it's not this is a seriously revolutionary tech: property without government.

Fiat paper currency and fractional reserve are basically independent concepts. Fractional reserve is practiced by the banks, and was done under gold-backed currency just as much as today. A really interesting thing is the period of "Free Banking"[0] -- in Scotland in the 1700s/1800s where banks were essentially unregulated; State banks in the US were loosely regulated in much of the 1800s as well.

All that's required to do fractional reserve is the ability to distinguish "money on account" from notes. Either issue private notes, or maintain ledgers of balances.

You could conceivably have a 100% reserved bank (doing bailment of physical fiat notes -- a $100 note in the vault for every $100 in a savings account balance) even under fiat currency. Or you could have something with only one entity allowed to increase the money supply (deposit with the central bank, but a 100% central bank reserve requirement, but the central bank allowed to do loans).

[0] http://en.wikipedia.org/wiki/Free_banking

You're right that I conflated the two above but the relevant feature of each is that they're a form of money creation. With a fractional reserve, the amount of money created (through leveraging the reserve) is inversely related to the size of the reserve. With fiat currency the 'reserve' the government has is nonexistent, allowing for unlimited money creation. The government or a bank's ability to engage in money creation are both limited by the certainty that those using the currency have in its future value. If a bank loses it, we get a run. If a government loses it, we get hyperinflation.

Thanks for the distinction between the two concepts though. You're exactly right and gave a great explanation of them. I'll take a look at the free banking period. It does sound very interesting. Talking about the money and valuation sometimes it seems like all we have to measure things with is a rubber ruler, especially when the amount and value of currencies can be manipulated.

It goes even beyond that. It could be the first time in history where wealth can't be taken by force.

I totally agree with your first statement, that a more useful virtual currency will spring up on top of Bitcoin for immediate transactions (I actually have a good idea of what it will be). Yet I totally disagree with your second premise. I think Bitcoin is a fine store of wealth. Fractional reserve banking and a debt-based economy is what many of us are trying to get away from. And I can definitely see Bitcoin as a long-term store of wealth and an easy way to make deposits into other, more convenient virtual currencies that are springing up.

Bitcoin is no better than gold as a store of wealth, and it's widely understood in economics that "cash under a mattress" or "bank deposits not loaned out" are unproductive. It's reasonable for a very conservative individual to hold a lot of unproductive assets like that, but if everyone did for all of their assets, the economy would collapse, or at least be far smaller.

The current method for handling immediate transactions is a Green Address (https://en.bitcoin.it/wiki/Green_address). Basically using a third party that both people trust for sending coins so if you as a seller receive coins from this address you know they weren't double spent and can accept the coins right away.

There is a really cool project called Ripple that's designed to do exactly what you suggest: build a P2P transaction system where Bitcoin or USD or whatever you want is the "specie gold." It's basically a distributed banking system which IMO is an awesome concept. I don't know if this is going to take off but I hope something like it does.

http://ripple.com/

(I have an account and about $5 USD in XRP but no other involvement)

There are a lot of technical reasons I dislike Ripple and would prefer to just have a bunch of separate "mint operators" (technical organizations who run servers) and "currency issuers" (financial entities) and "exchanges" (which do instant currency conversion and publish exchange ratios), all using a common protocol, but not one based on consensus across multiple parties for each entity, but fully independent entities implementing their own governance and controls.

rdl-USD-001 is a "brand", and if it has weak security or weak financial backing, it trades at a huge discount vs. jvm-USD-001. There's no need for either to be "the official USD". You might create "hn USD" which is an index fund of hn particiant-issued USD obligations. There's no reason for everyone to use the same currencies for store of value, and with exchanges, you can convert to a common currency for transfers. I'd probably choose to display all my prices and account for my personal wealth in units close to USD, but someone else might pick EUR or BTC. Separating the 3 roles of money is the key element here.

Ripple essentially tries to be a multi-currency bitcoin. It also has no anonymity.

Those are good points. I agree that it's essential to have a way for ripple issues to trade at discounts (another way of saying this is that "Trust" should be continuous rather than binary and it should be dynamically set by markets if possible). It would also be nice for issuance to bear interest as well.

However I think that ripple would still have a place in such a system. Anyone could start a trading site using the ripple protocol that allows ripples to be exchanged at relative discounts. The Ripple protocol does treat, say, jvm-USD as different from rdl-USD; when you do a transaction you have to choose the issuer. The nice thing about having a universal P2P protocol is that there could be more than one trading site using the same protocols, and wallets would be seamlessly transferable across them. The P2P network provides the assurance that the issued notes don't rely on a 3rd party.

As I said above, I don't really care if it's Ripple or something else but I think this is a really powerful idea, and I would definitely want it to work the way you're suggesting.

The Ripple protocol can't be anonymous because it's a ledger; I'm pretty sure you need to give up at least one of anonymous, decentralized, secure-in-software-only.

Bitcoin is decentralized and secure-in-software, as is ripple.

Blinded tokens are decentralized and secure in software.

Cash (physical notes) are decentralized (per-issuer, like USG vs. JPN)/anonymous. You could do a trusted computing/smartcard protocol which was decentralized and anonymous, too. In both cases the level of security is down to physical counterfeiting or reverse engineering of circuits, which is a much weaker guarantee than cryptography.

I don't think there's a tractable software-only, distributed, anonymous system. The only way I could think of doing it is some kind of proof of work where the work required (storage or CPU) was something >50% of all resources in the world. Bitcoin has it easier because it's able to keep a record.

You can approximate software-only-secure, anonymous, and decentralized by having lots of distinct software-secure, anonymous systems more easily than you can approximate the trinity from other systems, I think. Even if you use a mix, vpn, etc to anonymize yourself with bitcoin, it leaks enough information to make someone identifiable.

Many in the bitcoin industry /community think that fractial reserve banking was a bad idea, and there would have never been the recent banking trouble if all the USD could be converted into gold (just ignore the banking problem when there was a gold based currency and ignore other countries that had banking problems).

There's potentially an argument for a currency itself to not have investment/fractional reserve features, but there is really no viable argument against investment assets existing independent of the currency at all (but denominated in that currency, potentially).

Also no sound financial argument for anyone (except those with short term needs or exceptional risk aversion) to store the majority of his wealth in a non-appreciating asset (like currency, even fiat USD) vs. income-bearing assets.