The advent of cryptocurrencies: a reason to rethink currency in the 21st century

Jen Wiechers, J. Amadeus Waltz & Manouchehr Shamsrizi
June 28, 2014
“[A] universal currency valid for trade transactions in all the world.”
– John Maynard Keynes

When John Maynard Keynes addressed the House of Lords in 1943 and spoke these words, the opportunities afforded to us by computerization  and the internet were as yet a distant dream. He was arguing for an  International Clearing Union which would provide a special unit of  account that was not, technically, a currency proper. Rather, it was a  way to keep track of international trade and, through international  agreements, incentivize nations to balance their imports and  exports. His ideas did not come to pass. It arguably inspired the  International Monetary Fund’s (IMF) Special Drawing Rights, though, a  supplementary foreign exchange assets which is mainly used as a unit of account by the IMF.

To cite Keynes as someone who could have been sympathetic towards the  use of cryptographic currencies (cryptocurrencies)  such as Bitcoin may  appear strange initially; indeed, they are much more closely associated  with names such as Friedrich August von Hayek and the Austrian school  of economics. Considering the decentralized nature of cryptocurrencies,  von Hayek’s Denationalisation of Money in particular comes to mind and Satoshi Nakamoto,  the pseudonymous inventor of Bitcoin, quite openly declared his  distrust of centralized banking and state interventionism with which  Keynes is closely associated. However, to see a cryptocurrency such as  Bitcoin exclusively through the lens of its inventor or its current  implementation is to fail to see its underlying potential just as much  as it is a disservice to the heritage of Keynes. His political and  economic thought has often been reduced to action titles for those  arguing either for or against extensive monetary intervention by the  government. Although Keynes certainly was one of the most profound early  influencers of the current central banking system and the dominant  monetary policy of the developed nations of the 20th century, his  relationship with the actual implementation of interventions is much  more complex; in fact he laid out his concerns succinctly with regard to  extensive interventionism, a focus on institutions instead of  individuals, and the debasement of currency through inflation in his The Economic Consequences of the Peace as  early as 1919. As such, Keynes, much like von Hayek, would have been  appalled by the idea that a bank, or any private enterprise, could be too big to fail and both argued that government should empower individual citizens, not institutions.

Where they differed was in the mechanisms through which they thought  this could be achieved. From von Hayek’s point of view, price was  everything: the market, left to its own devices, would eventually heal  itself and all the government should do is restrict itself to ensuring  its proper functioning through laws and policies counteracting the formation of monopolies and cartels.

Keynes cut to a more fundamental question and, in his 1936 magnum opus, The General Theory of Employment, Interest and Money,  used the term ‘animal spirits’ to describe the confidence and trust  that individuals place in the economic system, its fairness, resilience  and ability to cope with corruption and other detrimental influences. In times of crisis, Keynes suggested, wise government intervention could  counteract a loss of confidence in the economic system, preventing  prolonged destitution by empowering businesses and individuals alike.

While pegging the currency supply to a commodity such as gold proved  effective for a while, the uncertainty of reserves and rates of  production in a globalized economy eventually hampers the ability of  central banks to expand or contract credit in response to economic  circumstances. It therefore potentially prolongs – as was the case with the Great Depression of the early twentieth Century – economic turmoil.  The use of a centralized and democratically legitimized agency such as a  central bank to ensure confidence in trade and exchange through  governmental fiat and policy was, in the world of the still nascent  nation states of the early 20th century, the obvious choice. Today,  technologies such as cryptocurrencies may change this because their  supply and rate of production could be tailored, through democratic  mandate, to economic circumstances without having to rely on an agency  resembling what we know as a central bank.

“There are three eras of currency: Commodity-based, Politically-based, and now, Math-based.”
– Chris Dixon

The rise of the internet presages this tendency for decentralization.  It allows almost everyone in the developed world access to an  unprecedented library of knowledge and a worldwide exchange of  information without significant delay or transaction costs. It does not  simply broadcast the opinion of the state or powerful institutions, but, through its largely decentralized nature, empowers individuals to share  their views and to connect with like-minded people across the globe. It  is a medium which allows arbitrary services to be implemented. In a  similar fashion, cryptocurrencies rethink the concept of a currency in  this decentralized logic of the internet, providing the next evolutionary step in online transactions.

Much of our financial and political system is still based on premises  that were true when a phone call from New York to London cost more than  $100 per minute and documents were still, chiefly, sent by post or  courier; where nationwide, not to mention global, fair cooperation could  only be achieved, if at all, by delegating it to democratically legitimized institutions. The potential of cryptocurrencies lies in  reducing the overhead of financial transactions in a similar fashion as  the advent of email reduced the costs of communication.

“Bitcoin is for money what TCP/IP is to the Information Age”
– Micky Malka

Electronic forms of money and centralized currencies have of course  existed for decades with the most obvious example being online banking  and money transfer (electronic money) as well as loyalty programs  (currency). Moreover, MMORPGs (internet-based computer games)  successfully use ingame currency, i.e. a fictional electronic currency  that can be used to acquire ingame items from other players or  centralized stores, as an integral part of their virtual game worlds.  The Linden Dollar in Second Life or World of Warcraft’s Gold can serve  as an example.

The reduction in cost that a shift from physical to electronic  bookkeeping enables has already brought about significant progress not  just in the developed world, but also in developing countries such as  Tanzania and Kenya. There, mobile payments via SMS are one of the  leading forms of payment and Airtime (pre-paid cards for mobile phones)  has emerged as a functioning currency. However, common to these forms of  electronic currencies is that their handling is still reminiscent of  and, in many ways, constricted by, a design that considers them an  afterthought to physical money and currencies. More importantly, a  (trustworthy) central authority is essential in all these examples to  keep the books and/or issue the digital currency/commodity.

The revolutionary idea behind Satoshi Nakamoto’s Bitcoin is not its  use as a currency or as a form of electronic money, it is the nature of  the blockchain: a transparent and cryptographically secured public  ledger that records and verifies transactions. The cryptographic  validation inherent to the functioning of this public ledger of  transactions ensures that no trust in intermediaries or central  authorities is necessary because transactions cannot be faked, nor  currency counterfeited. It also provides an irrepressible transparency  of transactions: while transactions are usually pseudonymous, they can  be reviewed and are impossible to tamper with after being extensively  verified by the network. This security-by-design, which does not have to  rely on intermediaries, significantly reduces transaction costs with  striking results. To illustrate this, consider the case of a recent  donation facilitated via Dogecoin, a cryptocurrency originally meant to  satirise Bitcoin, but which has attracted (comparatively) widespread  adoption due to its community being perceived as inclusive, charitable  and good-natured.

In what is being called “the most valuable tweet in history” by news  media, an anonymous benefactor donated more than $11,000 in Dogecoin to a  charity: a water campaign organized by the Dogecoin Foundation in March  of 2014. The total transaction costs for his donation were less than  $0.0001 and, together with more than 5,000 other donors, over $30,000  were raised to build water wells in the Tana river basin in Kenya. While  there were some other larger donations, thousands of donors donated  many times over the span of the two weeks it took to raise the money  with each individual donation being miniscule, usually amounting to less  than fifty cents.

These donations would not have been possible using today’s  conventional payment processors which usually charge flat fees of  between $0.50 and $1 per transaction, plus between two and five percent  of the total; if the $11,000 donation had been processed by a well known  payment processor, fees for this donation alone could easily have  reached more than $500.

To consumers, many of these fees are invisible because it is usually  the receiver who pays them: merchants, charities or other organizations.  But they add up. Additionally, and perhaps shockingly, if they affect  individual users, they disproportionately affect those who are the most  vulnerable: overdraft fees, high chargeback fees for uncovered credit  card transactions and fees levied by remittance services impact the  already economically disadvantaged. Remittance, a fast-growing $500  billion market, incurs average transaction fees of more than 10%,  sometimes as high as 50%, and estimates for Africa suggest that more  than two billion dollars are consumed by fees each year. Fees that seem  incomprehensible in our digital day and age and which could otherwise be  used to empower families in the developing world.

At the moment, Bitcoin and its brethren predominantly form payment  networks and are therefore more properly comparable to PayPal,  MasterCard or Western Union, rather than the US Dollar, Euro or British  Pound Sterling. They also have a number of flaws, such as Bitcoin’s  forced scarcity. However, they deserve credit and study for being the  first form of a currency developed exclusively under the premises of a  globally connected transnational society.

They also deserve credit for overcoming the strict necessity of  intermediaries such as bank and payment processors by relying on  cryptography and a self-regenerating distributed computing network  established by their users. They also provide a means for a  decentralized monetary authority in which the power to create more money  is vested in a distributed computing network and dependent on a  transparent protocol which can be changed to accommodate changing  circumstances, but only if the majority of network users agree.

It is important to recognize that these are merely technological  possibilities and although they were in part conscious design  considerations of the inventor of the Bitcoin protocol, they are not  essential to the technology and its potential uses. Many services such  as banks and payment intermediaries can still provide valuable services  even if cryptocurrencies were widely adopted, and society may still  choose to delegate the management of its currency to a government or  private agency. However, in stark contrast to the realities of the 20th  century, even if such choices are made, cryptocurrencies provide new  means for public accountability.

In the end, it is important to be cognisant of just how different the  world is today from the world in which Keynes, von Hayek and the other  architects of the current monetary – and political – system found  themselves. Their thoughts are still of immense value, but in the face  of rapid technological advancement we need to fundamentally rethink our  premises. We believe that, in their current form, cryptocurrencies are a  first step which can stimulate engagement and debate with this subject  in the financial sphere. While cryptocurrencies will likely never be “a  universal currency valid for trade transactions in all the world”, their  technology has the potential to be a building block for a universal system for validated transactions in all the world – and that is a thought worth contemplating.


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Jen Wiechers, J. Amadeus Waltz & Manouchehr Shamsrizi