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Bitcoin, Utopianism and the Future of Money

bitcoin

Although its long-term impact is most likely to be seen in various applications of blockchain technology, such as Ethereum and Factom, Bitcoin raises some important and challenging questions about the future of money. It is important that we do not pass up the opportunity that Bitcoin, and cryptocurrency more generally, give us to think more deeply about the nature of money, particularly its social nature. We can also learn much from the way in which Bitcoin itself has developed as an alternative monetary form.

As a form of money, Bitcoin needs to be seen in the context of changes in the global monetary landscape that have been underway since the Bretton Woods system broke down in the early 1970s. Since that time, national currencies have been increasingly difficult to manage in the face of the unprecedented growth of financial instruments being produced by banks and other complex financial institutions that were operating in a global scale. These were the developments being talked about by Susan Strange in seminal books such as Casino Capitalism, from 1986, and Mad Money, from 1998. She warned that states – and, by extension, central banks – were increasingly powerless to control the circulation of financial instruments that had been developed specifically to deal with risks that emerged once those very same states had abandoned exchange rate controls. Money, which she conceived through Georg Simmel’s classic definition of it in The Philosophy of Money as a “claim upon society”, was being placed under threat by a series of sophisticated financial instruments that were designed to manage global risks. Many of these new instruments, such as derivatives, seemed to operate like forms of money in their own right. In their path-breaking book, Capitalism With Derivatives, Dick Bryan and Michael Rafferty would later argue that derivatives “are a new form of money that now provides an anchor to the global financial system”.

As I argue in The Social Life of Money, since the 1970s we have been witnessing two countervailing tendencies in the world of money. On one side, there has been a tendency towards homogenization, characterized by the growth of global financial instruments, widespread dollarization and the establishment of various monetary unions, the Eurozone being the largest of these. On the other side, there has been a tendency towards diversification, marked by the emergence of local and community currencies and other alternative, private monetary forms such as digital currencies. While both tendencies challenge the notion that nation-states are the ‘natural’ unit into which the monetary world must be divided, some might argue that with the emergence of Bitcoin and other cryptocurrencies, diversification – not homogenization – now has the upper hand. Moreover, the state’s role in the production, management and regulation of money has been further undermined by disruptive innovation within the payments industry. The anthropologist Bill Maurer calls this a “Cambrian explosion … of business experiments with new technologies and the systems people use every day in physical and online spaces to buy things”.[1]These latter developments are interesting for another reason. While the homogenization and diversification of money referred to above seem mainly to pose a threat to the relationship between money and the state, the changes in the payments industry that have been mapped out in the work of Maurer and Birch threaten to undermine the degree of control over money that has been exercised by banks. Bitcoin is consistent with both of these historical trends.

Mainstream money is created through a combination of private banks and the state.  Alternative monies typically involve cutting at least one of these actors out of the system, in a process known as disintermediation. Some proposals for monetary reform aim only for one kind of disintermediation, e.g. ‘sovereign’ money as envisaged by the Positive Money campaign in the UK seeks to disconnect monetary creation from banks. Hayek’s proposals for denationalizing money (echoed more recently by various proposals for ‘monetary freedom’ or ‘free market money’) aimed at disconnecting money’s production from the state. Alongside other cryptocurrencies, Bitcoin aims at both. Without a doubt, this dual disintermediation accounts for a substantial amount of the political appeal of Bitcoin and other cryptocurrencies. For example, these new forms of money are attractive to those with libertarian and/or anarchist sympathies who want to see money removed from the control of government. The reasoning here is that governments cannot be trusted to resist increasing the money supply when political expediency demands, even if it results in high inflation. At their worse, the argument runs, irresponsible governments use their powers over money creation to fund military adventures. The prominent Bitcoin investor Roger Ver offers a fairly extreme version of this perspective when he argues that “Bitcoin will prevent governments from being able to just print money at will and then use that to buy tanks and guns and bombs to murder people around the world”. At the same time, Bitcoin appeals to the political sentiments of those who blame the banks – not government – for the 2008 crisis, and are troubled by the power and influence of the so-called Wall Street System, and more specifically, are critical of the fractional reserve system that enables high-street banks to create money whenever they make a loan.[2] From this perspective, the problem with our current monetary system is not the control it gives to states but, on the contrary, the power it gives to banks, and specifically the way that it ties the production of money systemically to the creation of debt.

Significantly, a currency such as Bitcoin offers answers of a sort to both of these criticisms of the monetary system as it is now configured – albeit answers that do not necessarily point in the same direction. Indeed, having such varied reasons for supporting Bitcoin makes for some intriguing and seemingly contradictory political and ideological alliances around cryptocurrency in general. In wanting to divest banks of the right to create money, Bitcoiners (and other cryptocurrency enthusiasts) share common cause with movements such as Positive Money in the UK, and with the Chicago Plan, first conceived by Frederick Soddy during the 1920s and subsequently advocated by Irving Fisher and Henry Simons in the aftermath of the Great Depression.[3] But there is a crucial issue that sets Bitcoin apart from Positive Money. Whereas those who support Positive Money argue that money’s creation should be placed in the hands of a politically accountable central bank committee (hence we would have something they call “sovereign money”), Bitcoiners believe that only technology can be trusted to do such an important job. In this sense, the broader appeal of Bitcoin is not simply that it takes money away from the control of banks and states, but that it removes politics from the production and management of money altogether. And it is in this sense, particularly, that I would refer to Bitcoin as utopian.

Like many forms of money, from the Bristol Pound to the Euro, Bitcoin is underpinned by a series of ideals about the organization of society, and the role that money plays within it. But unlike those other forms of money, Bitcoin seeks to achieve these aims by technological means. This is not to suggest that Bitcoin is apolitical – quite the contrary, in fact. Arguably, the notion of distributing power throughout the network of computers that are responsible for producing the currency – and, just as importantly, distributing the record of transactions throughout the network by means of the blockchain – is perhaps the most crucial of its utopian aspects, which has much in common with the sort of “horizontalism” associated with recent social movements such as Occupy.

Bitcoin is essentially a techno-utopia. With Bitcoin, the regulation and control of money will be achieved not through trusted sources of authority – politically accountable human experts, for example – but by machines. In monetary terms, this is most obvious in the case of the production of money itself: the software is programmed to generate a specified number of Bitcoin every ten minutes or so, and this production is programmed to stop when the total number of Bitcoin reaches 21 million. In one sense this reflects quite a conservative understanding of money: Bitcoin is like gold, or land, whose fixed supply underpins money’s value. Ironically, given that at least some of Bitcoin’s supporters are on the political Left, this is a theory of money that has much in common with the austerity policies that have been pursued within the Eurozone, and are the cause of so much criticism of Germany, which has been most outspoken in its advocacy of austerity through so-called “sound” money policies – emphasising cuts in expenditure, debt reduction, and a commitment to preventing inflation so strong that verges on paranoia – for the Eurozone as a whole. These are the policies, and the politics, against which Syriza was elected in Greece. Some Bitcoiners might not appreciate the comparison, but it is impossible to avoid. If Bitcoin was ever to become the predominant form of money, the outcome would be something akin to hyper-deflation. Nobody seriously believes that this will happen, of course. As the Wall Street Journal’s Michael J. Casey and Paul Vigna argue in their outstanding new book, The Age of Cryptocurrency, Bitcoin – or, more likely perhaps, several other cryptocurrencies without Bitcoin’s design flaws – is more likely to play a relatively minor (but nevertheless important) role in the monetary and financial system of the future, namely, as a small and relatively hidden part of the payments system where its low transaction costs are attractive. One such area where Bitcoin is already being tried is in international remittance payments, where M-Pesa has made a significant impact (by reducing transaction costs and thereby making payments services more accessible to the unbanked), and BitPesa (which claims to cut transaction fees by almost half as much again, compared to M-Pesa) is worth watching for this reason.

For all of its qualities as a techno-utopia – whether we agree with these or not, and irrespective of our views about the technical competence of Bitcoin’s design – the currency has not lived up to the techno-hype surrounding it. Despite the claim that Bitcoin is a horizontal network, which is politics-free because it distributes the power of money creation, the currency is characterized by a strikingly high degree of political hierarchy and social organization. This is not about wealth concentration, but monetary production. If someone – say, a Winklevoss twin – chooses to accumulate a large percentage of Bitcoin by buying them on the open market, this tells us nothing about the world that we don’t already know. What matters, however, is that Bitcoin’s production is being dominated by a very small number of mining pools, indeed the software favours the most powerful producers and incentivizes monopolistic practices. If you want to mine for Bitcoin, your best – and perhaps only – chance of doing so successfully is to join such a pool, for example by renting space on a larger mining rig. This means that the Bitcoin network is not quite as “distributed” as its advocates claim, indeed one could argue that it demonstrates quite a strong tendency towards the centralization of monetary production by massively favouring those with more processing power. It is ironic, but significant, that this is a result of technical features of Bitcoin’s design. I say significant, because it suggests that another cryptocurrency with a new design might avoid this tendency to concentrate monetary production so much – which is exactly what designers of other altcoins, such as Litecoin and Dogecoin, have been claiming. This further underlines the importance of looking beyond Bitcoin when considering the potential role of cryptocurrencies in the future of money. In this regard, Bitcoin tells us something important about the relationship between technology and the social context of its use. To express the point more bluntly, technology cannot enact social organization on its own. As a form of money, Bitcoin has been sustained by social relations – structure, leadership, hierarchy, friendship and community – much more than it has evaded them. This is not necessarily a bad thing. My point is simply that the reality of Bitcoin – its social reality – is at odds with the theory behind it.

Bitcoin was (and still is) trumpeted as a currency that could overcome difficulties arising in conventional monetary and payment systems whenever trust breaks down (or is breached). In his original 2008 paper heralding Bitcoin, Nakamoto argued that “the root problem with conventional currency is all the trust that’s required to make it work”. In one sense this is complete nonsense: money always requires trust in order to work, simply for people to accept it as payment. But Nakamoto was specifically referring to two things: first, the trust we place in the monetary policy makers – central bankers, for example – to act responsibly; and second, in the specific context of digital currency, the trust we need to place in one another not to double spend. These are critically important aspects of Bitcoin today in that they point to two separate development trajectories in Bitcoin’s future. The first relates directly to money. Although it is open to debate whether – as Nakamoto alleges – the trust in fiat monetary systems has been fatally undermined, he was surely right to criticize a system that enables banks to “lend [money] out in waves of credit bubbles with barely a fraction in reserve”. In this sense, as I have already suggested, Bitcoin is in tune with political sentiments that emerged after the 2008 financial crisis.

The second trust issue points to wider applications of blockchain technology beyond money. The idea of keeping failsafe records through a distributed network that does not rely on trusted (but potentially inefficient, corrupt or incompetent) intermediaries is perhaps the most radical aspect of Bitcoin, and will be pivotal to a future that will be much broader than money alone. This is not to say that Bitcoin has no relevance to the future of money. I very much hope that it does. But for the reasons stated here, I believe that its role will be a partial one – and rightly so. A world in which all money is organized along the lines of Bitcoin, with money’s production strictly controlled, would suffer from hyper-deflation. This is very unlikely, however. Bitcoin, and cryptocurrencies in general, are part of a pluralistic future for money: they widen our options, achieve things that other currencies cannot do, and reach people (such as the unbanked) that other monies do not reach.

 


[1] These developments, and particularly their implications for the politics of personal identity, have been written about in great detail in David Birch’s 2013 book, Identity is the New Money.

[2] For the Bank of England’s explanation of how this works, see here.

[3] For an IMF perspective on this, see here.


  • I disagree. A 100% bitcoin world won’t lead to hyper-deflation. In a 100% bitcoin world bitcoin itself will be the perfect index fund. If world economic growth goes up, then value of bitcoin goes up (slight deflation); if world economic growth shrinks, the value of bitcoin will go down (slight inflation.) I don’t see this is as hyper-deflation.

  • Stephen Townsley

    I think this is an interesting contribution from an economic perspective but I would like to throw a couple of thoughts in.

    Firstly the article does deal with Bitcoin the currency and the blockchain pretty fairly but we don’t really yet know how Bitcoin will be used. If, for example, it becomes a remittance tool only and very few other purchases happen then 21 million coins would never be much of a limitation. If it was only used by governments or large institutions to speed up international financial settlements then 21 million coin would work fine and potential never need changing.

    In addition a Bitcoin can be broken up to 8 decimal places. Lets suppose that became 10 or 20 places. Then one coin could be $100,000,000 and still be usable at a fraction of a penny at the nth decimal place.

    I just think the deflationary/limit argument can be overplayed although it is an issue.

    However the bigger issue is Bitcoin the protocol. The protocol and the blockchain don’t necessarily dis-allow other forms of programming. So on the Internet we could argue that email is not a great way to transfer files and FTP is not a great way to transfer music or broadcast video. Applications like mail, music streaming etc sit on top of protocols. With the Bitcoin protocol it’s entirely possible for someone to program some other application that does currency better than the Bitcoin application currently running. So at some point a new coin takes over from Bitcoin. I am not talking about ‘altcoins’ here but rather a Bitcoin v2 currency that emerges out of v1.

    To work an improved currency would have to meet consensus in the network. Just like the HTML web experience went through iterations to become HTML 5 there is no reason why existing Bitcoins just become a new currency as versions change.

    Once money becomes programmable then it can evolve however to evolve the network must accept the change by coming to consensus. That latter trick is needed to protect the value of Bitcoins as they evolve.

  • Nigel Dodd

    Thanks a lot for these comments. The editors have asked me to reply, and I’m very happy to do so.

    To Datavetaren, your point merely restates the textbook definition of deflation, i.e. “the value of Bitcoin [money] goes up”. Note that my argument about deflation is hypothetical: “If Bitcoin was ever to become the predominant form of money, the outcome would be something akin to hyper-deflation”. Now that’s a huge “if” – Bitcoin almost definitely won’t replace fiat money! See also Vigna and Casey’s book (mentioned in my piece), where they also say that deflation would be an issue *if* Bitcoin replaced fiat money. There are plenty of debates about this issue out there as regards Bitcoin, e.g. http://www.economist.com/blogs/freeexchange/2014/04/money (see penultimate paragraph, especially). Arguments about this are a bit confused because some (e.g.http://www.newstatesman.com/economics/2013/04/bitcoin-hyperdeflation) are referring to a world in which Bitcoin is still priced in dollars.

    Stephen Townsley is therefore right to say that the inflation/deflation issue tends to be overplayed. I hope that I didn’t overplay it – I mentioned it, that’s all. By the way, Stephen sees my piece as coming from an ‘economic’ perspective and I would have to disagree there: my main argument is that we need to see Bitcoin as a social system, not simply as a technology. To repeat: “My point is simply that the reality of Bitcoin – its social reality – is at odds with the theory behind it” – this really isn’t an economic perspective! I find the rest of Stephen’s point super interesting and compelling. As I pointed out at the beginning of my piece, we probably need to look at other applications of the blockchain technology in order to grasp the wider significance of Bitcoin. I mentioned Ethereum and Factom, and I would now put Eris into that that, see http://ftalphaville.ft.com/2015/03/20/2122415/blockchains-as-a-public-and-private-resource/ for an account of an event I was at last week. But Stephen mentions “an improved currency”, “a Bitcoin v2 currency that emerges out of v1” – and I would love to hear more about that prospect.

    By the way, Izabella Kaminska has opened up an interesting debate in the FT about the legal status of Bitcoin versus cash, which raises issues I hadn’t thought about. See http://ftalphaville.ft.com/2015/03/24/2122678/bitcoins-lien-problem/. (Sorry that these FT references are behind a paywall!)