Article The changing value of money

Why Bitcoin won't triumph

The tech community, like any other, has a tendency to boast of its own achievements, and some its loudest self-congratulation can be heard on the matter of electronic currencies or cryptocurrencies. Bitcoin leads the charge, with extravagant claims being made by libertarian-leaning enthusiasts that it will render the state impotent or even defunct. Some of these people have highly paid positions and own shares in companies such as Google or Facebook, or are dotcom entrepreneurs made good. They have expertise and they have money and they feel their time has come.

“The revolution has started… Where do you stand?” proclaims Arisebitcoin, a San Francisco campaign group promoting the currency.

Meanwhile Max Keiser, a booster of cryptocurrencies with his own TV show, launched his own currency, Maxcoin, to the slogan “Bitcoin and Maxcoin will take down the banks.”

The assessment of the currency in the mainstream media has been more sober, with much concern expressed that it may simply be an investment bubble rather than a real currency. However the notion that bitcoin might undermine the state seeps out even into mainstream media commentary, such as a Bloomberg-hosted article excitedly entitled Bitcoin Really Is an Existential Threat to the Modern Liberal State.

But a shadow lies over these predictions: the long shadow of the state itself and its outlying institutions, among which we can include corporations. The bigger corporations, and banks in particular, are inextricably intertwined with the state and always have been. What that alliance represents is the existing power settlement, and it is a truly stupendous, globalised settlement, its collective power unrivalled by any empire yet known.

To give us a clue what a conflict between this establishment and cryptocurrencies might entail, we need to look beyond bitcoin’s boosters and its critics. Then we find that academics, whose positions on the sidelines can help them avoid being caught up in the latest hype, can write a paper with a mild title like: Regulating Cryptocurrencies in the United States: Current Issues and Future Directions.

Of course it is true that new technologies can have world-changing effects. There is no doubt that the internet will effect social change in the long term. But ‘in the long term’ is a key part of that statement, and being still in the dawn of the internet age we do not yet know which parts of it will be truly revolutionary and which parts may fade into the great archive in the cloud. Even what radical change does arrival may well take time. It is possible to argue that the printing press gave rise to the modern democratic settlement, or at least the English Civil War. But the printing press was invented in 1450, and the earliest dates we can claim for widespread suffrage in Western countries are four hundred years later; even the English revolutionary period was two hundred years later.

Perhaps technological development and social change have both speeded up since then. But we can also talk about the effects of other technologies we thought would change the world. We can talk, for example, about the era of mass production that flowered in the post-Ford era in Western countries until the 1980s. A common enough prediction in the early to mid twentieth century was that this mass production technology would free us from the world of work. We were meant to be working the three-day week by now. Or even the one-day week. Whatever went wrong?

The question we need to ask is who determines how technological changes are used? And in the short term at least, the answer is almost always: those who already have power. In the case of mass production technology, the power was in the hands of those who could afford the technology. They had no incentive at all to reduce people’s working time – quite the opposite. Why reducing working time when you can increase production? The power of decision over how the technology impacted our lives was not in the hands of ordinary people, or if it was, we didn’t know how to use it. The factory owners knew how to use their power, and here we are in the twenty-first century still grimly plodding through a five-day week.

There is a lesson here: the state or the corporations it creates are not a vast, featureless force, against which we can unleash a technological force, such as cryptocurrencies. The current state-corporate complex – of which people working in the tech industries form a part – is a highly adaptive political settlement. It can and does cope with innovation, even innovate itself, whatever its libertarian haters may claim. Furthermore the financial crisis taught us something about this adaptive state: if it has to choose between breaking you and breaking the banks, it will snap you like a twig.

That makes the state sound like a bully in a barroom brawl. Which is probably unfair, because the state will often only use violence as a last resort. The first resort will be regulation.

The first attempts are already being made, albeit fumblingly and falteringly – California’s cease and desist letter to the Bitcoin Foundation a particularly glaring example of failure. But the US governmental movement to regulate Bitcoin through the Money Transmission Act continues and officials are making noises that can’t be ignored. One report from the New York Department of Financial Services refers explicitly to unregulated ‘virtual currencies’ as a threat, including as a terrorist threat – in the land of Homeland Security anonymity of transactions is not a desirable trait.

Fears of the anarchy of anonymity seem to be what drove the government attacks on Mt Gox and Liberty Reserve, though the latter also attracted charges of deliberately ignoring criminal activity. Whatever the exact criminal charges, the thrust of these attacks is clear: cryptocurrency exchanges will not be permitted to process transactions without collecting data on their clients. While work-arounds may appear to combat this, legislation can also appear to combat work-arounds.

The UK has so far been more tolerant of Bitcoin even than the US but it has stated a position on tax that may turn out to have far-reaching implications. All cryptocurrency transactions are subject to the usual taxes, officials have said. But you can’t tax what isn’t recorded, or if you don’t know who to tax. If the UK decides to pursue this line it could eventually render even the quasi-anonymous cryptocurrencies a form of tax evasion.

We recently saw rumours that China had banned Bitcoin. These turned out not to be true, but the state had clamped down on banks and payment system providers using the currency. It was only one turn of the screw rather than the final end for Bitcoin in China, but who doubts that the Chinese government has other screws to turn if they wish?

But there is a reason I have talked more about the US than other governments here. The term for the economic advantage you can gain by being a currency issuer is seigniorage. Every government that issues currency enjoys benefits from seigniorage, but the United States enjoys another level of seigniorage: the dollar is the de facto global currency, and this gives the US certain global economic advantages. One theory about Bush and Blair’s Iraq War was that it was made inevitable when Saddam Hussein said he would sell oil in euros rather than dollars. It is difficult to know how big a factor that really was, yet to many people it did not seem implausible to suggest the US would start multi-billion dollar wars to defend the global supremacy of its currency. Bitcoin? That’s small fry.

Perhaps governments cannot get rid of Bitcoin entirely in such a multinational internet, but they can render it unfeasible as a medium of exchange – that being the property it needs to solidify to become a functioning currency. One possibility for an aggressive attack on Bitcoin is a 51% attack. Anyone who can contribute over 50% of the computing power in the whole Bitcoin network could choose to cause havoc in the system. The likely result would be total loss of confidence in the currency. More secure currencies may shut down that particular possibility, but the demise of the Silk Road ecommerce site should remind us that supposed ‘security’ can be a fairly flimsy notion in the face of government attention. There are also doubtless multiple ways to achieve a loss of faith in a currency – and like any currency, Bitcoin depends on faith. A series of successful hacks on Bitcoin wallets might be enough to achieve a ‘run on the bank’, and there are both private and public entities who may end up feeling motivated to do that.

The more likely approach governments might take is to tame Bitcoin, even turn it into something they can use. They can co-opt it and turn it into a shadow of its former self, as managed and as monitored as normal money. As mentioned above, moves have already been made towards this. If any of the major cryptocurrencies suffer a crisis of value or trust – and they will – that could be the signal for the state to jump in as saviour.

When regulation comes, it will almost certainly be demanded by the financial sector, and the population at large will not oppose it. It is the job of politicians to ease the path of those who already have power by creating narratives that allow them to get their way - particularly if those powerful people work in the financial sector. ‘Even among special interests, finance is special,’ Paul Starr, Professor of Sociology and Public Affairs at Princeton, reminds us. He goes on: ‘According to the Center for Responsive Politics, which tracks political donations, “the financial sector is far and away the largest source of campaign contributions to federal candidates and parties.” Thanks in part to federal policy, finance has become the dominant sector of the economy, increasing its share of total domestic profits from 15 percent in the early 1980s to 41 percent in the early 2000s.’ This is the environment in which Bitcoin finds itself, not that of a monolithic state crushing the forces of financial enterprise.

Are there technical problems with regulating Bitcoin? Doubtless. But does the state have difficulty accessing technical expertise? Ask the NSA. If necessary, the state will hire the very people who are currently designing cryptocurrencies and the very people currently promoting them in order to shut the currencies down. Nothing talks like money. And whatever currency you are talking about, the government has more of it than you.

While the US government is the most likely to move against cryptocurrencies, and most able to act, ‘the government’ here is really shorthand for a vast, globalised network of power that will ultimately decide the fate of Bitcoin. For now cryptocurrencies aren’t bothering people in power enough to do anything about them. If Bitcoin becomes enough of a success to bother them, it will be tamed or shut down shortly after.

The key point that some of Bitcoin’s fans do not always graps is that economics is, however it may appear, not as much about technical issue as we are led to believe. It is about power. Technology and technical fixes do not usually undermine power, at least in the short term. Rather they must fit into the existing landscape of power. Those who currently have power insist on them doing so.

I shall finish with a quote from Peter J. Henning, who again phrases things in that mild but authoritative way academics have:

“The question is not whether there will be greater regulation of firms developing new methods of transmitting payments with nongovernment currencies, but how much regulation they will face.”

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