The role that Bitcoin can play in facilitating illicit trade has so far attracted most comment. Silk Road, a secret website where contraband was bought and sold, showed that a virtual currency can be more useful to a drug dealer than cash, which must be carried, or bank transfers that leave an electronic trail.

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Real though these concerns are, they miss the far more serious threat from the economic ideas behind Bitcoin. An individual or group using the pseudonym Satoshi Nakamoto first described the workings of the virtual currency in 2008.cn domain The following year they released the first version of the software that issues Bitcoins and keeps track of when they are spent. By then, many had come to doubt whether dollars, euros and other government-issued currencies would hold their worth – and whether orthodox monetary institutions were the best way to promote prosperity. Bitcoin has gained a following partly because it seems to show us how we can do without money issued by the state. Currency could be nationless.

Keeping money stable and trustworthy has traditionally been a function of national governments. By controlling the money supply and targeting interest rates, the authorities try to promote job creation and economic growth, while preventing runaway inflation that would cause the system of market exchange to break down. Calibrating monetary policy to the needs of the economy is an enormous undertaking. Central banks such as the US Federal Reserve employ hundreds of people to analyse economic data, chart the best path for monetary policy and explain their decisions to the public.

Bitcoin is designed to take these jobs away from central bankers and give it to a simple algorithm instead. Since an autonomous computer system cannot react to complex data such as the unemployment rate or the level of output, Bitcoin uses a fixed formula to control the currency supply. New tokens will be minted at a predetermined rate until a ceiling is reached some time around 2140, after which supply of the currency will stop growing.cn domain

Nakamoto’s writings seem to indicate that the motivation, at least in part, was the libertarian ideal of putting money creation beyond the reach of meddling central bankers. But this is a mistake. It ignores the ebbs and flow of economic cycles – a reckless approach that is the equivalent of a doctor giving penicillin to every patient without first checking whether they are suffering from infection, depression or mania.

Some newer competitors to Bitcoin try to correct this, allowing the supply of the currency to grow indefinitely in an attempt to generate low but positive inflation. Others incorporate penalties for hoarding, which are intended to ensure that the tokens circulate more freely. While these are a marked improvement over Bitcoin, they all share the same flaw. The state of the economy does not depend solely on the pace of money creation but also on patterns of human behaviour that are too complex to capture in a simple rule.cn domain

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That is why we need central bankers who can adjust monetary policy to promote prosperity when people behave in unexpected ways. True, the experts in charge of monetary policy in the years before 2008 failed to prevent the financial crisis. But their decisive action in its aftermath is widely credited with preventing a depression. Without a massive expansion in the money supply, many countries may now be dealing with serious deflation. Yet it is precisely this kind of flexible and timely policy reaction that cryptocurrencies aim to rule out.

The software behind Bitcoin is a remarkable technical achievement but those whocn domain tout such systems as a way of saving capitalism are profoundly wrong. Governments should be wary of allowing any virtual currency, unless they first find a way of putting central bankers back in charge.