This coming January it will be 12 years since Satoshi Nakamoto, the pseudonymous creator of the peer-to-peer cryptocurrency bitcoin, established the first digital transaction in the system by mining the so-called genesis block.
As bitcoin begins to test its 2017 record high price of $20,000, it is time to assess if this new system has stood up to its self-imposed challenge. Has it really, as promised, provided a more robust and honest alternative to a supposedly corrupt central banking system? Or has it proved to be a scammers’ paradise, dispossessing more of their wealth than helping them make it?
The answer, as always, lies somewhere in the middle. The early vision of bitcoin backers was of forging a decentralised network where anybody could be their own bank and where the cost of transactions would be negligible. The discomforting reality for the early idealists is that 12 years on, the bitcoin ecosystem has more in common with the incumbent one it was hoping to displace than that original utopian vision.
Even before it became properly regulated, bitcoin’s structural inefficiency, complexity, energy intensity and risk made it economically impossible for it to compete with the standing system on price.
With the cost of regulation added in, the system has become ever more comparable to the luxury goods market — where people are prepared to pay more for services or products because of ideological, trend or lifestyle reasons — than it has to do with a more efficient or cheaper mass-market system.
Bitcoin took another step into becoming just another highly intermediated and intensively regulated financial service when PayPal began offering select US account holders the chance to hold it from October. Users still cannot make payments in the cryptocurrency, only store it. Until they can, the move does more to empower speculation than it does real commercial activity.
So, was all the trouble of creating it really worth while? Surprisingly, for a long-term critic, I’m going to say yes. Here’s why.
My longstanding criticism has centred on three fundamental points. The first being that people do not really want to be their own bank for entirely practical division of labour reasons. Most are busy with their own professions and thus naturally predisposed to trusting specialists to worry about the complexities of cryptographic key management or bitcoin security on their behalf.
It is no surprise, therefore, that bitcoin’s pathway to the masses has seen it adopt both gatekeepers and regulatory protections in a bid to engender broad public trust. These are the factors that represent the cost in the payments system. What it reveals is that neither bitcoin nor any of its imitators — despite their supposedly “trustless nature” — really solved the trust issue.
My second critique was related to bitcoin’s structural obsession with immutability and pre-scripted supply. Where the currency’s architects saw virtue only in rigidity and non-adaptability, I saw only cost and non-compatibility with human fallibility. More fundamentally, I saw it as an intrinsically volatile and inelastic form of money that transferred all the burden of a rebalancing shock to the real economy in an extremely destabilising way. That is why, outside the dark markets, it was hard to imagine bitcoin ever taking off as money. And it hasn’t.
Finally, I was always cynical of the notion that a stable monetary system could exist without a lender-of-last-resort guarantee backstopped by the state. It was, in my opinion, the state’s capacity to tax in its own currency that created the demand (and hence stabilising support) for its own currency.
All of the above remain true. Yet there is one scenario that changes everything: a world in which no government is prepared to stand up for true civil liberties or free enterprise. Such a concept is, of course, far-fetched.
But for some, government responses to the Covid-19 pandemic have provoked nightmarish imaginings of a future in which the world slips towards authoritarianism and civil liberties cannot be taken for granted. For those of such bent, bitcoin’s anonymous security acts as a hedge against the worst of dystopian realities.
It might be an extremely expensive and energy-intensive solution, but at least it provides a rationale for bitcoin’s existence. To be clear, I don’t believe in the risk of global authoritarianism painted by the cryptocurrency’s most fervid backers. But as a doomsday contingency system, I am glad someone created bitcoin just in case.