Modern monetary systems typically feature mechanisms for both creating and destroying money. In virtual economies these mechanisms are referred to as “faucets” and “sinks” respectively. How you define faucets and sinks says a lot about how your monetary system works and who it benefits.
Let’s use Bitcoin as an example. Bitcoin creates money through a computationally intensive “mining” process, that leaks new coins into the system at a predetermined rate. This faucet rewards people who have a lot of computational power to spend on this mining process. It also rewards early adopters since the faucet is slated to be slowed down and eventually turned off. Bitcoin doesn’t really feature any sinks, other than the fact that once bitcoins are lost they can never be retrieved. So one might say that carelessness is a kind of sink under the Bitcoin system.
Rewarding early adopters and those with computational power does make a certain kind of sense. Early adopters need to be incentivized or else the currency might never take off. And computational power is a stable, scarce resource, that in the case of Bitcoin is used to perform critical maintenance operations that keep the currency running.
However, the dark side is that Bitcoin is destined to create a new moneyed elite made up of this coalition of early adopters and computational donors. On the surface, it does not strike one as necessarily the most democratized monetary system possible.
Instead, one might imagine a currency that creates an equal amount of money in everyone’s wallet, every year. Such a system has both upsides and downsides, and there would be a lot of kinks to work out. That said, I think I might prefer such a system to Bitcoin.
One upside is that a basic income would be built directly into the system of money itself. If properly executed, everyone using the currency would be automatically insulated from the worst kinds of poverty. You would get a social safety net without the taxes.
Another upside is that this is probably an even better incentive to early adoption then Bitcoin’s deflationary model. Start using the currency and start getting an income. For many people that would be hard to turn down.
One downside is that to ensure against abuses of the system (e.g. creating two accounts and collecting two incomes) you would have to lose anonymity. Anonymity is a big value for a lot of people. However, an even larger group of people probably don’t care that much about anonymity. They’ve already accepted and gotten used to our current not very anonymous monetary system, and for them, this would simply be a lateral move. Furthermore if you buy contemporary arguments about the inevitable arrival of a post-privacy society, then anonymity may simply be an impossible goal to strive for anyway.
Another potential downside is that you would need a centralized authority to manage such a system. Again, this is going to be a problem for certain libertarian-leaning users, but it may not be that much of a problem for your average joe. Arguably, transparency and accountability are more important than decentralization for decentralization’s sake. Those attributes could possibly be preserved in a well-designed centralized system. In addition, one could argue that Bitcoin, even though it is decentralized in theory, still leads to a form of centralized power—namely the early adopters and computational donors mentioned above.
Such a system might also need sinks to protect against inflation. One idea might be to give the money an expiration date. Another idea might be to have the central authority be empowered to sell some sort of useful product or service, and then simply destroy the money after the purchase is made. There are literally countless ways this could be designed. The possibility space is wide open, and that is what is most exciting to me about digital currencies. (Though of course one must contend with the fact that governments are not always going to look kindly on monetary experimentation…)