The industry is abuzz with the new poster child of ‘disruptive’ innovation, Permissioned Ledgers. I spent quite a bit of time earlier in the year consulting for big name firms on bitcoin blockchain and permissioned ledgers. At the time I didn’t really view one preferably over the other, I considered each on its merits and useful applications. Of course when you are paid to technically consult for a company, they don’t want your biases, they want your technical expertise. Without fail, those of them who were interested in B2B models were interested more in a permissioned ledger, and those who were doing B2C models were interested in using Bitcoin to monetize their online business models. Most that were interested in B2B solutions had very bank-like businesses dealing with near-money like value systems. Decentralized ledgers are great as payment systems. Bitcoin is digital money, that runs on a decentralized ledger. Notice the difference? The ledger part is just a small part of Bitcoin’s innovation which is the money aspect. Because it is a money it is natural that banks or bank-like entities would want to steer clear of Bitcoin. There are very strict laws surrounding the control of who gets to print money, what is legal tender, currency control laws, and Bitcoin turns all of that on it’s head.
When I used to compare the two for my clients I would tell them that Bitcoin was harder to create a business model on top of due to the yet unclear legal issues while with permissioned ledgers I saw a clear potential for profit in developing cost saving systems. I was quite impartial to this difference until only 6 months ago, seeing both as equally beneficial as a technology. However, something happened in the interim that changed my views — Greece. With the Greek crisis, the world witnessed how the will of the common people matters little against the will of the privileged few. Many would like to blame the Germans but that would be unfair. The german economy suffers with continued bailouts as well; “throwing in good money after the bad” those of us in the industry call it. The central banking system is to blame, as whether deliberately or by greed or by chance, the world economy is starting to collectively crumble under the weight of our bad habits of spending, lending and investing with debt. And we witnessed first hand that when the chips are down, it will be everyman for themselves. Bail-in clauses have been put in place in all major countries of the world, so that the banks have a right to take your money to save themselves before you. They justify this as necessary to save the system as a whole. But is it really?
As much as we would like to blame greedy fat cat creditors for not showing debt lenience for Greeks (at the end of the day no fat cat will ever lose their skin when the system collapses ) it actually boils down to a lot of Greek working class people owe a lot of German working class people money. So somebody has to be the loser in this zero sum game. How we get into these terrible lose-lose scenarios is due to how money is created and lent out by the central banks, but I’ll save this topic for a later post. Today is about Bitcoin, and why its innovation as a money is immeasurably more valuable than any permissioned ledger in terms of disruptive and positive applications for the world.
Because Bitcoin first and foremost as a permissionless, censorship free, money gives us for the first time in over 80 years, Monetary Sovereignty. What is monetary sovereignty? It’s your basic rights of personal property, applied to your money. Ever since our gold has been confiscated from us and replaced by paper promises, we have not really owned our own money. Without monetary sovereignty, your money doesn’t really belong to you, it belongs to the central bank and thus is a poor long term store of value. Not to mention the banks may choose to revoke your use of it selectively if they don’t approve of you or your business. Banks started out as custodians to our money, now they have become more the gatekeepers overseers of the economy, deciding who can participate in it and who cannot. They practice active economic censorship. Such a money system cannot have any real long term value. If you cannot control your own money then its value cannot be stable for you.
“But fiat money is a great historical store of value” some may say, “more so than the volatility of say gold/silver/oil over the last 100 years”.
But that is an illusion. An illusion made possible by the fact that all the other monies are reckoned in terms of dollars. If you flip that mindset around then you can clearly see that the value of USD has plummeted vs gold in the last half century, by 6000% (gold was 20 dollars an ounce in 1913, around 1200 dollars now). Even if that weren’t the case, fiat money is about as useful a store of value as an electric powered heater in the arctic circle. Great if you have a politically stable and constantly growing economy (electricity), utterly useless otherwise. We are seeing signs now that the world economy is becoming more and more unstable, with crisis brought about by collectively over extending credit, spending debt, and the interconnectivity of our financial systems which makes economic mismanagement in one part of the world affect all the other parts. We are also seeing that growth is slowing despite all efforts by the central bankers to stimulate it. So the electricity is running out, and it is going to get really cold here out in the igloo.
Bitcoin allows people to keep their money private, away from prying eyes, or sticky fingered governments who would need collect more and more taxes to keep their regime from collapsing. What started as well-meaning collection for the socialization of basic needs can quickly devolve into economically productive folks subsidizing a failing system. This is what is happening to the EU and soon US as well. We already see the signs of it, profitable corporations going to great lengths to avoid paying taxes, which forces the government to spend more money enacting stricter laws and enforcement of tax regulations. It’s a vicious cycle.
Bitcoin is a threat to the current system. It is a threat just by its existence alone. As long as Bitcoin can be there as an alternative money system in the event that the current system suffers a catastrophic drop in confidence, the flight of people afraid of losing their savings will cause them rush to alternatives like gold, silver, CHF, Bitcoin. And if it does come to pass, it is clear to see that only Bitcoin could be used practically for daily commerce under the strict monetary regime that will no doubt be imposed upon the world in a martial law fashion. (just ask any Greek who had to line up to withdrawal money at 60 EUR per day)
Bitcoin is unique among its kin. It is the only cryptocurrency to have obtained the status of a money. It got to where it is because when it was still growing nobody, including the bankers and the government, took it seriously. Now that it has grown to a size where the cost of attacking the network is prohibitive even for nation states and proven that a digital money system free from government control can actually work. You can be sure that there is no way any government will ever allow another cryptocurrency to grow to this level of adoption and resistance to federal control again. You only get to fool them once. Bitcoin fooled them. It will not happen again. That is why I don’t believe any other alternative cryptocurrency will ever achieve Bitcoin’s level of widespread adoption. As those in power now lack the capability to attack the Bitcoin network in a direct way (the security of the Bitcoin network is presently beyond the processing power of any government to topple) they must resort to more clandestine ways to weaken, disrupt, and sow seeds of division among its community, whether by means of demonization, regulation, and finally by threat of violence if necessary. This is why Bitcoiners must be extra vigilant against any changes to the network that would sacrifice any iota of decentralization, which is what keeps Bitcoin free from censorship or government coercion.
So if monetary sovereignty is the freedom that comes with using Bitcoin that we all want to preserve, is that all there is to the value of Bitcoin? Or is there a way to make money from it as well? We are capitalists after all, and Bitcoin is a system whose security is based on aligning incentives of the network participants with profit-seeking. This is the key reason why it has worked. Now while it is certainly true that there is a lot of money being put into a collective conscious campaign to rebrand Bitcoin to just ‘blockchain technologies’, do not be fooled by this charade. While blockchain without Bitcoin may have its uses as a cost savings initiative for banks, (no doubt given the amount of money being poured into the space), in my opinion, that is not as interesting in comparison to the work we can all help to do to ensure that Bitcoin remains the government-free alternative to fiat currencies, acting as a check and bounds to the central banking system.
So while many immediate opportunities may lie in the blockchain applications or permissioned ledgers, I would say that they matter very little in the long run.
And indeed, if the worst unimaginable were to happen with our current monetary system and we have squandered our best talents and efforts on cost cutting for banks and at the same time sacrificed our monetary sovereignty, then it won’t matter at all.
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