In its early days, Bitcoin attracted many for its promise of transactional freedom from governmental or institutional control. Indeed, some of those wanted to avoid governmental oversight because their transactions were illegal (think Silk Road) or because they were evading taxes (think money laundering). That illicit association kept a lot of investors and institutions away from bitcoin and other cryptoassets for many years. In 2018, however, billions of dollars are flowing into cryptoassets, infrastructure projects, and the crypto ecosystem. What do entrepreneurs and institutions see on the far side of the current bear market?
The Implied Promise
First, let’s go back. Back before nation states and republics when the rules emanated from a person – a king, a queen, or a lord. Those in power kept their power in large part through a primary instrument – the sword. If you didn’t do as the king wished or decreed, armed soldiers took care of the dirty work. Crude perhaps but effective none the less.
The secondary instrument of control was through the currency. Those in power controlled what coins were used, how they were created, and how many there were. Transactions – and ultimately taxation – had to occur in the approved currency of the land in order to make everything work – at least for those in power. If or when subjects weren’t compliant in this regard, they were visited by men with swords.
Fast forward several centuries to the time of the American colonies under the Kingdom of Great Britain. In good part because of King George’s arbitrary taxation policies, American colonists declared their independence from the crown and fought a long war to remain independent. After that war, several founding fathers published a series of papers to convince the American citizenry to adopt the proposed constitution. Even with ample examples through my many years of history courses, the Federalist papers were able to finally distill a core idea for me about the essence of government – that government is power. The clarification informed me greatly as to how the founding fathers thought about their recent situation and how they were thinking about the future federal government. The same idea can help us today understand in part what is happening in the world – and specifically for cryptoassets.
Source of Money
Where does money come from? From the central governments or from their appointed central banks. People often refer to government-issued money as fiat currency. Fiat comes from the Latin root “let it be done” by decree, order, or resolution. Governments create money which is then distributed by itself or through the largest banks in the land – a highly centralized, top-down approach – a very good model for centralizing power.
Now, for the first time in history – a somewhat dramatic but arguably true statement, the ability to create and distribute money on a mass scale does not have to be a top-down phenomenon – it can be bottom up or fully decentralized. Cryptoasset promoters often point out the decentralized creation methods for many coins. Not as many have focused on the distribution aspect but some are looking to that as well now as seen with the idea of small scale air drops. While full crypto decentralization may be possible in theory, a truly decentralized cryptoasset hasn’t shown up just yet.
For now, cryptoassets are less centralized than government based money but they still have strong centers. Think about Bitcoin and the role of miners. In its early days, “anyone” could mine bitcoin but as the network and processes have evolved, the function of mining has centralized to a relatively few large entities. Miners are neither bad nor conniving but self-interested and efficient. Satoshi foresaw this and while miners have centralized some of the power for Bitcoin, no one entity has overtaken it. Various other cryptoasset originators have been considering ways to enable broader decentralization. In addition, people are now starting to think about distribution of their coins/tokens – a largely unexplored area still. For example, what if everyone (or some large group) were granted some new cryptoasset that was fully exchangeable?
Questions like that illustrate why cryptoassets offer entirely new ways of how we create, distribute, and use money. Thinking innovatively, however, can be very challenging because we tend to frame cryptoassets thinking into our well-developed industrial-era models for economics and business. Cryptoassets, or more specifically blockchain technology, will have far-reaching effects on many industries and will likely completely transform or even kill the business models of some very large companies. Envisioning such outcomes requires some imagination and a systems thinking approach. Van will be sure to focus in on the systems nature of cryptos specifically in his next Systems Thinking Workshop.
The End of Fiat?
Are we watching the sunset of centralized fiat currencies before our eyes? Well . . . let me point to a story the Wall Street Journal ran last week about a Bitcoin investor who spent several years tracking down coins he had lost in the famous 2014 Mt. Gox hack. He had been attracted by Bitcoin’s promise of being able to avoid governments, banks, and crooks. Instead, he has found himself deeply entangled with all three for the last several years.
That’s just the way things work – for now. Systems have inertia and are meant to sustain themselves – but they yield to massive improvements. Transferring money across borders used to be expensive and take a long time. With cryptoassets, however, it’s cheap and takes minutes – if not seconds. Applying this kind of thinking, we can imagine how cryptoassets could replace fiat currency in many ways. How and when? Nobody knows – and it will happen in some ways we can probably imagine already and in other ways we can’t conceive right now. Systems thinking enables us to consider myriad ways to apply blockchain technology far beyond the traditional uses of traditional money.
In any case, the sun may not have set yet for the power that fiat currencies yield centralized power … but maybe we are starting to notice their twilight.