A Dangerous Idea
In 2009 someone working under the pseudonym Satoshi Nakamoto developed a currency using blockchain technology. The basic idea behind this technology was to create a public, online ledger spread across the computing power of numerous computers within the blockchain network. But despite being publicly available the ledger was also encrypted, which meant that only those with the appropriate digital keys could unlock the corresponding portions of the ledger. The currency using this blockchain technology was called bitcoin. Bitcoin was the world’s first cryptocurrency, and remains the most widely used cryptocurrency despite the roughly 1,100 alternative cryptocurrencies that have flooded the market.
Bitcoin and the blockchain technology underlying it invokes a wide range of responses. Some consider it to be an irrelevant “funny money” that amounts to a cute past time for nerds at best. They say bitcoin is nothing but an overly decentralized way of emailing encrypted digital tokens back and forth. Others see it as a dangerous means of circumventing legitimate government authority and even a threat to the entire social system. And still others speak about it in messianic terms, describing this new technology as a savior that will bring down corrupt regimes and usher in a new age of opportunity and freedom. This article discusses the various challenges that bitcoin and blockchain technology level against modern government in an effort to understand how this technology disrupts the system.
The Individual and the Return of Cash
In recent years governments have increasingly pushed for the removal of cash. India provided the most dramatic example of this when it suddenly eliminated its two largest notes in November of 2016 and consequently plunged the nation into a finical panic. European nations have also been slowly weening themselves off of cash, and the 500 euro note has all but disappeared. American Economist Kenneth Rogoff has argued along similar lines in his book, “The Curse of Cash”.
There are several obvious security versus privacy issues related to this debate. Those concerned with government overreach fear that any group, particularly one with access to the brute, violent force that a government does, and knowledge of the financial transactions of every citizen and every institution could abuse its power. That means targeted harassment towards political opponents, such as what the IRS previously directed towards outspoken Tea Party members, or even full blown spying on anyone with politically incorrect opinions. Conversely, government sympathizers will argue that cash allows terrorists and drug dealers to discretely trade in contraband and consequently blinds law enforcement and military investigations. Thus, the anomalous nature of cryptocurrency removes government’s ability to track all financial transactions, for good or for evil.
But there is another sense in which crypto currencies allow individuals to undermine the government. Central banks typically lower interest rates during recessions in an effort to stimulate spending. The rational behind this decision is that people will be less likely to save money if they have a lower return on their investment. Consequently, they will spend more and stimulate the economy. This is part of the reason why so many first world economies such as Switzerland and Japan currently have negative interest rates. The other reason is that lowering the interest rate associated with a particular currency also devalues that currency, which in turn gives companies trying to advance in the international arena an advantage over foreign competition, albeit at the expanse of consumers who now have access to a weaker currency and can no longer acquire cheap foreign goods.
The problem that both cash and bitcoin create for central banks is that they place a minimum floor on how low interest rates can go. Theoretically, if all currencies were digital and there was no way to access a means of exchange without using a government approved currency in a government approved bank, central banks could lower interest rates to negative 100 percent if they so choose. This may sound unthinkable to us, but there is a certain logic behind this approach. If you eliminate a person’s ability to save, you encourage them to spend. And if spending, not saving, is what drives the economy, then why would you allow people to selfishly tie up capital when they could instead put such capital into motion spending copious amounts of money and thereby stimulating the economy for everyone? Obviously, those who believe that saving drives economic growth will try to find alternative ways to save, which is where something like Bitcoin comes in.
This tacit of cutting off the individual’s access to savings for the sake of stimulating spending lies at the heart of central bank policy. It is what central banks do when a recession comes, it is how they manage the economy. Without this tool much of the justification for modern central banking is neutered, and both physical cash as well as “digital cash” in the form of crypto currencies like bitcoin put a leash on central banks’ favorite tool.
The End of Sanctions
Many Americans will say that the United States can cut its enemies out of the international monetary order at any moment it pleases. The reason for this extraordinary claim is that America controls access to the SWIFT Banking system. This is the means by which bank wire transfers occur. If a bank cannot access SWIFT, then for all intents and purposes the bank cannot interact with other banks. And what good is having money in a Russian or Iranian bank if you cannot get that money out of the bank and exchange it for goods and services elsewhere.
The problem with cryptocurrencies is that they do not care whether the account they are sending bitcoins to is associated with a Russian or anyone else for that matter. America can set up all the sanctions it wants, and an American can still send bitcoins to Russia, North Korea, Iran, and whomever else he or she desires. Furthermore, one can do so in a much timelier manner than the extremely dated SWIFT system, which often takes days instead of minutes to send a bank wire transfer. Thus, the effect of economic sanctions will dwindle. They cannot have any substantial importance in a world dominated by cryptocurrencies.
How long would a government last if it could not collect taxes? What would happen if the government had literally no funds by which it could pay for teachers, police officers, soldiers, politicians, and the like? Well, anarchy would unfold.
Believe it or not this is exactly what many of the people involved with bitcoin want. The philosophy of anarcho capitalism is rampart throughout the ranks of many bitcoin enthusiasts. To summarize an extremely complex and layered philosophy, anarcho capitalism pretty much says that the market can more efficiently deliver any good or service than a government can. The invisible hand, if actually left alone, would build roads, bridges, schools, police, and anything else one can think of without the overhead, corruption, and mal investment indicative of centralized government. The only thing a government might be able to do better than the market is build massive standing armies, which is a disservice to humanity, not a benefit. Thus, the best way to fight back against the beast is to starve it, and what better way to starve the state of tax money than to avoid using the government’s currency?
Whether one believes this is a brilliant idea or absolute madness, bitcoin provides an alternative to government. It is a medium of exchange via an electronic system that can circumvent taxation. And without taxation the state cannot survive. In this sense, blockchain technology provides the most powerful threat to the one institution that under any other circumstances would seem untouchable. And it does so in a nonviolent way that is far less terrifying to average citizens than joining a revolution ever could be. Previously, trying to overthrow the government was a life threatening and dangerous decision. Now, trying to overthrow the state is for all intents as simple and convenient as sending a particular kind of email.
Possible Government Responses – Ignore the Gnat
Despite all these dangers one must remember that money is not just a medium of exchange, but also a store of value. In fact, many gold bugs argue that the ability to hold onto financial energy for a long time in a stable format is the primary feature of money. Bitcoin and blockchain technology does provide a way for people to exchange, but as of this point the technology is still too new to know if it will ever stabilize. How do crypto currencies do in a recession? What about bitcoin’s value in a depression?
Furthermore, many assume that bitcoin will continue to go up in value just as it has been for the foreseeable future, but this in itself might not be enough to make it money. Remember, in late summer of 2015 the Chinese devalued their yuan by less than two percent. The resulting chaos caused the largest intraday crash in stock market history of over 1,100 points and caused a more than 10 percent drop in the Dow. Likewise, a sudden shift in the currency of Thailand, (at the time the 37th most widely traded currency on the planet), during 1997 almost brought down the entire world financial system the following year. Bitcoin by comparison could easily move five percent up or down in a given day despite the fact that overall it keeps going up in value. As of this point in time, bitcoin trades a lot more like a stock than a currency. And yes, as its market share grows its volatility will decrease, just as Amazon stock moves more slowly than penny stocks. But is Amazon stock stable enough to ground an entire worldwide financial system? That is an interesting question. If you think big corporate stocks are too unstable to act as money, then you probably are not afraid of bitcoin bringing down national currencies. If on the other hand you think they are stable enough, then you should pay close attention to blockchain based currencies.
Possible Government Responses – If You Can’t Beat Em, Recruit Em
Suppose that crypto currencies can stabilize enough to challenge national currencies, or for that matter a massive financial crisis the likes of which the world has never seen destroys the stability of all national currencies. If that were to happen and the government were to lose control of the economy as more and more people began to opt out of their national currency what would the government do? Well, there is one option the government could choose if it were desperate enough.
It could always give up on trying to hunt down bitcoin users at the level of software via online bitcoin exchanges and instead switch over to controlling hardware. Imagine a world where everyone had a chip that acted as their means of exchange. Believe it or not some people have already become cyborgs and started using bitcoin chips inserted into their flesh. This chip could also store a variety of information about them such as their medical history, retina scans, and finger prints. No one could lose their wallet and all financial transactions would be digitally recorded just as those who want to ban cash for security reasons would like. Remember that the cryptographic part of a crypto currency only works if one is using uncompromised hardware. The moment your hardware is compromised is the moment that the cryptographic veil is pierced. Thus, this approach actually turns blockchain on its head and transforms the technology from a government’s worst enemy to the government’s best friend; nothing could concentrate more power into the hands of the authorities faster.
Many think this approach sounds more appropriate for a science fiction movie or a Bible prophecy inspired Left Behind novel, but there is no technological reason why people could not be chipped, and no reason why such a chip could not interact with blockchain technology to create a permanent online ledger that only the government could have full access to. And arguably the government backed blockchain currency would be more stable, and in that sense a better money. Whether such an approach would ever be allowed for political and social reasons is another argument altogether.
Either way, the authorities have recently made powerful moves into the blockchain world. The International Monetary Fund, former Federal Reserve Chairmen Ben Bernanke, the United Nations, and super bank Goldman Sachs have all shown interest in a centrally regulated blockchain technology, (much to the increasing chagrin of the alternative media).
Where Is This Headed?
People thought bitcoin was a waste of time when it was first created. Then they said it was a bubble at $30, and $250, and $1,100. As of the time of this article’s writing it sits comfortably at well over $4,000. Will its price fall off the edge of the cliff in a tulip style bubble? Or will it become the next world reserve currency? At this point, no one knows for sure, but we do know that this new technology has created a great deal of excitement and fear.