From Project Syndicate by Steven Strauss:
Bitcoin seeks to be an electronic cash (currency) system that doesn't rely on trust. Paradoxically, Bitcoin requires a trust-based ecosystem.
As a brief summary: The Bitcoin system was developed as an electronic currency by Satoshi Nakamoto (apparently, a pseudonym). Bitcoins exist only in the online world (they have no physical form). Each Bitcoin is uniquely identified, and is part of a limited edition (only a pre-set number will be issued). And, if properly executed, Bitcoin transactions are anonymous and non-reversible. For a more detailed explanation of Bitcoin's architecture, see Benjamin Wallace (Wired) or The Economist.
Bitcoin is intended to be digital cash/currency, based on cryptography and peer-to-peer networks, rather than trust. As Nakamoto explains:
"The root problem with conventional currency is all the trust that's required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts."
Nakomoto cites as conventional currency's root problem: "all the trust that's required to make it work." But Bitcoin requires us to replace trust in legal systems, institutions and procedures, with a system where we must:
- Trust the willingness of counterparties to accept Bitcoin as currency for payment -- a huge leap of faith. Purchasing Bitcoins means participation in a 100 percent trust-based system, without any legal mechanism to compel their acceptance. Conventional currencies rely not just on trust, but also on the force of law. For example, in America the "Legal Tender Statute" (31 USC Sec. 5103) specifies that: "United States coins and currency ... are legal tender for all debts, public charges, taxes, and dues." No country issues Bitcoins, and no government legally compels anyone to accept them as payment.
- Trust unregulated institutions with your personal bank information just to purchase Bitcoins. As described in Mother Jones:&
"... if you ... have qualms about handing over all of your bank information to an anonymous internet stranger, then you might want to just give up now. The major Bitcoin exchanges don't accept credit cards ..."