Bitcoin, the shadowy digital currency, is described by its backers as “a consensus network that enables a new payment system and a completely digital money.” As self-professed “digital skeptic” David Golumbia explains below, though, Bitcoin is more accurately understood as an ideology than as “cash for the internet,” another conceptual shortcut offered by proponents. When the Bitcoin world was rocked this week by the collapse of the Mt. Gox exchange—which today filed for bankruptcy—we asked Golumbia to help us see the development in context. Golumbia, author of 2009’s The Cultural Logic of Computation, is at work on a book project he’s calling Cyberlibertarianism: The False Belief in Digital Liberation. As he details below, that liberation won’t be bought with Bitcoin.
Stories about Bitcoin (BTC) have become hard to avoid recently, especially in stories regarding the loss or theft of most of the holdings of the major Bitcoin exchange Mt. Gox, but the meaning of those stories is much harder to judge. While it is widely understood to be an alternative form of money, according to most formal definitions Bitcoin is currency rather than money, and at any rate may be better understood not as a financial instrument but as the realization in software of a politics, one based on outdated conspiracy theories, most of which emerge from the far Right. Shorn of those politics, Bitcoin or technologies like it may one day function as useful global payment systems, but these will be far less world-shaking than most of Bitcoin’s most fervent advocates insist.
Those advocates tell us to focus on the way that Bitcoin’s intricate and original technology promises to solve urgent political problems. But it is not Bitcoin’s technology that fails to live up to these promises. Rather, the flaws lie in the diagnosis itself. Like many of the most influential ideas associated with what I and other scholars have called cyberlibertarianism, enthusiasts demand we understand Bitcoin as a welcome political intervention, but when pressed for details about that political intervention, its advocates unfailingly turn back to technical and engineering matters. In Bitcoin’s case this is especially notable, because the financial matters Bitcoin is said to “fix” are complex, technical, and hard even for experts to understand; Bitcoin advocates routinely reject this complexity and argue that well-regarded economists do not know what they are talking about (read the comments to Paul Krugman’s “Bitcoin Is Evil” for examples).
Bitcoin is the most famous of so-called “cryptocurrencies,” called that because the software used to create them makes heavy use of cryptographic techniques. It was developed by a shadowy figure or group of figures who went by the name Satoshi Nakamoto, who has not been heard from since 2010; in part it delighted hackers because it gave them a means to donate to WikiLeaks when MasterCard and Visa prohibited such donations. Without getting into the weeds of its technology—again, I think too much attention is paid to this part of it and that this actually distracts from its political and financial functions—here is a short summary of how it works from a recent piece by Adam Rothstein (for a more complete technical discussion see this post by Michael Nielsen):
Basically, [Bitcoin] is a peer-to-peer database that lists a number of units of value, or coins, by unique addresses, and assigns them to personal owners by more unique addresses. The database makes sure that only the right coins are assigned to the right owners by keeping a single list of who owns what, called the blockchain. It also makes sure that the blockchain cannot be falsified, by placing the transactions between pieces of a complicated code, which are called the proof of work. Since every computer on the network is simultaneously generating the proof of work (and is rewarded for doing so by being given a fraction of new BTC according to the amount of work they are doing, in what is called mining), it would take a computer that is more powerful than all the others combined to mess up the record. So, through this peer-to-peer verification system, the record stays legit, without needing the need for a centralized bank to be in charge.
In brief, Bitcoin allows a distributed network of user machines to create virtual “coins” (really just bits of software), with some certainty provided via both cryptography and computing power that it is impossible or at least very difficult to counterfeit them.
But the word “coins” already gets us into the political and fiscal issues that figure everywhere in discussion of Bitcoin. “Coin” tends to imply money, and many talk about Bitcoin as if it were money, but more sober advocates who are a little more familiar with money talk about it almost exclusively as a currency. Money and currency are not the same thing. “Money,” as we use the word today and as economists define it, has three attributes: it is a medium of exchange, a store of value, and a measure of value. “Currency” refers to the medium-of-exchange function, but it is well known that almost anything can serve as a medium of exchange. The store and measure of value functions require State (or other overarching institutional) backing and, historically, have required State interventions to ensure stability—functions that Bitcoin cannot force nations to relinquish. It is Economics 101 that “store of value” and “medium of exchange” are not the same thing, yet reading Bitcoin materials it often seems as if its advocates refuse to acknowledge they are different.
“Money” names the instrument in which official transactions in that nation-state are conducted: all other things being equal, US Government bonds have a value in US dollars, and taxes in the US must be paid in dollars. As another economist puts it, “In post-Keynesian monetary theory money is anything that will settle a legal contractual obligation. And by the civil law of contracts, the government determines what settles a legal monetary contractual obligation.” This is the fundamental point, critical to all monetary theory, that Bitcoin advocates seem unable or unwilling to recognize (and admittedly it is what was until now a fairly arcane point of economic theory): the State decides what money is, and no assertion otherwise by individuals or groups can change that—only the law can.
The nature of money is highly complex. As the Cambridge sociologist and political scientist Geoffrey Ingham wrote in 2004 in The Nature of Money, “perhaps the greatest paradox is that such a commonplace as money should give rise to so much bewilderment, controversy, and, it must be said, error. It is not well understood.” Ingham reports that Joseph Schumpeter, who has become the patron economist for digital disruption, could not sort out his own ideas about money sufficiently to complete a monograph about it, despite trying for much of his career. Yet cyberlibertarians continually write as if money is simple, straightforward, that any attempt to delve into its complexities is disinformation propounded by central bankers, and so on—despite themselves being unwilling even to investigate the basic parameters of the thing they claim to have bettered.
The most florid claim of Bitcoin advocates is that Bitcoin poses “an existential threat to the nation-state,” because nation-states supposedly live in fear that their hold on monetary policy via central banks like the Federal Reserve is threatened by the existence of alternatives to money. But as many economists have pointed out, alternatives to national currencies abound—from frequent flyer miles to credit card bonus point programs, from grocery-store coupons to high-value goods like fine art, precious metals, and gems—and it is only in this trivial and colloquial sense that Bitcoin is money. None of these alternative currencies pose any threat whatsoever to national sovereignty over money, a fact that Bitcoin advocates seem unable to process. In fact, they make continual reference to the superiority of gold-backed money, despite the fact that governments fixed even the price of gold at many moments in history to tame volatility, and in the face of current stories about gold and silver prices being part of the actually conspiratorial LIBOR price fixing scandal. This preference for gold versus what they somewhat inaccurately call the “fiat currency” of nation-states only shows the ideological nature of their assertions, since gold exists right now, is widely traded and untraceable, largely resistant to counterfeiting, and yet is mostly used by the very nation-states that Bitcoin advocates dislike.
The comparison with gold opens the door to the cryptopolitics that underlie too much writing and thinking about Bitcoin. Many of its most vociferous advocates rely on characterizations of the Federal Reserve as a corrupt idea in and of itself, a device run by conspiratorial bankers who want “the state to control everyone’s lives.” These claims are grounded in rhetoric propounded in the US and across the world by far-Right politicians like Ron Paul, a vocal advocate of Bitcoin, whose bald declarations about the Federal Reserve are far more ideological than substantive in nature. Paul claims to want the abolition of the Fed and a return to the Gold Standard, as if this would result in the kind of absolute economic freedom libertarians demand. Yet history shows that Gold Standards themselves are regulatory in nature, and no more free from manipulation, derivation and speculation than are any other currencies; gold itself provides clear evidence of this, in its recent price volatility.
Such beliefs require one to ignore the direct evidence of one’s own eyes. Precisely because it is outside of regulatory structures, Bitcoin is particularly prone to the kinds of hoarding, dumping, and manipulation that characterize all instruments that lack central bank control and regulatory oversight by bodies like the SEC. Contrary to the advocates’ claims, unregulated securities instruments are everywhere in contemporary finance; there is convincing evidence that the inability of the Commodities Futures Trade Commission to establish regulatory authority over CDOs and CMOs is the proximate cause for the economic crisis of 2008. Now the lack of regulation of Bitcoin means that hoarders (as of Dec 2013, half of all Bitcoins were owned by approximately 927 people, such fight-the-power revolutionaries as the Winklevoss twins of Facebook infamy among them) can use all sorts of sophisticated trading methods to manipulate the market. It means that fly-by-night operations can come and go, stealing huge amounts of Bitcoin for themselves (as the operators of the short-lived Silk Road drug supermarket replacement ironically called the Sheep Marketplace appear to have done), or being emptied out by others, all of which may be the story of Mt. Gox.
The Mt. Gox story deserves one more note, because it demonstrates a critical flaw in the thinking of Bitcoin advocates. Until and unless entire societies switch over to Bitcoin as their own national monetary system—so that the complete economic cycle of production and consumption can be conducted in no currency other than Bitcoin—Bitcoin will always require exchange into a national currency at one point or another, and States have the means, mechanisms, and legal obligation to oversee those exchanges. Bitcoin advocates’ understanding of finance is so rudimentary that many believe they do not owe taxes on Bitcoin transactions because they are not denominated in national currencies and that tax laws do not apply to Bitcoin, but of course that is ludicrous—tax laws apply to all transactions because of one’s citizenship or country of domicile, independent of the currency in which one transacts the exchange. Someone who buys X for 1 Bitcoin on Tuesday, and sells X for 3 Bitcoin on Wednesday, owes taxes on his or her profit of 2 Bitcoin, no doubt indexed to the value in dollars of the Bitcoin on each of those days, the same way as if that transaction had been conducted in diamonds, gold, or jujubes. And again, it is only the Ron Pauls and Alex Joneses among us who think that society would be well served if even more members of the citizenry stopped paying taxes.
Bitcoin’s incredible volatility and lack of regulation, celebrated by cyberlibertarians, actually prevent the cryptocurrency from being used in just the way its advocates claim. The very reason central banks regulate the value of currencies is to ensure one of the three major functions of money: to be a stable source of value. The Bitcoin experiment demonstrates a law of finance that has never yet been disproven: absolutely unregulated markets result in extreme boom and bust cycles. If Bitcoin becomes regulated enough to serve as a stable store of value and to ensure debacles like Mt. Gox don’t happen in the future (and even its own staff fears that the event may be “the end of Bitcoin”), it may be useful as a global system of payments (but so are generally non-transformative technologies like PayPal and Dwolla). But that will hardly shake world political structures at their foundations. If it remains outside of all forms of both value and transactional regulation, Bitcoin will continue to be a very dangerous place for any but the most risk-tolerant among us (i.e., the very wealthy, whose interest in Bitcoin should indicate to advocates how and why it cannot be economically transformative) to put our hard-earned money.