This could not work and I see a lot of flaws in it. Firstly, it is all digital and there is nothing physical backing it. It is even more worthless then paper currency. Also, being that it is digital...it would give hackers an avenue to pretty much be digital bank robbers.
A currency needs to be physical and worth something (or at least backed by something of value). Gold and Silver are the top two precious metals that are used of value. Anything else that isn't backed by a precious metal loses its value. Paper currency by itself doesn't work, and neither would this.
I will have to disagree with you my friend. Bitcoin, is basically a digital central bank controlled by its market participants. The claim that it has no physical backing, is false. What is backing it - is fiat currency, and fiat still does(unfortunately), carry demand. So, that demand still creates market value, and a market pricing mechanism(consuming, producing, and taxes). Bitcoins, is now officially the Federal Reserve Banks competitor, in the legal-tender market(next to gold and silver(savings)). This will now throw another incalculable variable at the monetary policy-makers!
What Bitcoins does is allow voluntary actors(consumers and producers); to now create a free-market price mechanism, that is free from government restraints(i.e. regulations, wage controls, price controls, etc...). Generally(as I understand it), the system uses complex econometric algorithms that calculates(in/de-flation) according to the number of participants and invested capital(fiat money). So, if you want to picture its balance sheet: the producers are assets(they have goods/services ready to be sold), consumers are the liability(they can sell off their Bitcoins for fiat), and the capital/equity is the fiat currency holdings(100% reserve). Basically, it is not a fractional-reserve bank, so that means no boom and bust cycles(or, insolvency)!
The one big problem(or, unknown), is future government imperialism, or in this case - hackers!
It is also the greatest tool for tax evasion. How does the U.S. Government collect taxes? Through the consumption of U.S. Federal Reserve Notes, right? If all revenue and savings is stored in the Bitcoin market(just like gold/silver), how will the government collect its income? Without taxation, savings will skyrocket(in Bitcoins), and entrepreneurs(producers), can now have the tool they have been longing for - economic calculation!
Another thing to think about...
In the event that hyperinflation hits the U.S.(and, Bitcoin is not over runned by the government), the invested capital could be easily switched over to a hard digital currency(i.e. gold/silver standard), to protect its own free-market pricing mechanism.
I am pretty sure I sounded like a salesman.
But, I am a free-market anarchist, and I am pretty sure this software was created by free-market anarchists. Also, there maybe soon to be other competitors in this market as people around the globe seeks alternatives to their monopolistic central banks.
Sorry GQ, didn't mean to change this to a PR topic, but that is what Bitcoin is. It's anarchists taking away power from the State!
