Chapter Six — Fundamental Infrastructures: Money
[This is the tenth installment in my serialization of my book-in-progress, tentatively titled Desktop Regulatory State] , and the second of two installments on Chapter Six. Because I have split some chapters into multiple new ones since the previously posted excerpts, there is a loss of continuity in numbering. The current Table of Contents with active links can be found here.]
Bitcoin. …the biggest shortcoming of Bitcoin, from a community currency standpoint: it serves more as a store of value than as a simple denominator of exchange. Its quantity is fixed beyond a certain point, which means that individual units will appreciate in value as people come into the system. That is, it’s deflationary. From the perspective of most currency designers, that’s a serious bug. Deflation makes it subject to Gresham’s law: that is, people will hold onto it as an investment rather than keep it in circulation. Most LETS systems have a tendency toward hoarding because the range of good and service providers participating in them means the average member can only meet an unsatisfactory portion of her total needs through the system, and has leftover notes with nothing to spend them on. Silvio Gesell built demurrage into his currency system—i.e., it lost value over time—as an incentive to spend it rather than hoard it, and overcome the deflation and idle capacity of the larger economy.
So Bitcoin functions like a typical commodity currency, and tends to promote speculation and the concentration of wealth into a few hands. Community Forge co-founder Matthew Slater notes:
Complementary currency activists have been stupified as bitcoin came from ‘nowhere’, gained huge media attention, reached a market capitalisation of $1bn, and is now attracting investors and entrepreneurs and becoming established. Bitcoin serves libertarian purposes by evading central bank controls, but as the financial services build up around it, it increasingly resembles the old system. Some of us understand that any commodity currency serves the interests of the wealthy….
According to Michel Bauwens of the Foundation for Peet-to-Peer Alternatives, “Bitcoin is designed by people who believe in a certain type of economy, it is designed to be like gold, privileging hoarding.”
Bitcoin can be described as a deflationary currency, or even a mere (virtual) commodity. Like gold, bitcoins are valuable because of their scarcity—Bitcoin’s money supply is limited to 21 million of units. A feature, according to libertarians and gold standard advocates, yet a bug for many….
Another way to put it: since bitcoin units are being created at an increasingly slower pace while more and more users join the currency, the value of each unit can only rise. Thereby, new entrants only have a smaller share of the Bitcoin monetary mass — unless they are rich enough to buy more bitcoin against official foreign currencies.
“Bitcoin is about creating asymmetry and inequality where there is none,” concludes Financial Times’ journalist Izabella Kaminska, ”It’s a system designed to create bitcoin millionaires.
Those Bitcoin millionaires are not a myth. By examining the entire Bitcoin graph (pdf) as of July 12th 2011, researchers Dorit Ron and Adi Shamir have found very insightful results. First, they estimated that 59.7% of the Bitcoin coins are dormant, which means the majority of the coins are saved rather than spent in the system. Second and more interesting, they found that 97% of Bitcoin accounts contain less than 10 bitcoins, while a handful of 78 entities are hoarding more than 10,000 Bitcoins. Last but not least, the researchers identified only 364 transactions with more than 50,000 Bitcoins. “All these large transactions were descendants of a single transaction which was carried out in November 2010,” their paper concludes.
So basically you have a group of happy few people controlling the vast majority of all Bitcoins. But who could these guys be? Well, some further research led by Sergio Lerner suggests that one of those bitcoin millionaires is the mysterious Satoshi Nakamoto, the alleged inventor of Bitcoin. Since Nakamoto was most certainly the first Bitcoin user to make a transaction, Lerner could trace all of his account’s activity and found that he must own about 980K Bitcoins, which equal about 110 million dollars with today’s exchange rate….
Michel Bauwens — whose institution, the P2P Foundation made use of Bitcoin very early — has also sensibly withdrawn his support of the digital currency and expressed strong criticism during a talk at OuiShare Fest in May 2013. But contrary to Varoufakis, he remains optimistic:
Thank you Bitcoin for doing this, because now we can do something better — Michel Bauwens, P2P Foundation.
A statement warmly applauded by the audience, reflecting two days of intense discussions around virtual currencies, and a wide consensus on the need for something else.
At a panel at OuiShare Fest on Virtual Currencies, everyone agreed on the principle that next currencies should be based on trust, and help the real economy. But where to start?
And because the money is created by a third party rather than by the very act of spending it, it doesn’t solve the problem of liquidity for those who lack conventional money.
The ownership of Bitcoin wealth is so concentrated as to cause even Thomas Piketty to stagger. Over half of all Bitcoins are owned by one tenth of a percent of all Bitcoin accounts. And on top of everything else, a single entity for the first time (June 2014) has acquired 51% of total computing power used for mining Bitcoins for substantial periods of time….
But far more important than questions of security and opacity to the state is the question of Bitcoin’s functional role. The problem with Bitcoin, to repeat, is that it’s a store of value. So if neither party to a transaction has Bitcoins from past transactions, or that they’ve bought with official currency, there is no source of liquidity for an exchange of services between them. Because Bitcoin isn’t generated by the act of exchange itself, people with skills and needs who lack money are stuck with the old “mutual coincidence of wants” system of barter. The only thing Bitcoin is good for, over and above conventional currency, is payments where confidentiality is at a premium:
“At the moment there is no need to use Bitcoin, as anything that can be bought for BTC can be bought for ‘real money’ elsewhere,” a Redditor writers. “Love it or hate it, Silkroad is the one example of Bitcoin actually being used as it was designed.”
In other words, Bitcoin is good for black marketeers who need an anonymous medium of exchange—and there’s certainly nothing wrong with that!—and for secure, anonymous exchange between local trust networks. But it’s maladapted to the primary purpose of an alternative currency: to provide liquidity for exchange between people in a local economy who need a way to transform their services into purchasing power in a stagnant economic environment where there’s “no money.”
Matt Slater observes that disintermediating banks is not enough; so long as it retains its essence as a commodity, money will always be manipulated and hoarded by the rich. What’s needed, above and beyond disintermediation, is zero-interest, peer-to-peer credit money—ideally based on blockchain technology and incorporating smart phone apps. If interest-free money, based on reputation, was prevalent, Slater says, the effects would include average mortages falling from thirty to ten years, the implosion of the portion of price reflecting embedded interest throughout the entire supply chain, and an average three-day work week….
To the extent that Bitcoin has a useful role in the post-state society, it will likely be under conditions of anonymous, long-distance trade where trust is low, with Bitcoin nested into a larger ecosystem that includes more trustworthy currencies that are pure units of exchange for most transactions….
Matthew Slater has proposed a global networked digital currency system on the Greco credit-clearing model, as an alternative to Bitcoin:
Thomas Greco has called for a credit commons, comprised of a network of local clearing systems and for five years now I’ve been working on tools for constructing that network.
Last September a handful of us met in Berlin and hammered out this semi-official protocol on the social and technical levels. http://blog.p2pfoundation.net/wp-content/uploads/CXP_protocol_intertrading_api-1.0-beta-1.pdf …
I think an Intertrading API, implemented across the networks such as are represented here, would be *as interesting as Bitcoin*, oh yes. Imagine:
A global payments network, with a stable unit of value, issued by member communities on the basis of trust and agreed limits, promoted towards transition groups, communities, intentional communities, LETS, time banks informal barter groups.
Unlike Bitcoin, participation involves trust.
Unlike Bitcoin, credit issuance would be done by member communities according to their own policies
Unlike Bitcoin, governance and responsibility would be required.