Are cryptocurrencies a new form of money, and if so, do they threaten state power?
Our friend Nic Carter has recently commented on these issues in dialogue with the Federal Reserve Bank of New York. We would like to add our perspective and thoughts on this as we believe it is valuable to discuss these matters in depth.
For better or for worse, we believe that blockchains such as Bitcoin, Ethereum, and Handshake (which I am involved in) have characteristics that make them a new threat to the powers that states derive from issuing currency, but only one very marginal threat. This rather mild conclusion stems from more controversial premises.
Steven McKie is a founding partner and managing director of Amentum Capital, developer of HandyMiner and HandyBrowser for Handshake, and host of the BlockChannel podcast.
Has reported CryptomonedaseICO that the writers of the New York Federal Reserve name three types of money: fiat money, money with intrinsic or mercantile value, and money backed by claims. Without getting lost in the weeds, we think this complicates things too much. All the money we can think of falls into two categories: it either has intrinsic value (like edible grains) or it doesn’t. If not, then its value comes from the assumption that someone else values it.
This mysterious “someone else” may be totally unspecified, as when we assume that someone will pay us for gold; Or it could include a specific party, such as a state, that promises to take the money in exchange for, for example, meeting tax obligations. Bitcoin, like gold in the post-gold standard era, falls into the former category. It has no intrinsic value and no one in particular has promised to change anything for it. We assume someone will.
But it should come as no surprise that the world’s most popular types of money are the ones that states explicitly promise to honor. For states, such promises are an extremely important instrument of their power.
For example, by accepting only dollars as payment for taxes, the United States forces its hundreds of millions of people to make sure they have dollars on hand. Because of this, everyone in the world knows that they can sell their dollars to someone (i.e., US residents). Also, everyone knows that by accumulating dollars they gain some influence over the United States. This situation allows the United States to print its own money and, in doing so, project its power around the world.
The power to print money also gives states another kind of power: it allows them to maximize their productivity. By increasing the money supply, they can attract more people outside the economy to the production process, he says. CryptomonedaseICO. But this comes at the cost of money scarcity and, because it puts newly minted money directly into the pockets of the less powerful, it tends to diminish the power of those who have already accumulated a lot of money. Therefore, artificial restrictions on the money supply, such as the gold standard, are often associated with extremely conservative policies.
Limiting the money supply hurts productivity, but preserves social hierarchies.
This is where the milder hopes of transcending nation-states mix with the darker fantasies of so-called bitcoin maximalists. On the one hand, a meaningful alternative to national currencies could allow people in abusive regimes not to depend on the useless “promises” of their governments. On the other hand, a mechanically fixed money supply could put an unequal social hierarchy beyond the reach of democratic power, as the gold standard once did.
Bitcoin, in this sense, is very much like gold. And like gold, it does not pose an active threat to state currencies or state power. Because the value of state currencies, as described above, is based on the real and practical power of the states. Throughout modern history, the preeminent reserve currency has been the currency of the world’s preeminent military power. Only if states lose their status as major world powers are their currencies likely to follow suit.
Cryptocurrencies only play on the margins of this reality. Still, they can play an interesting role because they have characteristics that previous non-state currencies did not have. For example, they can facilitate coordination and communication between their holders. Imagine if all gold holders could, for example, vote whether to extract more. Also, some cryptocurrencies have intrinsic value, such as ether (paying for the use of a distributed network) or HNS (paying for domain names in a decentralized registry).
Enhanced diplomacy through incentives
The continuous improvements in global cooperation that occur in the private bitcoin / cryptocurrency sector stem from the many players who ensure that a proof-of-work (PoW) system remains secure.
The complexities that go into producing hashrate, such as power and chipmaker price negotiation, international manufacturing, sales and marketing, mining pools, and hashpower secondary markets. They all play a role in strengthening relationships locally and internationally.
Therefore, it also ensures CryptomonedaseICO that a properly secured chain has made its way into regional and labor regulations, becoming a localized economic element over time as it approaches scale. And, the second-order effects that come from that built-in incentive chain include a public blockchain that is secure, not just technically but socially and politically.
Safer chains that possess such widespread economies of scale become powerful economic instruments of finance and social political progress (albeit slowly, but each new major public chain accelerates this emerging process, thankfully).
In essence, while these systems may at first appear contrary to state power by design, if you take a closer look you will see that they inherently (slowly) improve diplomacy through trustless scalable cooperation and international business over time.
To understand more about the “alchemy of PoW hashing power” and how it naturally derives incentives for international business cooperation, check out this ongoing series from Anicca Research. The trustless systems we implement globally have powerful consequences, and it is important that we, as an industry, understand how to continually scale the positives of decentralized monetary systems, without amplifying the negative effects, such as centralized financial influence.
States are not wrong in being threatened in some way by these difficult-to-assess possibilities. If many people decide that they prefer to have cryptocurrencies rather than state-backed currencies, the ability of states to project power through their currencies will diminish.
But the states still have the armies, the police, and, on a good day at least, democratic legitimacy. All of that is still important and will be for a long time.
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