Update The System or Race To The Bottom?
--
“Some people don’t like change, but you need to embrace change if the alternative is disaster” Elon Musk
The future will not look like the past, it never has. The status quo has terminal problems and if we are to solve them we may have to accept profound societal change. It has been a turbulent 12 months which has seen the creation of nearly a quarter of all US dollars and the world’s billionaires get 54% wealthier. Today’s financial system appears more unjust and unsustainable than ever. Bitcoin is a strictly rule-based form of money that has created a monetary system run by citizens, not governments and banks — a daring idea. Furthermore, it has the potential to reduce the economic dominance of individuals and countries over others. The status quo, however, is a powerful construction. Resistance to change on an individual and societal level, as well as obstruction from those in power, and a dysfunctional social commons are all factors that restrain Bitcoin. Not just Bitcoin but decentralised finance and the broader cryptocurrency industry in general. The electric vehicle industry experienced a similar kind of resistance but has evolved to gain widespread acceptance and adoption.
It is often said that living standards have improved around the world. Regardless of the veracity of that statement, certain terminal problems have been growing all the while. There is a global wealth inequality which continues increase at an ever faster rate, and more so than usual during the past year when economies were partially shut down. We are reaching planetary limits — species extinction, ocean dead zones, pollution, rainforest destruction. Clarity is getting lost as artificial intelligence governs which debates, and which opinions we see on the internet and social media. We’re not solving these issues and, moreover, we are not even moving in the right direction.
Technology has brought new problems that were difficult to anticipate. Updates and patches are used to fix problems with apps and operating systems everyday. Bitcoin and the cryptocurrency concept, as a whole, offer an update to our global financial operating system. The decentralisation, inclusivity, and egalitarianism of Bitcoin, however radical and idealistic it might seem now, is likely to be increasingly adopted by younger generations. Such a change will have to overcome the considerable power of people and groups invested in the current system and it will have to overcome people’s attachment to social norms. Efforts to bring through the electric vehicle have already shown how difficult it can be to overcome social norms. It does seem now, with the success of Tesla, that the electric car has reached that turning point. Just as with electric cars, the updates now happening to our financial system may be seen in hindsight as a logical and necessary progression for civilisation. Eventually the question will be why didn’t we see it before.
Any radical shift towards new models is not an easy thing to achieve. It requires individuals, to go against the norms of society until their ideas create a network effect and a new set of norms evolve. It requires people in the present day to upset the apple cart, to be revolutionary.
“If you ever find yourself on the side of the majority, it is time to pause and reflect.” Mark Twain
Normative behaviour is the psychological capacity dedicated to understanding norms. We develop it in order to be part of the group and aid our survival. Once we adopt a norm, it functions both as a rule that guides our behaviour and as a standard against which our behaviour is evaluated. Perhaps more importantly, individuals typically become motivated to enforce the norms they adopt. This is why major cultural shifts are so hard fought. I suggest most leaders in power today have been rewarded for believing in the social norms of their era and for perpetuating them. I will also add that most of them are not looking to change the system; only to function optimally within it.
In 2020 Oxfam reported: “The world’s 2,153 billionaires have more wealth than the 4.6 billion people who make up 60 percent of the planet’s population.” More surprising perhaps is the knowledge that the wealth gap has grown exponentially during a period of global economic shutdowns. Between March 2020 and March 2021 the combined wealth of those billionaires increased by 54% according to the Institute for Policy Studies.
One of those billionaires, the hedge fund manager, Stan Druckenmiller, recently spoke about the recent increase in the wealth gap: “I don’t think there’s been any greater engine of inequality then the Federal Reserve Bank of the United States in the last eleven years. I’ve just had the best year I’ve had in fifteen years last year. Everyone wealthy I know is making a fortune. And why are we making it? Because this guy [Jerome Powell] is printing money like there’s no tomorrow. The kids in Harlem, in my opinion, are not benefitting from money printing but Stan Druckenmiller and other people are. So for the life of me, I can’t figure out why the Left are so excited about money printing…There is no one, no group, who will get hurt more by a bust than the poor, they will be first in line to get screwed.”
The current systems of power are ineffective in tackling sustainability. It has become accepted as normal that the aims of organisations claiming to work towards solutions are not met. In 2020 one of the UN’s own poverty advisors, Philip Alston, said the UN must “avoid sleepwalking towards assured failure, while pumping out endless bland reports.” Is it fair to ask if our problems are such that we need new mechanisms for solving them? The financial system today works well for those in rich countries or the wealthy but it does not work the same for the rest of the global population. Charles Hoskinson of the Cardano network/cryptocurrency has often said that the definition of success for the cryptocurrency industry is that the poorest person has access to the same system as the richest person in the world. To the cynical that may sound like hot air, but other idealistic pioneers have overcome naysayers before and brought big changes.
Elon Musk is a visionary who wants to progress the human race by the application of new ideas and new technology. He has emerged over the past few years as one of the world’s most compelling figures. Certainly one of the more unorthodox billionaires Musk, 49, briefly became the richest person on the planet in 2020. He initially found success in the development of Paypal, an internet payment system, and now heads Tesla, Space X, Neuralink, and the Boring Company. Many changes occurred in 2020. A deeper schism in the public consciousness appeared and I think Musk’s story somewhat helps to explain it.
Tesla has become the auto manufacturer with the largest market capitalisation (value of a company’s outstanding shares), eclipsing Toyota in July 2020. Not because Tesla were selling more cars than Toyota. Not by a long way. It was because people were attracted to the idea of electric cars. Visionary investors focused on the potential of renewable energy bought Tesla stock. Tesla stock rose 695% in 2020. It has been a show of ideological intent by the Robinhood generation. A new group of young investors, for so long shut out, are suddenly included in the financial system via easy-to-use apps and fractional shares, and they want to invest in ideas that they believe in.
It is important to note that Musk is one of the richest men in the world because people invested in Tesla. His wealth is largely tied up with other people’s valuation of his company’s stock; something that is not directly under his control.
Professing to save the human race while at being at odds with the establishment, Elon Musk is an enigmatic figure. For years he fought the establishment, those in power, the systems in place, that are evidently damaging civilisation. Young people are the ones actually staring into the face of environmental disaster. The ideals Tesla and Musk are focused on are appealing. Affordable zero emission cars, affordable and reliable solar energy. Another of his projects, Starlink, aims to provide internet access for remote areas of the globe that are as yet unconnected.
Perhaps hard to believe now but in 2008 when Tesla released their first car, few people gave them much hope. Doubts about cost and usability, cynicism, and resistance from people with vested interests all contributed to a public mistrust of electric cars. It was also a major deviation from the norm. It was, and still is, normal to have a car that runs on petrol. An entire global economy that has built up around the petrol engine for more than a century. Jokes, editorials, newspaper cartoons, public speeches, gleeful reports of disastrous developmental phases all created a certain public perception. Even as recently as 2018 President Trump said “all electric is not going to work”. There has been a sense that, up until recently, electric cars were fair game for public ridicule.
The financial institutions have certainly not aided the development of electric cars. Ever since Tesla made their stock public in 2010 it has been constantly subjected to downward pressure by institutions who have made it the most shorted stock in the world for most of its existence. In fact, no other stock has even come close. It is often the case that heavy short interest can make a company obsolete. The justification being that shorting exposes frauds and badly run businesses, and creates space in the market for well run businesses. The rumours (occasionally voiced by Musk himself) have always been that the short interest was a conspiratorial aim by so called ‘Big Oil’ to bring down the entire idea of electric vehicles. It is remarkable that Tesla survived. Musk felt the aim was too meaningful to be allowed to be crushed by cynical short sellers:
“…pessimism, f*** that; we’re going to make it happen. As God as my bloody witness, I’m hell-bent on making it work.” Musk to Wired in 2008
One of his aims now is to make a car that is as cheap as possible so that it is accessible to the many, not the few. If the environment is going to benefit from electric cars they need universal adoption. Maybe Tesla isn’t perfect but nowadays it isn’t the only major electric car manufacturer. Everyone is now focused on electric vehicles which was not the case when Musk began working with Tesla:
What began as a ridiculed, fringe idea is now generally accepted and supported mainstream consensus and public money. Despite Tesla being a month away from bankruptcy in 2019 there is a sense that electric vehicles have turned a corner and will now be profitable. Musk helped create that cultural shift. Beyond just environmentally friendlier vehicles, the Xi and Biden administrations now appear to be intent on supporting a societal switch to renewables.
New technologies are frequently criticised in their gestation phase. In the early days of the internet it was widely dismissed. It was thought to be useful mainly to criminals — human traffickers, money launderers, child pornographers, arms dealers. It was too slow, too expensive, too limited, too unreliable. It had too few real-world applications. In hindsight it is easy to say that we all saw the potential. The truth is most of us tend to live our lives entrenched in habitual thinking that hinders new ideas from germinating. Did we also envisage the global adoption of smartphones, mobile phones, and personal computers when we first heard of them and was it the young or old who adopted them first?
Musk is in tune with the younger generations in many ways. Not many billionaires wield the power of memes the way he does. He knows the impact of social media. Master meme culture and capture the zeitgeist. If we have grown up in a world before social media it might be easy to dismiss Twitter, YouTube, and Reddit as nonsense. But if we allow ourselves to be open to the inevitability of generational change, we might see that a valid culture has been developing quite organically among the younger generations. Musk has frequently said formal education is “no evidence of exceptional ability” and that his home-schooled children use Youtube and the internet for learning; “everything is available, basically for free. You can learn everything for free.” The internet is an incredible resource.
In January 2021 Tesla converted 8% of its treasury into bitcoin. It happened against a backdrop of large-scale quantitative easing by central banks. When the Tesla news came out in February the price of Bitcoin rose. Mainstream media and politicians were sceptical while investment banks remained quiet.
It was intriguing that Musk had got involved with Bitcoin. Was it only opportunistic speculation? His actions don’t suggest money is his priority. This is a man who has challenged the establishment because he thinks following the establishment will not allow us to thrive or even continue.
Shortly before the Tesla news broke I had seen the Twitter and Square CEO, Jack Dorsey, share his thoughts on bitcoin and the subject of the internet economy. I found his reasoning interesting and understood more clearly the necessity of something like Bitcoin for the internet economy and for people who have been shut out by traditional finance. Dorsey, whose social media platform is at the centre of modern culture, expresses these ideas clearly and persuasively:
The Bitcoin network runs on blockchain technology. Blockchain is a series of databases, usually publicly available, though not always. It is used to keep secure, tamperproof records of events and things. It really is as dull and prosaic as that. If you manage to watch Anders Brownworth’s great visual explanation of blockchain technology to the end without falling asleep you deserve a medal. But the applications are endless: monitoring supply chains, digital identification, copyright and royalty protection, secure voting, real estate and auto title transfers, tax regulation and compliance, food standard verification, workers’ contract enforcement, medical record-keeping, weapons tracking, managing the Internet of Things, equity trading, wills and inheritances, securing access to belongings, and decentralised, censorship resistant social media and digital applications. DHL, Coca-Cola, BMW, Honda, Ford, Daimler, Unilever, AIG, Prudential, Cargill, Shell, Siemens, General Electric, Etihad, Delta, British Airways, Boeing, Microsoft, Amazon, Maersk, Walmart, Pfizer, De Beers, the FDA, the CDC, and the United Nations are just a few of the organisations trialling and using blockchain technology. The longest running blockchain has been securing digital documents and appeared in every edition of The New York Times since 1995.
But what happens when blockchain technology is used for transactional exchange and storage of value; when it is used for money? Well then it becomes an intensely challenging political debate. It challenges to the status quo. It challenges the world order. Bitcoin supporters posit the notion that this new superior technology will eventually replace the current financial system of banks and central banks and, ultimately, traditional government structures. Of course, for some (perhaps dependent on their geography and personal circumstance) that sounds wonderful and for others it is horrifying. Bitcoin promises a highly secure, tamperproof, censorship resistant, universally inclusive, publicly verifiable, incorruptible, decentralised monetary system that removes the need for third parties and allows individuals to transact directly with one another (‘Promises’ because although Bitcoin has shown these claims to be true so far, it still is only 12 years old). To the casual observer it is all very hard to believe. It also doesn’t help that, to be able to verify anything in the previous sentence, one has to do extensive research, become technologically and economically competent, and actually use the Bitcoin network. If we’re completely honest, it’s pretty difficult for most of us to even establish that Bitcoin is anything more than just air.
The early anarchism, the clickbait, the YouTubers, the get rich quick scammers all created negative opinions in the public consciousness. Those outside the community see Bitcoin and crypto proponents simply trying to enrich themselves by encouraging more people to buy in. After all, if Jack Dorsey convinces the world to adopt Bitcoin he, as an early adopter, stands to make significant financial gains. It is also detrimental that some Bitcoin holders react aggressively to criticism. Even Edward Snowden, a vocal proponent of Bitcoin and a man who divulged he has “more bitcoin than anything else” commented: “The worst part of cryptocurrency transforming into dragon-level wealth is witnessing good people emotionally devolve into dragons themselves: so intellectually paralysed by the fear that everyone they see threatens their hoard that they lose sight of the world beyond their cave.” It is understandable that people are sceptical of a Bitcoiner’s motives, but I find it less easy to understand why people might not apply that same scepticism to the people in power who frequently speak out against bitcoin. I do wonder if normative psychology obfuscates that particular lens.
United States Secretary of the Treasury, Janet Yellen, 74, continues to push a narrative that bitcoin is used for criminal activity despite US dollars being the worldwide currency for criminal activity. Yellen has made $7 million in recent years by giving speeches to Wall Street banks, major corporations and industry groups. When she says Bitcoin is a poorly functioning system and funds illicit activity, to me at least, it is questionable whether she is giving an honest, informed opinion or whether she is giving an opinion that serves the system she has gained status, wealth and power from. (Interesting Forbes article addressing what they say is the false narrative of Bitcoin’s use for illicit activity)
In 2017, Jamie Dimon, JP Morgan Chase’s CEO, called Bitcoin a fraud and threatened to fire anyone in his firm who bought it. Bitcoin leads an alternative system that threatens to make traditional banks obsolete so one of their CEOs defaming it is not a surprise to me. A few years on, however, and Dimon’s firm is quietly developing its own cryptocurrency, JPM Coin.
The world’s most famous investor, Warren Buffett, 90 years old, has called it “rat poison.” His Berkshire Hathaway partner, Charlie Munger, 97, went further this year, saying, “I think the whole damn development is disgusting and contrary to the interests of civilisation”. These two men have profited from government bailouts in the past. They understand the financial system very well but they do nothing to redress the balance. (The Berkshire Hathaway-owned Burlington, Northern and Santa Fe Railroad received stimulus money in 2009. The US taxpayer put money into Berkshire Hathaway holdings too: $25 billion into Wells Fargo, $6.6 billion into U.S. Bancorp, and $3.38 billion into American Express through the Troubled Asset Relief Program. Berkshire invested $5 billion in Goldman Sachs on September 24, 2008; on October 28, 2008, Goldman Sachs agreed to take $10 billion in TARP money. Berkshire invested $3 billion in General Electric on October 1, 2008; in 2008, GE Capital received approval from the Federal Deposit Insurance Corporation’s Temporary Liquidity Guaranty Program to issue up to $139 billion in debt backed by a government guarantee. In 2020 more taxpayer money went, this time directly, into Berkshire Hathaway.)
Over the past few years the performance of the naira and the lira has seen many Nigerian, Turkish and citizens scrambling to Bitcoin and cryptocurrencies to save their salaries or conduct business. They have been doing this while their governments repeatedly talk of bans. These central banks’ existence is directly threatened by a decentralised, public system such as Bitcoin, but the system they control can’t offer their citizens any assurances about the value of their salaries a week or a month after they receive them. Aykan Erdemir, senior director of the Foundation for Defence of Democracies’ Turkey Program, said the central bank attempts to ban crypto were “basically a government attempt to try to control Turkey’s payment ecosystem. Ultimately Erdoğan has his eyes on Turkish citizens’ savings…Cryptocurrency is Turkey’s final frontier. It’s almost like the last safe haven citizens believe is out of Erdoğan’s reach.”
Is it reasonable to ask if certain people and organisations are committed to defending existing power is because they are the existing power? It is undeniable that there are a lot of extremely rich and powerful people with vested interests in the financial system. Can these people be trusted to serve our civilisation’s best interests? For most of us this is a murky question that we will never know the answer to. The irony is that Bitcoin is the most rule-based monetary system we have ever had and yet listening the financial establishment one gets the opposite impression. Even those most deeply involved in the establishment occasionally give us a clue as to what our financial system is like:
“Of all the many ways we have of organising banking, the worst is the one we have today” Mervyn King, the Lord King of Lothbury and former Governor of the Bank of England
Some powerful individuals and organisations are embracing crypto. This year Visa CEO, Al Kerry, saying they are moving into crypto “in a very, very big way.” A similar announcement from Mastercard: “We are preparing right now for the future of crypto and payments, announcing that this year Mastercard will start supporting select cryptocurrencies directly on our network.” Paypal began enabling the buying and selling of bitcoin on their platform last year. In early 2021 a number of banks announced plans to offer bitcoin and crypto trading including, Goldman Sachs, Deutsche Bank, Wells Fargo, and JP Morgan Chase. The Ethiopian government is working in tandem with the Cardano network/cryptocurrency to use blockchain technology to provide its coming generations with the ability to own, control, and use their own data. El Salvador’s president, Nayib Bukele, announced they will be the first sovereign nation to adopt Bitcoin as legal tender. This could mean Bitcoin being used on the foreign exchange market.
As far as young people are concerned, it may be that they are attracted to Bitcoin, not just in spite of, but because of warnings from figures in the established power. Someone born in 1980 has spent their lives living through, or recovering from, one financial crisis after another, no matter where they are in the world. They are aware they will be paying off national debt for the rest of their lives. They are aware the centralised banking system won’t give them the benefits that it has given to the previous generations. They are not obliged to support or trust the banking system. With that perspective in mind, investing in a meme of a dog from your mobile phone doesn’t seem so silly. If fiat currency is not backed by anything and can be created on a whim, by people who personally profit from doing so, is it actually any more valid or trustworthy than Dogecoin?
Vested interests and biased opinions aside, it could be that people in power are not as technologically astute as the younger generations and are unable to see the potential. If we don’t go to 70 or 80 year olds for their help with computers and smartphones why would we seek their opinions on a form of money that exists in a technological realm that is outside their expertise. Joe Biden or Christine Lagarde are unlikely to be able speak with authority on the subject of mempools? Their expertise lies elsewhere. If and when cryptocurrencies reach ascendency the older people of the current establishment probably won’t be in positions of influence anymore so they aren’t motivated to learn about new technology.
People who have grown up with smartphones and the internet are more in tune with technology and have a better grasp of cyberspace. This is somewhat a generational thing and it is also dependent on an individual’s focus and expertise. Leaders in the tech sector, for example, are acutely aware the internet economy wants to work on all time zones and economies simultaneously and never sleep. Cryptocurrencies are not confined by the hours of Wall Street or the office hours in Shanghai, for example. They are not, for the most part, constrained by international borders or legal jurisdictions. The internet is truly global and unceasing but the current financial system is not. It developed before the internet.
Any financial system that was created in the age of the internet would not look the way the legacy system looks. As an example, the diagram below shows the third parties and their regulators involved in transactions in the United States.
When you buy a coffee with a Visa card it clears almost instantly but because of the number of actors involved in any transaction it will take 3–5 working days to settle. There is a difference between clearing and settling. During that settlement period, third parties such as banks and clearing houses, and regulators are adding time and costs to the transaction (as seen above). Bitcoin is peer-to-peer; it goes directly from the payer to the payee. Currently it averages 10 minutes and a cost of $28.02 to reach final settlement. Costs don’t rise exponentially depending on whether it is 10,000 BTC or 0.0001 BTC. Larger transactions carry lower fees than in traditional finance. In 2019 a transaction worth $486 million occurred that carried a transaction cost of just $374.98. Not possible prior to Bitcoin. To claim that Bitcoin transactions are too expensive to be practical is disingenuous. It is too expensive for some transactions.
Although Bitcoin is fast and cheap enough to significantly improve larger transactions it is still not fast or cheap enough for a coffee. However, developers on other blockchain networks and layer 2 solutions such as the Lightning network are working on that. There are technical issues with speed and cost on a global scale that currently exist in Bitcoin and cryptocurrencies but when we look at the early internet and the evolution of mobile and smart phones we see they also had the same initial scaling problems. The first motorcars did not have the luxury of a petrol station situated every few miles along the road.
According to Dorsey, there is a need for a financial system that includes people no matter their circumstances or their geography. Political and economic factors, usually in the form of trade restrictions, prevent nations and/or their citizens from taking part. A much cited Global Findex report in 2017 determined that 31% of adults globally were unbanked. This is rarely the case in Europe and most of the English speaking world but is commonplace in other parts of the world. The chair of the SEC, Gary Gensler, has said himself, that financial inclusion is one of the greatest potentials of blockchain technology. Having the US dollar as the world’s reserve currency does not promote global inclusion.
In 2019, 88% of all foreign exchange transactions occurred in dollars. In a technical sense, all of these transactions pass through US territory and incur costs by doing so. This primarily benefits the United States banks and government.
Not only is there a financial cost for global users of the US dollar but an ideological one as well. The US can cut off access to dollars if a country is at odds with them politically, culturally, or economically. I would also add that when the US Federal Reserve prints trillions of dollars they are expanding the money supply for everyone in the world. They are inflating asset and commodity prices globally, not just in the United States. I encourage you to watch this Wall Street Journal piece, as a starting point, before continuing with this article:
In a country like Venezuela where the bolivar has been hyper-inflating over the past five years its people seek refuge in the US dollar, buying it at inflated prices from their banks, their government, and on the black market. If the Venezuelan president, Nicolás Maduro, accepted certain conditions of the US government, Venezuela could abandon the bolivar and move to the dollar. But only if Maduro, a man ideologically opposed to US influence over Latin America, accepted their conditions. Regardless of ideology, it has been the Venezuelan people themselves, not the politicians, who have suffered the economic consequences trade embargoes. They are the victims of situation that has been wholly out of their control.
The US dollar may look like a stable currency when compared to, say, the bolivar, the lira, the rubel, or the naira, but last year alone 22% of the world’s dollars were printed and the dollar itself continues to lose value against assets and commodities. For the last three decades the normalisation of monetary expansion has been inflating assets and devaluing fiat currencies. With this in mind Dorsey and Musk took the understandable decision to buy Bitcoin for Square and Tesla. Bitcoin has averaged 200% yearly gains since 2011. That trend does not have to continue but thus far it has been more profitable than holding dollars. For some, that is still not a good enough reason, Nils Pratley of The Guardian, responded to Tesla’s purchase with:
“Tesla should stick to what it’s good at — and that isn’t bitcoin”
Later the same month Fortune Magazine came out with this:
“Tesla has made more money on Bitcoin this year than on selling cars and batteries”
If people are making profits by investing in Bitcoin or other cryptocurrencies it is because they are early adopters. In the same way, early adopters profited by investing in the right companies during the dotcom bubble of the early 2000s. However Bitcoin is the most decentralised money we have ever created. Being an early adopter may mean you increase your wealth, but it doesn’t mean you can control or disproportionately influence the system itself. That’s a key difference between current financial system and the Bitcoin. It’s highly improbable that any amount of wealth or lobbying would enable you to change anything about the protocol. (Bitcoin’s neutrality/decentralisation is debatable but, across the world, there are over one million miners, solving complex mathematical puzzles to mine bitcoin into existence, and 10,000 full nodes, verifying transactions and blocks, currently operating. It would require 51% of these miners to agree in order to change anything about the bitcoin protocol. So it is unlikely though not impossible and it is wise to keep Murphy’s Law in mind.)
Speculation by early adoption is one thing, simply looking for a stable store of value is another. 2020 saw dramatic inflation. The list below shows a number of US commodity and asset price changes from June 2020 to March 2021 (Note: These rises are extreme and as economies open up again, we would expect to see some deflation in these prices, although it’s unlikely to take them back to pre-March 2020 levels):
The inflation seen above might be surprising when the US Bureau of Labor Statistics announced that the Consumer Price Index (CPI) rose by just 2.6% between March 2020 and March 2021. However, the Consumer Price Index is a hand picked selection of goods and services selected by the US Bureau of Labor Statistics themselves. It must also be said that the US government has an interest in keeping official inflation figures low in order to be able to service it’s own debt. Governments can be effective in ensuring that supermarket and amenity prices remain stable via international trade agreements and domestic subsidies but they are less successful in governing house prices, stocks, commodities etc. Against a backdrop of normalised monetary expansion, inflation will appear somewhere because all money has to go somewhere.
The graph below charts is the M1 money supply since the 1970s (M1 money supply definition). The Federal Reserve announced in February 2021 that they will no longer be supplying this information to the public.
In my view, not only is the dollar as the global reserve currency fundamentally inegalitarian but it is also defective as a store of wealth. The dollar, like all fiat currencies, continually heads in a downward direction in terms of its purchasing power. At certain times its downward movement is faster than others but over the long term always down, and historically speaking, eventually to zero. The oldest surviving currency in the world is the British pound. It is so called because at the time of its conception, approximately 1200 years ago, its value was equal to a pound weight of silver. The pound is no longer backed by silver and a pound of silver now costs £304. Silver took 1150 years to get to the value of £10 by 1971. The rest of the inflation has occurred in the last 50 years. (1971 is significant because between 1971–73 the United States moved off the gold standard and thus moved the world off the gold standard. Some say that since then there has been nothing that backs the US dollar apart from faith and the US military.)
Jack Dorsey also spoke of the need of an internet connection in order to take part in this new Bitcoin system. It is a common criticism. But in truth only cash and cheques do not require the internet or a global communication system to function. Like Bitcoin, modern payment systems such as online banking, Visa, Mastercard, and Paypal all require connection to a global communication system. Given that roughly 2 billion more people were connected to the internet in the past five years and the advent of a project like Starlink it does seem safe to assume almost all could be connected relatively soon.
The moral questions regarding currencies requiring internet access will also have to be asked of central banks like the United States Federal Reserve, European Central Bank, and the People’s Bank of China, who are all developing their own digital currencies. (CNBC piece on central backed digital currencies)
The blockchain makes tracking every transaction that takes place on the network very easy. This would make governance and bureaucratic tasks of the governments easier, faster, and cheaper. Chinese citizens are already using the digital yuan and it will be on show for visitors of the Beijing Winter Olympics in 2022. It runs on some form of ledger database network (the project is mysterious and it is not even clear whether it runs on a blockchain). The important thing to note is that it doesn’t run on a public, open source network like the bitcoin network. The digital yuan is privately controlled. The Chinese government control it.
These central backed digital currencies (CBDCs) will be controlled by central banks and visible only to them. None of the central banks have plans for digital currencies that are open source or transparent. Every transaction that has ever occurred on the Bitcoin network can be seen and verified by anyone in the world who has a computer and an internet connection.
Christine Lagarde of the European Central Bank said this year that she expects the digital euro to be ready in four years time. If it does take four years it may simply have to take a seat at the table with an established, truly global crypto and decentralised finance space where every currency directly or indirectly interacts with a Bitcoin base layer. Nations, individuals, corporations, will have the choice to use a new global monetary system that cannot be controlled by good or bad actors, or to use CBDCs which cannot promise the same.
If I have been positing the notion that Elon Musk has been driving the renewable energy sector I am obligated to discuss the environmental questions surrounding bitcoin. This has been discussed at length and is particularly discussed at the moment Tesla recently stopped accepting bitcoin as payment, citing the “rapidly increasing use of fossil fuels for bitcoin mining and transactions, especially coal, which has the worst emissions of any fuel”. The Bitcoin community was confused by Elon Musk and Tesla’s mixed messages, and were further confused by Musk’s numerous follow up tweets on the subject. There may be method in Musk’s madness and I think this particular chapter is, as yet, incomplete. In my view he is entitled to bring up the issue of coal-fuelled bitcoin mining in the Sichuan region of China and furthermore the community and society as a whole has a responsibility to debate every problem and potential problem.
Certainly I have found that most of the mainstream media articles about the network’s environmental impact contain many misunderstandings of bitcoin mechanics, and rely on discredited and outdated papers and research. For a mainstream journalist to confuse Bitcoin mining with bitcoin transactions and then extrapolate the future energy usage of the network at global adoption level does not enable genuine debate. To refer to the energy usage of the network without mentioning that the miners are often in remote areas utilising energy that would otherwise be lost in transfer is disingenuous. In very few other situations would it be widely acceptable for journalists to fail to grasp the topic in hand at no cost to their reputation. But in this case, scepticism of Bitcoin is the norm amongst the establishment so an uninformed journalist who is hostile to Bitcoin is on safe ground and risks nothing professionally.
Renowned Bitcoin commentator,Nic Carter, wrote an article on this subject. In his view, “The question ultimately boils down not to the particulars of mining but rather the societal merit of non-state money.” I think he has hit upon the real discussion here. Do we as a civilisation consider Bitcoin to be a valid use of energy. The Bitcoin network uses a lot of energy compared to what exactly? The current financial system, gold mining, lithium mining, air conditioning units, Christmas lights, Las Vegas, the internet, smartphones, Youtube, Netflix, computers, the US military complex? What is a necessary and worthwhile use of energy? It has been estimated by multiple sources that YouTube uses somewhere between 1% and 2% of global energy. YouTube has almost infinite educational videos where one can learn about every subject and skill. It also has 12 billion views of Gangnam Style and Despacito. Gold and silver are used in electronic circuitry and are also used for jewellery. Military industrial complexes protect us from enemies and are also used for unjust wars and territorial occupation. The energy used by the traditional financial system is used to pay for policing, hospitals, and social welfare. It is also used to make banks, nations and individuals disproportionately wealthy at the expense of others. I don’t think it is possible to objectively validate energy consumption (this Laurence Wintermeyer article explores the idea further).
The Bitcoin network is a unique consumer of energy and doesn’t fit into any other category. Bitcoin can be mined next to power plants and none is lost in transfer to populated places. The miners can use run off energy that power plants cannot transfer to populous areas. The network can comfortably run on 100% clean energy and it may actually become a key driver of the global move to renewables. The Bitcoin Clean Energy Initiative started by Square, advanced by Cathie Wood’s Ark Invest, recently produced their whitepaper, putting forward exactly those ideas. The Miami mayor, Francis Suarez, also spoke confidently about Bitcoin’s future, “The counter narratives on Bitcoin will equally fail. Yes, the U.S. will become a powerhouse for clean energy Bitcoin mining.” The developers working in blockchain technology are, first and foremost, problem solvers. Any question regarding Bitcoin or blockchain have already been discussed within the community and projected solutions are already there. This applies to security, privacy, interoperability, cost, and fair distribution. It also applies to environmental concerns.
The journalists who write articles without giving the subject the requisite research tend to purport Bitcoin to be a frivolous get rich/get poor quick scheme. Central and commercial bankers, politicians and mainstream media all routinely give that impression. I don’t think Bitcoin is frivolous at all. To me the idea of a monetary system that cannot be corrupted, cannot be controlled, and cannot exclude individuals, is the antithesis of frivolous.
Prior to any global adoption of Bitcoin we would likely undergo a bifurcation of norms and ideologies between the older and younger generations, between economically advantaged and disadvantaged until we reached a workable consensus. That might be the stage we are at now. It is a confusing stage to be at. When Mesopotamians were developing the first written word in order to create verifiable ledgers of account on wet clay they probably never envisaged ledgers eventually moving to cyberspace. It is not something easily or intuitively understood but somehow, 6000 years later, that is where we are. Is it possible to make changes in the traditional financial system and start closing the wealth gap without Bitcoin? Possibly, but it’s unlikely that would happen. There is no evidence to suggest it ever would. Satoshi Nakamoto created Bitcoin in 2009 to solve a problem.
