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Today, economist and Nobel laureate, Paul Krugman, wrote in the New York Times, that Bitcoin is taking us back 300 years in monetary evolution. As a result, he predicts all sorts of bad things.

A significant basis for Mr. Krugman’s argument is that the US dollar has value because men with guns say it does.

Is Bitcoin erasing 300 years of monetary evolution?

Running with the metaphor that fundamental change to an economic mechanism represents ‘evolution’, I think a more accurate statement is that Bitcoin is not erasing the lessons of history. Rather, it is the current step in the evolution of money. Of course, with living species, evolution is a gradual process based on natural selection and adaptation. With Bitcoin, change is coming up in the rear view mirror at lightning speed.

The Evolution of Money

When a medium of exchange is portable, fungible, divisible, unforgeable and widely accepted, it becomes money. For at least six millennia, barter was gradually replaced by various mediums of exchange.

  • Obsidian —» Cowry shells —» Gold —» Promissory notes (backed by a Bank, employer or wealthy industry) —» Fiat (national currency)

But what backs these forms of money? What gives them value?

The first 3 currencies above were accepted as money on 5 continents. They were backed by their scarcity and unique characteristic properties (Aristotle called this intrinsic value). But even gold cannot serve as a widely used currency today. Although it is portable and scarce, it is not easily tested or subdivided in the field; it is risky to transport and difficult to track; and it is not suited to instant electronic settlement. But what about Fiat money. What backs it?

What Backs National Currencies?

Fiat has been backed by various different things throughout history. They are all compromised attempts to establish confidence and trust. They are compromised, because the fall short of one or more facets of trust.

In the list below, monetary backings in Red are what Mr. Krugman calls “men with guns”. That is, he claims that government demands give value to the dollar:

  • Value tied to gold —» Promise of redemption —» Legal tender (public must accept it for all debts) —» settlement of taxes —» The “good faith and credit” of workers

Unfortunately, the transition away from a trustworthy basis and the constant temptation of kings, dictators and politicians to print money based on credit (or nothing at all—as in the case of our fractional reserve system), has created a house of cards that few people believe is sustainable.

Bitcoin changes all this.

Finally, a crowd-sourced trust basis was invented (or discovered). It is unhackable, un-inflatable, unforgeable and immutable. Most important, it allows a government to be decoupled from its own monetary policy and supply. This is a remarkably good thing for businesses, consumers, creditors, trading partners—and especially for governments.

And Bitcoin is backed by something better than guns, gold or promises. It is provably scarce, capped in supply, completely fair, and built on a massive, crowd-sourced network of bookkeepers and auditors. It is the first currency—and quite probably the last—built on genius math and indisputable trust.

Despite the gross misunderstandings and misconceptions of early pundits, it does not interfere with a government’s ability to tax, to spend or to enforce tax collection—and it does not facilitate crime.

Bitcoin is new, but the goal of distributing trust is not as radical as you might think. It addresses a problem that economists and mathematicians have pondered since Aristotle and the ancient Greeks…

Background

Ever since the transition from real gold to government notes, bank notes and bank ledgers—economists have wondered if value can arise from a public trust that is durable, distributed and stateless. Until 2009, the answer seemed to be that this was impossible because of the double-spend problem.

But 9 years ago, something changed; and the change is dramatic. It will take an additional decade for most people to understand and appreciate this change…

In the first paragraph, I cited Mr. Krugman’s statement that the US Dollar has value because of “men with guns” (a reference to the fact that its use is legally compelled for payment of any debt and for government taxes). But this is not what gives it value. The dollar, the Euro, a Picasso painting and a fresh serving of hot french fries all derive their value from supply and demand. Bitcoin is no different. The trick is to generate viral demand and a ubiquitous infrastructure needed to achieve a robust two-sided network.

In the white paper that introduced both blockchain and Bitcoin (the first blockchain application), Satoshi taught us that a widespread and easy to access communications network (the internet and universal access to smartphones) can give rise to value that is based on a different type of trust. Instead of trust in a government, a bank, or testing the chemistry of a precious metal, value can arise from trust in a formula that is ubiquitous, redundant and constantly monitored and vetted.

All of these things have a value based on demand and the available supply. But with Bitcoin, the medium of exchange (and additionally the store and transfer of value), can be achieved by math, distributed trust and a pure, two-sided network.

So, is Bitcoin taking us backward in time, utility, safety and governance? I have never been awarded a Nobel Prize—but it seems pretty clear to me that Bitcoin is taking us forward and not backward.

Philip Raymond co-chairs CRYPSA, hosts the New York Bitcoin Event and is keynote speaker at Cryptocurrency Conferences. He sits on the New Money Systems board of Lifeboat Foundation. Book a presentation or consulting engagement.

Anyone who has heard of Bitcoin knows that it is built on a mechanism called The Blockchain. Most of us who follow the topic are also aware that Bitcoin and the blockchain were unveiled—together—in a whitepaper by a mysterious developer, under the pseudonym Satoshi Nakamoto.

That was eight years ago. Bitcoin is still the granddaddy of all blockchain-based networks, and most of the others deal with alternate payment coins of one type or another. Since Bitcoin is king, the others are collectively referred to as ‘Altcoins’.

But the blockchain can power so much more than coins and payments. And so—as you might expect—investors are paying lots of attention to blockchain startups or blockchain integration into existing services. Not just for payments, but for everything under the sun.

Think of Bitcoin as a product and the blockchain as a clever network architecture that enables Bitcoin and a great many future products and institutions to do more things—or to do these things better, cheaper, more robust and more blockchain-01secure than products and institutions built upon legacy architectures.

When blockchain developers talk about permissionless, peer-to-peer ledgers, or decentralized trust, or mining and “the halving event”, eyes glaze over. That’s not surprising. These things refer to advantages and minutiae in abstract ways, using a lexicon of the art. But—for many—they don’t sum up the benefits or provide a simple listing of products that can be improved, and how they will be better.

I am often asked “What can the Blockchain be used for—other than digital currency?” It may surprise some readers to learn that the blockchain is already redefining the way we do banking and accounting, voting, land deeds and property registration, health care proxies, genetic research, copyright & patents, ticket sales, and many proof-of-work platforms. All of these things existed in the past, but they are about to serve society better because of the blockchain. And this impromptu list barely scratches the surface.

I address the question of non-coin blockchain applications in other articles. But today, I will focus on a subtle but important tangent. I call it “A blockchain in name only”…

Question: Can a blockchain be a blockchain if it is controlled by the issuing authority? That is, can we admire the purpose and utility, if it was released in a fashion that is not is open-source, fully distributed—and permissionless to all users and data originators?

Answer: Unmask the Charlatans
Many of the blockchains gaining attention from users and investors are “blockchains” in name only. So, what makes a blockchain a blockchain?

Everyone knows that it entails distributed storage of a transaction ledger. But this fact alone could be handled by a geographically redundant, cloud storage service. The really beneficial magic relies on other traits. Each one applies to Bitcoin, which is the original blockchain implementation:

blockchain_logo▪Open-source
▪Fully distributed among all users.
▪ Any user can also be a node to the ledger
▪Permissionless to all users and data originators
▪Access from anywhere data is generated or analyzed

A blockchain designed and used within Santander Bank, the US Post Office, or even MasterCard might be a nifty tool to increase internal redundancy or immunity from hackers. These potential benefits over the legacy mechanism are barely worth mentioning. But if a blockchain pretender lacks the golden facets listed above, then it lacks the critical and noteworthy benefits that make it a hot topic at the dinner table and in the boardroom of VCs that understand what they are investing in.

Some venture financiers realize this, of course. But, I wonder how many Wall Street pundits stay laser-focused on what makes a blockchain special, and know how to ascertain which ventures have a leg up in their implementations.

Perhaps more interesting and insipid is that even for users and investors who are versed in this radical and significant new methodology—and even for me—there is a subtle bias to assume a need for some overseer; a nexus; a trusted party. permissioned-vs-permissionlessAfter all, doesn’t there have to be someone who authenticates a transaction, guarantees redemption, or at least someone who enforces a level playing field?

That bias comes from our tendency to revert to a comfort zone. We are comfortable with certain trusted institutions and we feel assured when they validate or guarantee a process that involves value or financial risk, especially when we deal with strangers. A reputable intermediary is one solution to the problem of trust. It’s natural to look for one.

So, back to the question. True or False?…

In a complex value exchange with strangers and at a distance, there must be someone or some institution who authenticates a transaction, guarantees redemption, or at least enforces the rules of engagement (a contract arbiter).

Absolutely False!

No one sits at the middle of a blockchain transaction, nor does any institution guarantee the value exchange. Instead, trust is conveyed by math and by the number of eyeballs. Each transaction is personal and validation is crowd-sourced. More importantly, with a dispersed, permissionless and popular blockchain, transactions are more provably accurate, more robust, and more immune from hacking or government interference.

What about the protections that are commonly associated with a bank-brokered transaction? (For example: right of rescission, right to return a product and get a refund, a shipping guaranty, etc). These can be built into a blockchain transaction. That’s what the Cryptocurrency Standards Association is working on right now. Their standards and practices are completely voluntary. Any missing protection that might be expected by one party or the other is easily revealed during the exchange set up.

For complex or high value transactions, some of the added protections involve a trusted authority. blockchain-02But not the transaction itself. (Ah-hah!). These outside authorities only become involved (and only tax the system), when there is a dispute.

Sure! The architecture must be continuously tested and verified—and Yes: Mechanisms facilitating updates and scalability need organizational protocol—perhaps even a hierarchy. Bitcoin is a great example of this. With ongoing growing pains, we are still figuring out how to manage disputes among the small percentage of users who seek to guide network evolution.

But, without a network that is fully distributed among its users as well as permissionless, open-source and readily accessible, a blockchain becomes a blockchain in name only. It bestows few benefits to its creator, none to its users—certainly none of the dramatic perks that have generated media buzz from the day Satoshi hit the headlines.

Related:

Philip Raymond is co-chair of The Cryptocurrency Standards Association,
host & MC for The Bitcoin Event and editor at A Wild Duck.

Recently, I was named Most Viewed Writer on Bitcoin and cryptocurrency at Quora.com (writing under the pen name, “Ellery”). I don’t typically mirror posts at Lifeboat, but a question posed today is Quora_Most_Viewed_splashrelevant to my role on the New Money Systems board at Lifeboat. Here, then, is my reply to: “How can governments ban Bitcoin?”

Governments can enact legislation that applies to any behavior or activity. That’s what governments do—at least the legislative arm of a government. Such edicts distinguish activities that are legal from those that are banned or regulated.

You asked: “How can governments ban Bitcoin?” But you didn’t really mean to ask in this way. After all, legislators ban whatever they wish by meeting in a congress or committee and promoting a bill into law. In the case of a monarchy or dictatorship, the leader simply issues an edict.

So perhaps, the real question is “Can a government ban on Bitcoin be effective?”

Some people will follow the law, no matter how nonsensical, irrelevant, or contrary to the human condition. These are good people who have respect for authority and a drive toward obedience. Others will follow laws, because they fear the cost of breaking the rules and getting caught. I suppose that these are good people too. But, overall, for a law to be effective, it must address a genuine public need (something that cries out for regulation), it must not contradict human nature, and it must address an activity that is reasonably open to observation, audit or measurement.

Banning Bitcoin fails all three test of a rational and enforceable law.

Most governments, including China and Italy, realize that a government ban on the possession of bits and bytes can be no more effective than banning feral cats from mating in the wild or legislating that basements shall remain dry by banning ground water from seeking its level.

So, the answer to the implied question is: A ban on Bitcoin could never be effective.

For this reason, astute governments avoid the folly of enacting legislation to ban Bitcoin. Instead, if they perceive a threat to domestic policy, tax compliance, monetary supply controls or special interests, they discourage trading by discrediting Bitcoin or raising concerns over safety, security, and criminal activity. In effect, a little education, misinformation or FUD (fear, uncertainty and doubt) can sometimes achieve what legislation cannot.

Reasons to Ban Bitcoin … a perceived threat to either:

  • domestic policy
  • tax compliance
  • monetary supply controls
  • special interests

Methods to Discourage Trading (rather than a ban)

  • Discredit Bitcoin (It’s not real money)
  • Raise concerns over safety & security
  • Tie its use to criminal activity

Avoiding both a ban—and even official discouragement

There is good news on the horizon. In a few countries—including the USA—central bankers, monetary czars and individual legislators are beginning to view Bitcoin as an opportunity rather than a threat. Prescient legislators are coming to the conclusion that a distributed, decentralized trading platform, like Bitcoin, does not threaten domestic policy and tax compliance—even if citizens begin to treat it as cash rather than a payment instrument. While a cash-like transition might ultimately undermine the federal reserve monetary regime and some special interests, this is not necessarily a bad thing—not even for the affected “interests”.

If Bitcoin graduates from a debit/transmission vehicle (backed by cash) to the cash itself, citizens will develop more trust and respect for their governments. Why? Because their governments will no longer be able to water down citizen wealth by running the printing press, nor borrow against unborn generations. Instead, they will need to collect every dollar that they spend or convince bond holders that they can repay their debts. They will need to balance their checkbooks, spend more transparently and wear their books on their sleeves. All good things.

Naturally, this type of change frightens entrenched lawmakers. The idea of separating a government from its monetary policy seems—well—radical! But this only because we have not previously encountered a technology that placed government accountability and transparency on par with the private sector requirement to keep records and balance the books. [continue below image]…

What backs your currency? Is it immune from hyperinflation?

What backs your currency? Is it immune from hyperinflation?

Seven sovereign countries use the US Dollar as their main currency. Why? Because the government of these countries were addicted to spending which leads to out-of-control inflation. They could not convince citizens that they could wean themselves of the urge to print bank notes with ever increasing zeros. And so, by switching to the world’s reserve currency, they demonstrate a willingness to settle debts with an instrument that cannot be inflated by edict, graft or sloppy bookkeeping.

But here’s the problem: Although the US dollar is more stable than the Zimbabwe dollar, this is a contest in relative trust and beating the clock. The US has a staggering debt that is sustained only by our creditors’ willingness to bear the float. Like Zimbabwe, Argentina, Greece and Germany between the wars, our lawmakers raise the debt ceiling with a lot of bluster, but nary a thought.

Is there a way to instill confidence in a way that is both trustworthy and durable? Yes! —And it is increasingly likely that Bitcoin is the way to the trust and confidence that is so sorely needed.

Philip Raymond sits on the New Money Systems board. He is also co-chair of Cryptocurrency Standards Association and editor at A Wild Duck.