Its machinations defy central banks. Its magical blockchain is impervious to greed, replicating transaction benevolence, rendering its integrity safe regardless of any sinister impulses of each peer or user. William Jennings Bryan warned us that he will not be crucified on a cross of gold. No crucifixion here just liberation from central banks in 2015. This transformative rhetoric notwithstanding, I am not sure we can infer that from a Bitcoin economy.
Bitcoin offers obvious advantages that its promoters state constantly. Do those advantages threaten the future of central banks? The political implications of Bitcoin are best summarized:
Note the immediate political implications. Within the Bitcoin system, a set of powerful central intermediaries (the cartel of commercial banks, connected together via the central bank, underwritten by government), gets replaced with a more diffuse network intermediary, apparently controlled by no-one in particular. [1]The promise of settling transactions without those intermediaries sets many libertarians' hearts a flutter. Its their version of monetary Eden untainted by the Original Sin of central bankers. If Bitcoin can deliver on just half of its potential to render central banks obsolete, it may resurrect Mises so libertarians of all shades can dance on the grave of the central bank. For once their a priori claims about abundance prevailing in a stateless condition will be true. Freedom from control mechanisms is never that easy.
Can the blockchain be written with algorithms that by design remain indifferent to promotion of specific classes? History shows examples of technologies filled with revolutionary promise. Equally true, every revolution breeds a counter revolution. Will bitcoin break this cycle, bringing a horizontal platform fully resistant to being co-opted by a power structure that will establish conditions of its usage?
Central banks' authority to inflate stokes libertarians' constant fears of such actions eroding purchasing power, or more accurately, bondholders' confidence. Bitcoin's limited circulation appeals to libertarians as a solution to monetary cranks. This strength of Bitcoin raises many questions of which I will only identify two.
First, for any currency to gain widespread usage it must be used to settle transactions of goods and services. Currently, Bitcoin is primarily held in anticipation of future price appreciation:
Second, currencies are integral to credit expansion. Bitcoin is not issued as a credit extended to borrowers who in turn repay lenders. Instead:
How will Bitcoin with its designed limited supply help improve stagnant wages and historic economic inequality? These are economic problems that exist prior to Bitcoin but without their being addressed how can any crypto-currency enable greater freedom to wage earners? The libertarian ethos shaping discussions of Bitcoin suggest that its independence from central bank control is sufficient to establish the most desirable state of freedom.
"Let me issue and control a nation's money and I care not who writes the laws." This quote is attributed to Mayer Amschel Rothschild (1744-1812), founder of the House of Rothschild. His making this statement may be just historical folklore. Regardless, this famous and often quoted statement presupposes an understanding that money creation is essential to monopolistic power that central banks will simply not concede to anyone or anything. Bitcoin or other crypto-currencies may outsmart the central bank. But, not before their employing the most draconian measures to maintain their financial power over the masses. Bitcoin's and other crypto-currencies' architecture prevent their delivering a single, fatal blow to central banks. Their architecture though may enable it to kill central banks by thousands of paper cuts.
Bitcoin's potential as a crypto-currency circumventing central banks is questionable. But, at this point our assessing Bitcoin's economic, political, and social impact generates more questions than answers. Bitcoin may be just marketing hype registering no permanent blip on any screen. Yet, given the central bank's power it wields over us and it's integral role in the increasing financialization of the economy, it's worth pursuing Bitcoin's revolutionary potential whatever it might be.
Central banks' authority to inflate stokes libertarians' constant fears of such actions eroding purchasing power, or more accurately, bondholders' confidence. Bitcoin's limited circulation appeals to libertarians as a solution to monetary cranks. This strength of Bitcoin raises many questions of which I will only identify two.
First, for any currency to gain widespread usage it must be used to settle transactions of goods and services. Currently, Bitcoin is primarily held in anticipation of future price appreciation:
Most activity in Bitcoin seems to be in trading, not in its use as a means of payment for legal products and services. Most of the released Bitcoin stock is obviously not used for any current activity at all, but held in dormant accounts (Cohen-Setton 2013). The expectation that limited stock will meet growing demand, leading to appreciation, is the strongest economic motive to acquire bitcoins. People thereby motivated will periodically jump on and off the currency depending on the state of expectations about its future development. [2]Of course this maybe just an initial trend that will eventually become a secondary use of Bitcoin once the general public gains more confidence in it as a currency to settle transactions of goods and services. But, for now given that Bitcoin is bought to be hoarded instead of transacted, what will provide the catalyst to widen its usage?
Second, currencies are integral to credit expansion. Bitcoin is not issued as a credit extended to borrowers who in turn repay lenders. Instead:
Bitcoin is deliberately decoupled from credit. Supposing Bitcoin were successful in replacing current money: What would that mean for the economy? Bitcoins are created as rewards for participants contributing computer power to transmit payments between users in the system (Nakamoto 2009). Thereby the Bitcoin payment transfer system is cross-subsidized until the upper limit of available bitcoins is reached. In contrast to the established monetary system, money creation is not coupled to economic production. [3]Once the maximum number of bitcoins are released into circulation and if it became the dominant currency, what would prevent chronic deflation? Real solutions may be forthcoming and crypto-currencies may change or accompany paradigmatic shifts in the mode of production muting this question. It is too early to know at this point.
How will Bitcoin with its designed limited supply help improve stagnant wages and historic economic inequality? These are economic problems that exist prior to Bitcoin but without their being addressed how can any crypto-currency enable greater freedom to wage earners? The libertarian ethos shaping discussions of Bitcoin suggest that its independence from central bank control is sufficient to establish the most desirable state of freedom.
"Let me issue and control a nation's money and I care not who writes the laws." This quote is attributed to Mayer Amschel Rothschild (1744-1812), founder of the House of Rothschild. His making this statement may be just historical folklore. Regardless, this famous and often quoted statement presupposes an understanding that money creation is essential to monopolistic power that central banks will simply not concede to anyone or anything. Bitcoin or other crypto-currencies may outsmart the central bank. But, not before their employing the most draconian measures to maintain their financial power over the masses. Bitcoin's and other crypto-currencies' architecture prevent their delivering a single, fatal blow to central banks. Their architecture though may enable it to kill central banks by thousands of paper cuts.
Bitcoin's potential as a crypto-currency circumventing central banks is questionable. But, at this point our assessing Bitcoin's economic, political, and social impact generates more questions than answers. Bitcoin may be just marketing hype registering no permanent blip on any screen. Yet, given the central bank's power it wields over us and it's integral role in the increasing financialization of the economy, it's worth pursuing Bitcoin's revolutionary potential whatever it might be.
1. Scott, Brett. "Visions of a Techno-Leviathan: The Politics of the Bitcoin Blockchain. E-International Relations. June 01, 2014. http://www.e-ir.info/2014/06/01/visions-of-a-techno-leviathan-the-politics-of-the-bitcoin-blockchain/
2. Weber, Beat. "Can Bitcoin Compete with Money?" The Journal of Peer Production. accessed 11/15/2015. http://peerproduction.net/issues/issue-4-value-and-currency/invited-comments/can-bitcoin-compete-with-money/
3. Ibid.
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