I've recently been trying to gain a deeper understanding of the cryptocurrency phenomenon, including but not limited to Bitcoin. What I find striking is the lack of reasonable, middle-of-the-road opinions, particularly on Bitcoin. It seems to be an extremely polarising topic: you either think it's the future of money, or you think it's nothing but a pyramid scheme.
One thing I can say for certain is that Bitcoin is not a *conscious* pyramid scheme. Most of its proponents and fans fervently believe in its value, and think that naysayers simply fail to understand it, or work for the banks and financial service providers that are about to be swept away by the crypto revolution. Personally, I can see the appeal of Bitcoin on a conceptual level; a completely decentralized currency that can be transferred across borders with just a click is an interesting concept; it theoretically offers advantages that are not meaningless, especially if transactions speed up and the interfaces become easier to use. For instance, international migrants would be able to send money back home without going through Western Union, or paying its fees: all it would take would be a smartphone on both ends, and it is worth noting that there are far more people with a smartphone than a bank account in the world today.
What is even more interesting is the idea that one day Bitcoin could turn into some sort of international reserve currency, in addition to or in replacement of the US dollar. The dollar's role as the global reserve currency causes all sorts of imbalances and problems, not least to the United States itself. For now Bitcoin is being bought entirely as a speculative asset, and it is hard to imagine it becoming a globally accepted store of value, but stranger things have happened. Currently its volatility makes it unsuitable for anything except speculation, but a large increase in its popularity and usage would probably stabilize its value compared to other currencies.
While I find Bitcoin an interesting concept, the anarcho-libertarian ideology many Bitcoin enthusiasts subscribe to leaves me a lot less convinced. At its basis lies a hatred of conventional currencies, identified as the root of our economic ills because they are controlled by central banks that can print new money and create inflation at will. And yet printing more money is a basic tool of monetary policy that can have effects both good and bad depending on how it is implemented, and governments won't just give up on it anyway.
The idea that national currencies (what Bitcoin devotees disdainfully call "fiat money") could just be replaced wholesale by Bitcoin, as some of its most extreme fans are hoping, seems highly unlikely. While it may be impossible to ban Bitcoin all together, it would not be too hard for governments to disallow its use for ordinary business transactions. And even if it somehow were possible for the whole world to adopt a single currency, the results are in fact unlikely to be advantageous for poor countries, which often benefit from having weaker currencies.
Proponents of Bitcoin like to hype up its liberating potential, as a decentralized, untraceable and un-censurable currency based only on a source code and a blockchain no one can alter. Some of this reminds me of the idealism that surrounded the internet in the early nineties: it was going to make borders meaningless and allow everyone in the world to access uncensored information. It was a peer-to-peer system that no corporation could control. We have seen how that's worked out: a handful of corporations control most of our online life, social media poisons our public discourse, and as for uncensored information flowing across borders, well, China offers a great example of a highly censored and yet flourishing internet.
In the same way, even if cryptocurrencies become the norm, I doubt they will have the kind of liberating effect these people hope. Bitcoin is not the only cryptocurrency, after all. When it comes to corporations, Facebook is already developing its own cryptocurrency, the Diem (formerly known as the Libra), which unlike Bitcoin will not be decentralized, but controlled by the Diem Association, established by Facebook in Geneva, as a "de facto central bank".
Many cryptocurrency advocates seem comfortable with the idea that in the future there will be a "free market of money", with scores of cryptocurrencies competing for popularity. If this results in us having to choose between Facebook and Google as our central bankers, it sounds to me like the beginning of a libertarian nightmare. And indeed, there are quite a few right-wing libertarians among cryptocurrency enthusiasts. The sort of people who want the state to play as small a role as possible in the economy. In fact it was Friederich Von Hayek, the Austrian economist remembered alongside Milton Friedman as the pioneer of ultra-libertarian free-market thought, who first argued in his book Denationalisation of Money: the Argument Refined for a complete free market in the production, distribution and management of money to end the monopoly of central banks.
|Friederich Von Hayek|
The other thing is that many governments may soon be rolling out digital currencies of their own, which might offer some of the convenience of cryptocurrencies while still being linked to a national currency. As usual, China is moving faster than anyone. The new digital Yuan has already been rolled out in four cities across China, and will soon go national. It will not be based on blockchain and cannot be called a cryptocurrency, but it can be seen partly as a reaction to Bitcoin's popularity.
In practical terms, using a digital Yuan would not be much of a change for most Chinese, who have barely used cash for years and settle all transactions through WeChat and Alipay. This will however bring all digital transactions under the direct control of the state, rather than have them go through two private corporations whose size and dominance have started to bother the Party (look at Jack Ma's recent travails). Cash will probably go on existing, but become even less widely accepted than it currently is. Of course, all transactions made through the digital Yuan will be completely traceable by the People's Bank of China. But then again, no one in China is under the illusion that Tencent and Alibaba aren't sharing their data with the authorities, so protection of privacy is not really an expectation anyway.
While a digital Yuan might not change anything in the lifestyle of your average Chinese, it may hold various advantages for the government. For instance, it would theoretically allow them to set negative interest rates. Some are even predicting that it could offer a way to build a new international payment architecture to rival the SWIFT system, which would be centred on the Yuan and not vulnerable to US sanctions. This is an interesting thought, but the Yuan challenging the dollar as a leading international reserve currency continues to seem unlikely to me. The Chinese authorities are clearly not going to open up their financial markets or start running trade deficits, as they would have to do if they wanted their currency to go global. It is the US that currently runs the trade deficits, and this suits them fine. Still, a digital Yuan might help them to settle payments with Iran or North Korea, say, without going through SWIFT or other systems centred around the US.
In any case, China's digital Yuan may well presage the future of money much better than Bitcoin does. All advanced countries could follow suit, digitalizing their money while doing what they can to limit transactions in unauthorized cryptocurrencies. Bitcoin will continue to exist on the margins and find its uses, or perhaps even become a widespread and accepted way of storing value. But it won't save us from financial crises or revolutionize our basic relationship with money, any more than the internet has saved us from propaganda or from national borders. The truth is that no new technology can "liberate" us on its own, unless it is accompanied by deeper changes to the political and economic system.