Welcome to the CoinDesk Weekly Review 24th January 2014 – a regular look at the hottest, most controversial and thought-provoking events in the world of digital currency through the eyes of skepticism and wonder. Your host … John Law.

How many currencies are there? That’s an unanswerable question. If you define currency as nation-state backed traditional notes-and-coins currency, then there are around 170, lightly fewer than the 190-odd countries in the world. If you mean tokens of value, then who knows - you can count anything from Costa Coffee loyalty card stamps to gambling chips.

As for cryptocurrencies: last time anyone counted, there were 140 or so. By the time you read this, they’ll probably be on a par with the fiat brigade. And, if marketing outfit Humint’s plans come to fruition, there could be thousands.

Humint’s bright idea is for companies to create their own branded cryptocurrencies for loyalty-card like schemes. Technically, that’s not difficult or expensive: all the tools to create new cryptocurrencies are freely available and a small development team could get the whole lot put together, including mining software, mobile apps, wallets and chain management guff, in a few intensive days.

Or, if they’re smarter (and this has doubtless occurred to Humint, who presumably have some form of payback in mind), they spend a bit longer and build what’s called a white-label solution - a ready-to-go kit of parts to which a company just needs to add graphics, and names. Oh, and marketing.

Just because you can, doesn’t mean you should. What’s the point in multiplying cryptocurrencies? At the simplest level, it’s quite a quick and cheap way to create a loyalty scheme.

As soon as you go beyond a Costa-level system of rubber stamps (which is only suitable for low-cost items, as it’s so easy to defraud) you normally need something capable of running customer accounts. Which is why loyalty systems are either really small and limited, or run by huge companies in complicated ways.

The real fun comes when you consider that these things will be tradeable. Normally, it’s both complicated - or impossible - to trade your loyalty points for anything other than the stuff that the scheme owner allows.

But the glory of bitcoin-based currencies is that there is no central authority. If you want to swap your Pets-R-Us LizardCoins for a bunch of PerkyPence from the In-And-Out Cosmetic Surgery Shoppe, nobody will stop you (although they might giggle a bit).

All it needs is somebody else running an exchange, and you know how they blossom like mushrooms after rain. Good lord, one may even have to manage a portfolio.

There is one problem that may scupper the whole idea. Looked at from an accountancy point of view, loyalty schemes are actually quite complicated liabilities that have to squat on a company’s books. What if everyone decided to redeem all their points at the same time?

They won’t, of course, so what’s a reasonable way to measure the liability? This gets much more complicated if people are independently mining the tokens, and more complicated again if they start to have a separate life as a currency with an exchange rate above their redemption value with the company who owns the brand.

John Law doesn’t pretend to know how the existing dynamics of loyalty schemes will interact with the wild world of cryprocurrencies, except to note that it actually sounds a great deal more fun than just collecting Nectar Points when he buys his bog rolls at Tesco. And certainly more fun than his painfully acquired collection of Virgin Atlantic points, that quietly evaporated one year when he wasn’t flying much.

Not that he’s bitter. But he could really do with a spot of botox.

And talking of white-label systems, the biggest one ever was announced this week. Called Ethereum, it is … well, one problem is that it’s hard to describe.

It’s like a combined operating system/network/toolset for building not just cryptocurrencies but all manner of services and products. You can read all the details available so far, but in brief: it claims to fix most of the problems with mining by being very ASIC-unfriendly, it has clever ways to fix the problems in distributing giant block chains, and it has its own programming language.

That’s key. Using it, people can write apps - called contracts - that take care of the mechanics of sending and receiving coins, but can also add a lot of intelligence. That means you can link payments and identities to external assets, or financial instruments, or anything else you’d like to actually do with whatever currency you want to do it with.

It’s a very ambitious project, and will need a lot more discussion and conceptual tyre-kicking. The really interesting question is not whether it works, but what happens if it does?

The creators say that it’ll be a challenge to regulators, primarily because it allows decentralised organisations to exist - a group of people in a company-like collective, but with nothing you can actually point to as the place it exists. Add anonymity, and you’re a slippery beast indeed. Half-human, half-code, such chimeric corporations will be a most interesting experiment to try and contain.

John Law doesn’t think that’s the biggest elephant in the room. One of the things that could - hell, will - happen on Ethereum fairly shortly after it becomes reality is automated trading, in pretty much anything by pretty much anyone.

Experience of such systems shows that algorithms can and do behave very badly in the wrong circumstances, leading to out-of-control spirals or crashes in markets, and the big exchanges now have a number of big red buttons to push when some robot runs amok. And the regulators have built their own seriously severe monitoring systems.

The more complex and automatic a system is, and the greater the range of data types it has to deal with, the higher the chances of the unexpected event. These are examples of emergent properties; which are quite a hot scientific area to study. Mostly we know that we don’t know much about them.

But the point of Ethereum - and cybercurrencies in general - is that they’re big red button resistant. They encourage unregulated experimentation, and they thrive on removing barriers to things happening.

Welcome to the future: watch out for the elephants.

Phew. After such high-falutin’ thinkin’, what could be better than to sit back, loosen the tie, and fire up a big fat analogy. Sparking John Law’s interest this week is a fragrant, powerful, single-strain jazz cigarette of a concept: bitcoin is like cannabis.

Well, yes. Both annoy the authorities, who would like to ban their consumption on mildly illogical grounds to do with harm and criminality. They’re forbidden because they’re bad: the proof that they’re bad? Well, they’ve been forbidden.

However, people seem ever less willing to follow these strictures. Bitcoin is growing apace, and while the regulators clearly don’t like it they’re gradually adapting to something they can’t just ban. Dope smoking has been popular for a long time, but after a few decades of banning it to no good effect, the lawmakers are inching their way towards the exit on this one too.

In both cases, a lack of clarity (no, not the sort that comes after blazing the hydro) is causing its own problems.

In Colorado, where the state has legalised pot, cannabis shops are finding that because it’s still illegal under federal law, credit card companies are liable to refuse their transactions. Sometimes. The alternative is cash, and it’s not much fun having to haul large amounts of the stuff around on a daily basis.

Bitcoin might seem a philosophical match and a practical answer - but with banks still liable to shut down accounts used for bitcoin trading that’s one set of ambiguities too many. So the smoke shops are either not taking it or, if they are, not advertising the fact.

There is a delicious irony here, that a currency much lambasted for enabling transactions in prohibited substances fails to be much good once they come off the naughty list. It’s an object lesson in how, if you’re operating at the edge of legality, your other affairs must be scrupulously spotless.

John Law, of course, is beyond reproach in all his affairs, private and public, and recommends that nobody smoke anything stronger than a kipper.

Although, if a custom altcoin was introduced for enthusiastic smokers, he is sure it would have an impressive hash rate.

John Law is an 18th century Scottish entrepreneur, financial engineer and gambler. Having reformed the French economy, invented paper currency, state banks, the Mississippi Bubble and other ideas essential to modern economics, he took three hundred years off in a small cottage outside Bude. He has returned to write for CoinDesk on the foibles of digital currency.

Retro Robot via Shutterstock