“[A] universal currency valid for trade transactions in all the world.” – John Maynard Keynes
When John Maynard Keynes addressed the House of Lords in 1943 and spoke these words, the opportunities afforded to us by computerization and the internet were as yet a distant dream. He was arguing for an International Clearing Union which would provide a special unit of account that was not, technically, a currency proper. Rather, it was a way to keep track of international trade and, through international agreements, incentivize nations to balance their imports and exports. His ideas did not come to pass. It arguably inspired the International Monetary Fund’s (IMF) Special Drawing Rights, though, a supplementary foreign exchange assets which is mainly used as a unit of account by the IMF.
To cite Keynes as someone who could have been sympathetic towards the use of cryptographic currencies (cryptocurrencies) such as Bitcoin may appear strange initially; indeed, they are much more closely associated with names such as Friedrich August von Hayek and the Austrian school of economics. Considering the decentralized nature of cryptocurrencies, von Hayek’s Denationalisation of Money in particular comes to mind and Satoshi Nakamoto, the pseudonymous inventor of Bitcoin, quite openly declared his distrust of centralized banking and state interventionism with which Keynes is closely associated. However, to see a cryptocurrency such as Bitcoin exclusively through the lens of its inventor or its current implementation is to fail to see its underlying potential just as much as it is a disservice to the heritage of Keynes. His political and economic thought has often been reduced to action titles for those arguing either for or against extensive monetary intervention by the government. Although Keynes certainly was one of the most profound early influencers of the current central banking system and the dominant monetary policy of the developed nations of the 20th century, his relationship with the actual implementation of interventions is much more complex; in fact he laid out his concerns succinctly with regard to extensive interventionism, a focus on institutions instead of individuals, and the debasement of currency through inflation in his The Economic Consequences of the Peace as early as 1919. As such, Keynes, much like von Hayek, would have been appalled by the idea that a bank, or any private enterprise, could be too big to fail and both argued that government should empower individual citizens, not institutions.
Where they differed was in the mechanisms through which they thought this could be achieved. From von Hayek’s point of view, price was everything: the market, left to its own devices, would eventually heal itself and all the government should do is restrict itself to ensuring its proper functioning through laws and policies counteracting the formation of monopolies and cartels.
Keynes cut to a more fundamental question and, in his 1936 magnum opus, The General Theory of Employment, Interest and Money, used the term ‘animal spirits’ to describe the confidence and trust that individuals place in the economic system, its fairness, resilience and ability to cope with corruption and other detrimental influences. In times of crisis, Keynes suggested, wise government intervention could counteract a loss of confidence in the economic system, preventing prolonged destitution by empowering businesses and individuals alike.
While pegging the currency supply to a commodity such as gold proved effective for a while, the uncertainty of reserves and rates of production in a globalized economy eventually hampers the ability of central banks to expand or contract credit in response to economic circumstances. It therefore potentially prolongs – as was the case with the Great Depression of the early twentieth Century – economic turmoil. The use of a centralized and democratically legitimized agency such as a central bank to ensure confidence in trade and exchange through governmental fiat and policy was, in the world of the still nascent nation states of the early 20th century, the obvious choice. Today, technologies such as cryptocurrencies may change this because their supply and rate of production could be tailored, through democratic mandate, to economic circumstances without having to rely on an agency resembling what we know as a central bank.
“There are three eras of currency: Commodity-based, Politically-based, and now, Math-based.” – Chris Dixon
The rise of the internet presages this tendency for decentralization. It allows almost everyone in the developed world access to an unprecedented library of knowledge and a worldwide exchange of information without significant delay or transaction costs. It does not simply broadcast the opinion of the state or powerful institutions, but, through its largely decentralized nature, empowers individuals to share their views and to connect with like-minded people across the globe. It is a medium which allows arbitrary services to be implemented. In a similar fashion, cryptocurrencies rethink the concept of a currency in this decentralized logic of the internet, providing the next evolutionary step in online transactions.
Much of our financial and political system is still based on premises that were true when a phone call from New York to London cost more than $100 per minute and documents were still, chiefly, sent by post or courier; where nationwide, not to mention global, fair cooperation could only be achieved, if at all, by delegating it to democratically legitimized institutions. The potential of cryptocurrencies lies in reducing the overhead of financial transactions in a similar fashion as the advent of email reduced the costs of communication.
“Bitcoin is for money what TCP/IP is to the Information Age” – Micky Malka
Electronic forms of money and centralized currencies have of course existed for decades with the most obvious example being online banking and money transfer (electronic money) as well as loyalty programs (currency). Moreover, MMORPGs (internet-based computer games) successfully use ingame currency, i.e. a fictional electronic currency that can be used to acquire ingame items from other players or centralized stores, as an integral part of their virtual game worlds. The Linden Dollar in Second Life or World of Warcraft’s Gold can serve as an example.
The reduction in cost that a shift from physical to electronic bookkeeping enables has already brought about significant progress not just in the developed world, but also in developing countries such as Tanzania and Kenya. There, mobile payments via SMS are one of the leading forms of payment and Airtime (pre-paid cards for mobile phones) has emerged as a functioning currency. However, common to these forms of electronic currencies is that their handling is still reminiscent of and, in many ways, constricted by, a design that considers them an afterthought to physical money and currencies. More importantly, a (trustworthy) central authority is essential in all these examples to keep the books and/or issue the digital currency/commodity.
The revolutionary idea behind Satoshi Nakamoto’s Bitcoin is not its use as a currency or as a form of electronic money, it is the nature of the blockchain: a transparent and cryptographically secured public ledger that records and verifies transactions. The cryptographic validation inherent to the functioning of this public ledger of transactions ensures that no trust in intermediaries or central authorities is necessary because transactions cannot be faked, nor currency counterfeited. It also provides an irrepressible transparency of transactions: while transactions are usually pseudonymous, they can be reviewed and are impossible to tamper with after being extensively verified by the network. This security-by-design, which does not have to rely on intermediaries, significantly reduces transaction costs with striking results. To illustrate this, consider the case of a recent donation facilitated via Dogecoin, a cryptocurrency originally meant to satirise Bitcoin, but which has attracted (comparatively) widespread adoption due to its community being perceived as inclusive, charitable and good-natured.
In what is being called “the most valuable tweet in history” by news media, an anonymous benefactor donated more than $11,000 in Dogecoin to a charity: a water campaign organized by the Dogecoin Foundation in March of 2014. The total transaction costs for his donation were less than $0.0001 and, together with more than 5,000 other donors, over $30,000 were raised to build water wells in the Tana river basin in Kenya. While there were some other larger donations, thousands of donors donated many times over the span of the two weeks it took to raise the money with each individual donation being miniscule, usually amounting to less than fifty cents.
These donations would not have been possible using today’s conventional payment processors which usually charge flat fees of between $0.50 and $1 per transaction, plus between two and five percent of the total; if the $11,000 donation had been processed by a well known payment processor, fees for this donation alone could easily have reached more than $500.
To consumers, many of these fees are invisible because it is usually the receiver who pays them: merchants, charities or other organizations. But they add up. Additionally, and perhaps shockingly, if they affect individual users, they disproportionately affect those who are the most vulnerable: overdraft fees, high chargeback fees for uncovered credit card transactions and fees levied by remittance services impact the already economically disadvantaged. Remittance, a fast-growing $500 billion market, incurs average transaction fees of more than 10%, sometimes as high as 50%, and estimates for Africa suggest that more than two billion dollars are consumed by fees each year. Fees that seem incomprehensible in our digital day and age and which could otherwise be used to empower families in the developing world.
At the moment, Bitcoin and its brethren predominantly form payment networks and are therefore more properly comparable to PayPal, MasterCard or Western Union, rather than the US Dollar, Euro or British Pound Sterling. They also have a number of flaws, such as Bitcoin’s forced scarcity. However, they deserve credit and study for being the first form of a currency developed exclusively under the premises of a globally connected transnational society.
They also deserve credit for overcoming the strict necessity of intermediaries such as bank and payment processors by relying on cryptography and a self-regenerating distributed computing network established by their users. They also provide a means for a decentralized monetary authority in which the power to create more money is vested in a distributed computing network and dependent on a transparent protocol which can be changed to accommodate changing circumstances, but only if the majority of network users agree.
It is important to recognize that these are merely technological possibilities and although they were in part conscious design considerations of the inventor of the Bitcoin protocol, they are not essential to the technology and its potential uses. Many services such as banks and payment intermediaries can still provide valuable services even if cryptocurrencies were widely adopted, and society may still choose to delegate the management of its currency to a government or private agency. However, in stark contrast to the realities of the 20th century, even if such choices are made, cryptocurrencies provide new means for public accountability.
In the end, it is important to be cognisant of just how different the world is today from the world in which Keynes, von Hayek and the other architects of the current monetary – and political – system found themselves. Their thoughts are still of immense value, but in the face of rapid technological advancement we need to fundamentally rethink our premises. We believe that, in their current form, cryptocurrencies are a first step which can stimulate engagement and debate with this subject in the financial sphere. While cryptocurrencies will likely never be “a universal currency valid for trade transactions in all the world”, their technology has the potential to be a building block for a universal system for validated transactions in all the world – and that is a thought worth contemplating.