Is the cryptocurrency just going to end up reinforcing the financial system it was supposed to disrupt?
Bitcoin was a clever idea. Idealistic, even. But it isn’t working out quite as its developers imagined. In fact, once all the coin has been mined, bitcoin will simply reinforce the very banking system it was invented to disrupt.
Watching the bitcoin phenomenon is a bit like watching the three-decade decline of the internet from a playspace for the counterculture to one for venture capitalists. We thought the net would break the monopoly of top-down, corporate media. But as business interests took over it has become primarily a delivery system for streaming television to consumers, and consumer data to advertisers. Likewise, bitcoin was intended to break the monopoly of the banking system over central currency and credit. But, in the end, it will turn into just another platform for the big banks to do the same old extraction they always have. Here’s how.
At its core, bitcoin is just an extension of the old PGP, or Pretty Good Privacy encryption protocol. Public and private keys are used to hide and verify the identity of the parties in a transaction. The transaction itself is authenticated by thousands of internet witnesses, who vote for its veracity with all the cycles of their computers and the electricity on which they run. In return for dedicating all that hardware and wattage authenticating transactions and recording them in a ledger known as the blockchain, they are rewarded with bitcoin. It is their verification activity that mines new bitcoin into existence. And the more bitcoin they have, the more committed they will be to maintaining the integrity of the blockchain recording their assets.
In essence, bitcoin is money built and maintained by nerds, based on the premise that good nerds will outnumber the bad nerds. Sure, bad actors can dedicate all of their processing power to fake transactions, but they will be outnumbered by those who want the token to work properly.
At its most ambitious, bitcoin is meant to provide an anonymous, decentralized, frictionless, and incorruptible form of transaction–an alternative to the extractive, central, bank-issued currencies now enjoying a virtual monopoly in our economies. Cryptocurrencies aren’t just about increasing efficiency, but taking down an economic elite that has been using its control over currency to maintain its wealth and power.
Central currency is not the only kind of money that ever existed. For many centuries, gold and other precious metals served as money. The problem with gold was that it was so scarce and valuable in its own right, that no one wanted to spend it on daily necessities such as bread or chicken. Gold was hoarded, and really only useful for long-distance trading between the wealthy.
During the Crusades, however, many European communities adopted the more flexible market money systems they had seen used in Moorish territories. Market money was virtually worthless: like a poker chip or IOU that was redeemed for a loaf of bread or dozen eggs at the end of the day. Unlike gold, which was no good for transactions because it was too scarce, market moneys existed only to enable trade, and often expired at the end of the day. They couldn’t be stashed.
But this sort of money was fabulous for trade, which was the whole point of money, anyway. Everybody who had a way of creating value–whether making shoes or growing grain–now had a way of exchanging that value with others. The use of market moneys led to a century or two of wealth creation unlike any we’ve ever seen since. The former peasants of feudalism became the merchant middle class, working just three or four days a week, and exhibiting a level of skeletal growth (a sign of health) larger than at any time in the history of humanity, until the 1980s.
The problem was that the aristocracy, who hadn’t created value themselves for hundreds of years, was losing its stranglehold over the masses. As the poor grew wealthy, the wealthy grew relatively poorer. So they outlawed local moneys, and replaced them with central currency. Central currency sometimes had trivial bits of gold in it, but that’s not where it got its value. No, central currency was valuable by decree.
Everyone who wanted to transact from then on had to pay kings and their banks for the privilege of using coin of the realm. All money was borrowed from the central treasury, at a rate of interest set by the king. People had to pay back more than they borrowed. It was a terrible drain. The rising merchant middle class of the late Middle Ages became incapable of transacting on their own; the money was just too expensive. The merchant class became peasants and laborers again, the cities became the only place to work, and the plague soon followed.
And that’s the system we’re stuck with today, with central banks issuing money, and banking conglomerates lending it to the public and verifying our transactions for a fee. All of our businesses are just subsidiaries of a banking system with a legal monopoly over our money.
Bitcoin was meant to cut out those unnecessary intermediaries, and replace them with computer cycles. The high processing cost of mining bitcoin–as well as an arbitrary limit on the total number of coin that can ever be mined–keeps the money supply scarce. But this means that instead of re-creating those high-velocity market monies of the Middle Ages, the abundant ones that worked like poker chips, bitcoin re-creates the market mechanisms of gold, a currency that invites hoarding and speculation while discouraging transactions. Oops.
This explains why bitcoin has become less a means of exchange than a speculative pyramid, as well as why the coin’s developers and early investors have ended up billionaires. The wealth disparity in bitcoin is worse than that of central currency, with 4% of users owning 96% of bitcoin. So much for breaking the banking monopoly; this is just hackers seizing the banking industry for themselves.
The money itself is worthless. Less than worthless, in fact. We are spending massive amounts of machine cycles and electricity, burning fossils fuels for no reason other than to prove our commitment to the coin. It’s not like we don’t already have enough problems generating energy to operate our highly industrialized civilization. Now we’re spending billions of dollars and millions of gallons of fossil fuel in a symbolic act of securitization. What if the “proof of work” for coin were based on something good for the world, rather than aiming so directly for ecological self-destruction?
The non-financial uses of the blockchain are certainly inspiring: Smart contracts let people devise and administrate complicated agreements without hiring lawyers. Whole companies and co-ops can be orchestrated and secured through simple sets of instructions that are confirmed and recorded on a blockchain such as Ethereum. It requires a whole lot of code and electricity, however, and may say less about how much computers can assist business than how selfishly and unethically we expect one another to behave without such elaborate safeguards.
Still, even if such currency and contract solutions can work, the part of the story that nobody’s talking about is the ending. What happens when all the bitcoin is mined? Bitcoin transactions are authenticated by the thousands of people who dedicate their computers and electricity to building the blockchain. They’re not donating all this money and computing power; they are being paid in bitcoin. Mining for bitcoin and authenticating transactions is the same thing.
What is the incentive for people to spend millions of dollars on computers and power once there’s no more kickback of coin? I have asked this question of the world’s leading blockchain investors, miners, and scholars, and none of them have offered a satisfactory answer. The best they can come up with is “we’ll figure out when the time comes.” (How is that good enough justification for a combined quarter of a trillion dollar bet on cryptocurrencies?) I spoke to the CEOs of four companies that have either just issued or are about to issue tokens, and none of them had even considered how the blockchain is administrated once the coin is all mined, or what that means to the future of their operations.
So what will really happen when all the bitcoin is mined? The people and companies currently authenticating transactions for coin will instead insist on service fees. The more processing power and electricity it takes to authenticate, the more they will want to be paid.
Already, financial institutions like banks and brokerage houses are rising to the occasion, promoting their own blockchain– as well as authentication services for those who want to keep using existing cryptocurrencies. So instead of disrupting and replacing the banking industry and its fees, bitcoin and other blockchains simply feed into the banking monopolies. They don’t disrupt banking, they reify it, only they do so through obscenely wasteful and unnecessary expenditure of processing power and computing hardware.
Bitcoin may have been meant to disintermediate the agents of trust who monopolized commerce and currency. Like the internet, it was meant to engender trust by connecting people directly to one another. But all it really did was substitute for trust in a new way–with computer cycles instead of a human or institutional middleman.
As such, it ended up less a way of promoting transactions and trade than the same old extraction and growth. So just as our computer screens became just another outlet for television, our blockchains will become just another instrument of the financial services industry.