Some voices from the left have, over a lengthy period and often quite loudly, called for nationalisation of the banks. It seems they might have to move quickly as it is possible these institutions may not be around for much longer. (The reverse, it has to be said, is also possible.) In a recent issue of the London Review of Books (21/04/2016) John Lanchester’s “When Bitcoin Grows Up” suggests that new technology may change the world of money. Lanchester is one of that useful breed of thinkers who, with no specialist background in the area, leaped into the swamp of money and economics after the crash in 2007 in an attempt to find out what had happened to cause distress and puzzlement to so many, including Queen Elizabeth. The question at the heart of his essay is whether the peer to peer financial transactions possible through bitcoin mean the banks are done for.
For many people the nature of money is something that is uncertain and considering it is studiously avoided. Those coloured bits of paper have something of the mystery of religion about them. In both cases faith plays a big part; despite the evidence of the senses people believe there is a major unseen reality behind the visible.
So, girding our loins, we must ask what is money? Money, it transpires, is not bits of coloured paper; well it is, or it can be, but it is something else as well: a convenient and trusted means of recording everyone’s multiple debits and credits. Even very simple societies have needed currency because there are just too many debits and credits around to manage. Lanchester tells the fascinating story of the South Pacific Yaps who use a rare limestone as currency. The Yap currency is large round stones with a hole in the middle. You can have one outside your house. They are too large to move or pass around like coins or paper money. So even when you dispose of one or, presumably, part of one, in exchange for some service or goods, the stone stays outside your door. Let us say the owner is a Mr Dan Murphy. As Yap society is an oral culture, community memory registers which bits of the stone Dan still owns and which bits are owned by others. Why, it might be asked does community memory not simply record the transactions which make up the islanders’ debits and credits. The answer is that there are too many transactions but the net situation expressed in limestone pieces can be encompassed in community memory.
John Lanchester tells us that all money works along those lines and comments: “The register of ownership, held in the community memory, is the money.” The register is the money; the money is not really the money and in the developed world legal tender is only a small part of the story. In the UK for example only four per cent of money exists as the stuff we have in our wallets. The rest exists only as entries on the credit side of ledgers. Credit card companies do not hand over currency to retailers or to their banks. Credits owing to the retailer are simply entered into the register. Some people look very carefully at their bank statements to make sure no one is messing with the register. The banks – under the regulation of the central bank ‑ look after the register for us. But they don’t do that out of the goodness of their hearts. For facilitating debit and credit transactions between individuals, companies and institutions they take quite a sizeable reward, which some refer to as rent. Obviously the community memory of the Yaps couldn’t skim off rent but the banks take quite a lot, $1.7 trillion every year. No wonder bankers appear so contented!
Money, as Lanchester says, is a way of transferring credit. It has developed over time and in tandem with technology. The question now is does the new technology with its transformative powers of connectivity offer a way of registering credits and debits which eliminates the need for banks and their Medici era structures? Could those involved in transferring debits and credits – which is everyone in the developed world and beyond – save that $1.7 trillion every year?
One interesting experiment is taking place in Kenya. Lanchester explains: The great trailblazers for this are in the developing world, especially Kenya, which has adopted a form of direct transfer called M-Pesa. This involves the transfer of credits not from bank account to bank account, but from one mobile phone to another. M-Pesa was introduced in 2007, and took off in popularity when violent chaos following the elections at the end of that year brought the regular banking system to a halt. […] A few years after its adoption, M-Pesa is the conduit for half of Kenya’s GDP.
Banks give security but mobile phones do so too because they incorporate sophisticated cryptography originally developed to ensure security around the deployment of nuclear weapons. For Kenyans, it seems, that is not only an acceptable level of security but superior to that available from their banks. The M-Pesa is clearly working in Kenya but it is probably not sophisticated enough to challenge the financial hegemony of banks in the western world. Bitcoin may have that potential. Lanchester explains:
“Cryptography is also central to one of the most interesting developments in the world of money, and that is bitcoin. […] Bitcoin is a new form of electronic money, […] Bitcoin’s central and most exciting piece of technology is something called the blockchain.[…] It’s impossible to fake a new addition to the chain, but it’s relatively easy […] to verify a legitimate transaction. So: impossible to fake but simple to verify. The entities transferring the money are anonymous[…]
For the first time in human history, we have a register that does not need to be underwritten by some form of authority or state power, other than itself […] A decentralised, anonymous, self-verifying and completely reliable register of this sort is the biggest potential change to the money system since the Medici. It’s banking without banks, and money without money.”
But is “an effectively anonymous, untraceable way of moving money” really so great? It certainly offers those who possess the wealth generated in society the possibility of a radical disconnect from politics and from the world in which people live, a world of hospitals, schools, contracts, law, personal security and much more.
Transactions in Bitcoin can easily avoid governmental taxation and likewise wealth accumulated in Bitcoin can escape taxation. So, if bitcoin were to become dominant, how do you run schools? How does organised society continue? Perhaps the libertarian answer is that the market will take care of schooling and other needs if governments would just do the logical thing and stand down. In such a world bitcoin might well be the future.
It is hardly surprising that one of the most successful Bitcoin enterprises, Silk Road, was established by a libertarian hater of government and taxes:
Silk Road was an online drug market, set up by a charming, handsome, 26-year-old Texan called Ross Ulbricht. [..] he set up an online exchange where buyers and sellers could meet to trade anything that did not involve doing harm to others: what that meant in practice was no to child pornography, but a big yes to fake IDs, guns and, especially, drugs. The exchange was accessible only via Tor, the highly secure internet browser which hides the location of users so successfully that it is a great favourite of terrorists and paedos. [….] Tor gives anonymity and geographical unlocatability to all its users; bitcoin gave an anonymous, non-locatable way of transferring payment. […] Within two years, Silk Road was one of the most successful internet enterprises in the world, and had attracted a buyer willing to offer $1 billion.
The boring old-fashioned state which forbids trade in drugs and collects taxes came after Ulbricht. But it seems they would never have got the charming, handsome, 26-year-old if he hadn’t made an easily avoidable mistake. It was human error rather than a failure in the technology that toppled him. On one occasion in the early days he used his real e-mail address thus leaving a trail which the FBI – the agents of what Ulbricht saw as “the tax eating, life sucking, violent, sadistic, war mongering, oppressive[state] machine” – could follow. He is now serving two life sentences and is ineligible for parole.
There are two points of interest about this ‑ apart from the obvious one that high-IQ oddballs should not be permitted to seize extensive social power. The first is that the FBI was lucky and it is not difficult to imagine that the tiny chance they seized could be successfully avoided by future Ulbrichts. The second is that in closing down Silk Road the US authorities did not “conclude that this extra-governmental, anonymous, untraceable money was, in and of its own nature, illegal”.After forty years of neo-liberalism, it seems the US state is conflicted on the question of its own legitimacy and, it would appear, is happy to allow an exciting enterprising phenomenon which is capable of undermining it.
It is worth noting also that the “freedom” of bitcoin is a double-edged sword. Bitcoin, like paper currency, can be stolen but when this happens, to whom do you go for help? One owner of bitcoin who had the electronic currency stolen blogged “Some may ask why we didn’t report this to the authorities when this occurred, and the answer is that we just didn’t know what happened, didn’t want to cause panic, and were unsure who exactly we should be contacting.”
As Lanchester observes: “[A] deregulated currency, explicitly constructed to be outside state control and policing, might tempt thieves, and might also mean they’d have a problem getting help from the authorities.” Well, as mafiosi are all too aware, problems can arise in enterprises which operate outside the law and if you don’t have access to the apparatus of legal enforcement there is no alternative but to take the law into your own hands. It is hardly surprising that Lanchester reports that the charming and handsome Ross Ulricht took out assassination contracts on individuals with whom had a gripe.
So we are left with an amazing technology which would work beautifully in a civilised global utopia but in the world as it exists it cannot (despite the benign attitude of the FBI) be allowed much of an existence other than in the colourful margins of society. Nevertheless, the technology remains transformative. All this may explain why there is a split in the online bitcoin community. Some want the technology restricted to its original purpose. Others want it to become more corporate-friendly.
David Birch, who has written on “general issues around new forms of money, and new possibilities generated by blockchain technology”, says “I’m not convinced that money or payments is the optimum [use] of the technology”. It seems the blockchain might have the potential to hugely assist if not transform the work of governments in collecting taxes and in other everyday administrative business. And of course the world of traditional finance has been watching. Financial syndicates have been formed to research and patent blockchain type technologies.
Lanchester, who is understandably affected by the excitement and innovation of bitcoin, finds this a bit of a downer. The idea behind Bitcoin was
‘A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.’ It looks as if, on the contrary, those very same financial institutions are going to use this new technology to keep themselves right where they are: in the middle of every possible transaction network, extracting all the rent they can.
For John Lanchester bitcoin could have an impact as great as the new kind of banking introduced in Renaissance Italy. This he says would be “more fun” than “the continuation of banking hegemony in its current form”.
Could there be a Chinese curse “May you live in fun times”? We have to be careful what we wish for. If society decides it needs some bitcoin wealth to pay teachers or nurses it may have difficulty getting it. But if society decides to take some of the banks’ annual €1.7 trillion for social purposes at least we’ll know who they are and where to find them. This, perhaps, is where the Trotskyist outside the tube station on Tooting Broadway is on the money.