One of my favorite things about bitcoin
is how it’s such an all-inclusive tent.
Bitcoin attracts political idealists from the
right, political idealists from the left, Silicon Valley technologists,
social science academics, philosophers, capitalists, socialists, and even
apolitical speculators.
Alex Payne kicked off this latest round of analysis with his blog piece: “Bitcoin, Magical Thinking, and
Political Ideology”. A self-described programmer and secular humanist,
Payne worked as an early engineer at Twitter building the service’s developer
platform and backend infrastructure.
Mostly, he criticizes Silicon Valley for its self-indulgent hyper-capitalism
that lacks meaningful solutions to real-world problems. Oh yeah, and he
specifically targets Chris Dixon, Andreeseen Horowitz, and their Coinbase investment.
Chris Dixon, Andreessen Horowitz’s partner on the Coinbase
board, promptly shot back in defense with “Why I’m
Interested in Bitcoin“ where he disavowed himself of any libertarian ideology or “fantasies of a crypto-powered stateless future” and instead
highlighted bitcoin’s technological promise in
reforming the mismanaged financial system.
Personally, I prefer Marc Andreessen’s recent tribute in The New York
Times, “Why Bitcoin Matters.”
The divide between ideology and technology as the driving purpose behind bitcoin permeates the bitcoin
investment community and the Bitcoin Foundation’s
approach to public policy. Advocating and using a non-political monetary
unit is a forceful political statement. Investing in a non-political monetary
unit or its infrastructure companies is an equally powerful statement.
The bitcoin network cannot be separated from the bitcoin monetary unit and if the central bank, or the
Federal Reserve in the United States, provided an important function, bitcoin would be unnecessary.
Carried through to its ultimate conclusion, the bitcoin
unit competes with the government’s unit in a modern version of Hayekian
currency competition.
More importantly, bitcoin is money without
government: just as one cannot separate the bitcoin
network from the bitcoin monetary unit, one cannot
separate the bitcoin network effect from its
central banking implications.
Personal Journey
My personal journey towards bitcoin
began in the mid-1990s when David Chaum’s DigiCash company and technology debuted in
America.
At that time, I was working in Silicon Valley at RSA Data Security’s new
spin-out company, Digital Certificates International, that later became
VeriSign. The new SSL encryption in Netscape browsers relied on these digital
certificates for authenticating and securing web servers.
With Chaum’s DigiCash
technology, for the first time ever, digital bearer features of physical cash
could be emulated in software using cryptographic protocols.
This was pure genius and it hit me like a ton of bricks.
During the next two years, I started thinking through scenarios of monetizing
equity mutual funds and real estate and how ideas like e-gold
could be transformed into digital bearer instruments backed by gold, not just
a ledger-based transfer system. I even published a research paper at the London School of Economics.
However, I quickly realized that the centralized nature of these two systems
inherently gave them a limited life span due to a single point of ‘failure’
that could be used for suppression.
Predictably, the political pressures increased with DigiCash needing regulatory approval to
operate as an issuing mint within a bank and then e-gold suffering a Department of Justice shutdown and asset seizure at the
peak of its epic success.
My thoughts shifted to how precious metals and other commodities could be
stored, assayed, and audited without revealing knowledge of their location. This proved to be a very difficult feat.
The Bitcoin Protocol
Network Effect
In late 2008, five years ago, a developer named Satoshi Nakamoto devised a protocol which distributed trust across a decentralized
peer-to-peer ledger and eliminated confiscation risk by replacing physical
assets with a mathematical proof of work.
More than anything, it is these two features that would lead to bitcoin’s real world success because the system now had
the attribute of survivability. When angels and venture
capitalists invest in bitcoin-related business
models, they are investing in a survivable protocol – a protocol that
will survive political institutions.
Herein lies the dichotomy: how can VCs knowingly
invest in a protocol that survives political institutions when it is those
same political institutions that allow them to capitalise
on their investments?
Money naturally operates like a virus and that makes digital bitcoin potently viral. It is viral cubed –
money on the Internet with a network effect. A monetary unit does not stop
expanding until it runs into artificially delineated boundaries or achieves
widespread dominance.
It is naive to think that governments believe so much in competitive
currencies that they would encourage and accept a digital monetary unit
without a central issuer. Some smaller governments may believe in that, but
only as a way to use it against certain other governments that currently have
dominant monetary units.
What’s more likely is bitcoin growth in the
developed world constrained by regulatory endpoints, legislative taxing
powers, and bans on merchants, but only up to a certain maximum market cap
for bitcoin. Sure, we’ll let it grow but not too much.
So what is that magical permissible level of adoption where going beyond that
point jeopardizes central banking and monetary policy? Is it a $100 billion,
$500 billion, $1 trillion market capitalization for bitcoin?
No one really knows, least of all the governments. A $1 trillion bitcoin economy may not be suppressible, but it definitely becomes a less friendly environment with respect
to established political institutions.
I guess your viewpoint depends on what problem bitcoin
is solving – high transaction fees and complex international remittances or
the problem of central banking and the intertwining of money and state.
Fortunately, bitcoin solves for both. But, you
can’t have one without the other. You can’t believe that central banks play
an important and necessary role in society and also believe that bitcoin serves as a monetary solution.
I am pro venture capital. Building the bitcoin
infrastructure around the world is important, but within certain
jurisdictions it can also be a frustrating contradiction. The success of
an investment depends less on the execution of a stellar management team and
more on the degree of regulatory latitude. For venture capitalists, bitcoin is not like Facebook and Twitter where worldwide
market saturation and dominance is the end game for the IPO home run.
Market saturation with bitcoin means that something
else lost and it’s not a competing cryptocurrency.
Therefore, it will be imperative for venture capitalists to remain astute
about the evolving political landscape and agile enough in timing their
exits.
Andreessen stated in The New York Times article that he’s with Ben and Milton when it comes to the promise of
reliable digital currencies. However, Bernanke and Friedman were referring to
digitized national units, not an alternative and independent numéraire.
The only plausible outcome may be jurisdictional competition. After World War II, wealth flowed
to the US dollar as the world’s reserve currency.
Now, real wealth flows from the West to the East in the form of gold bullion
and claims to natural resources. In the cryptocurrency
future, wealth will flow to the regions that facilitate and exploit bitcoin’s massive potential for unleashing true economic
growth.
By
Jon Matonis
CoinDesk
Thursday, January 23, 2014
http://www.coindesk.com/bitcoin-money-without-government/
