Quote from: Rassah on November 30, 2012, 03:27:28 PM

I'm sure I'm not the first to have thought of this, but...:

I'm still hearing arguments flying around how,
   "Bitcoin isn't backed by anything but people collectively believing is it worth something,"
   "Well, USD isn't backed by anything either, and only has value because people believe it does, too"
   with the usual final retort of, "USD has value/is backed because it is the only way to pay the IRS taxes."

Well, what makes the IRS any different from any other merchant that only accepts specific currencies? The only reason the IRS collects money is for the government to spend it on other stuff. It doesn't do it to prop up the currency. And the only reason the government directs the IRS to collect USD is because the government, like the rest of us, also believes USD has value. There is nothing to prop up USD's worth other than our collective belief, and if the USD value drops significantly, or even becomes worthless, you can bet that the government (and military, and everyone else) will want something else instead, and will direct the IRS to start collecting something else instead of USD. So, really, saying "But you can pay taxes with it!" is a fallacy that assumes the IRS is some separate body in charge of determining currency value, instead of just another merchant/business collecting whatever value it believes in, with the same goal of being able to spend it later.

The difference between IRS and any other merchant is the use of force. While you have the choice of paying any other merchant in their prefered currency, you are forced to pay IRS in their choice of currency. That is the essence of the "backed by taxation"-argument. It's an answer to why inferior fiat money is being used when there are superior alternatives. Dollars do not have any inherent properties that make them good as money, but their government enforced "not going to jail"-properties are valueable to most people. So just like people are prepared to pay for the "get out of jail free"-card in monopoly, they are prepared to use dollars for regular transactions because they know they will face the ultimate choice of paying dollars to IRS or go to jail.