David McWilliams piece in this weekend’s Irish Times – Cryptocurrency is Patently Not Real Money – is quite possibly the strongest argument I have seen for the legitimacy of bitcoin. Normally I really like his provocative and creative thinking, but not today. Let’s look at some of his arguments.
- ‘[Real] money needs to be a store of value, widely used and accepted, in order to buy and sell stuff.’ Well, bitcoin is a store of value – clearly, one of them is currently worth around €37,000. If you gave me one right now, I could go and buy a car. I might have to convert it first into Euros, but that’s the same if I have to buy anything produced in a non-Euro market. Sometimes dealers (importers) do that conversion for you. For a while you could buy a Tesla with bitcoin directly, and there are still car dealers accepting bitcoin directly. You can buy a Volkswagen with bitcoin. A friend of mine spent an entire week in Nairobi living off bitcoin, working through the Bitpesa exchange and converting bitcoin into mPesa for his beer and ostrich burgers and what-not. The bartender most likely wouldn’t take Euros in Nairobi either. Sotheby’s take bitcoin and ethereum. I bought a laptop (the one I’m typing on right now) with bitcoin last year.
- ‘[Real money] must have a reasonably stable relationship with the value of everything else in the economy.’ Does that mean that the late-Mugabe era Zimbabwean dollar is not ‘real money’? What about the Turkish Lira today, or the Argentinian Peso that currently has an inflation rate at an eye-watering 50%?! In both Turkey and Argentina, most people would probably agree that bitcoin maintains a far more stable relationship with the value of everything else in the economy than their state backed notes. Eurozone and US inflation are both currently above 5%. That’s quite high, if not quite unstable. The reckless deployment of QE over the past ten years on top of all of that recognises how the market that currencies support has failed to manage the vagaries of macroeconomics, and central bankers remain in a semi-permanent defensive posture, plugging the gaps and inventing new ways to solve structural deficiencies. How long can that go on?
- ‘If you can’t trade widely in a currency, it’s not money.’ I have a BOI app on my phone to manage my Euros. I have a Kraken account on my phone to manage my crypto. I can buy and sell fiat currency through either app; I can buy and sell crypto only through the Kraken app. There are no bank holidays or trading delays in crypto, and the exchange rate fees are minimal compared to ForEx in the bank.
- ‘Even the Islamic State, the most implacable anti-American group imaginable, demands its ransoms in dollars.’ That was true in the past, only because the dollar and its legitimacy has in many respects separated itself from the United States government. These days, Islamic State is as likely to work in bitcoin, as detailed in this 2019 New York Times report. Hamas now operates with bitcoin too. In addition, most ransomware and digital attacks now demand payment in bitcoin, not least those on the Irish Health Service in 2021. The reality is that physical money is increasingly a thing of the past – and that is the last real vestige of difference that fiat currency had over crypto.
- ‘Crypto is backed by nothing.’ (He says this twice) Well, since fractional reserve banking diminished the fraction to the point of being ridiculous, fiat currency isn’t backed by anything either! This perhaps gets to the heart of it. McWilliams writes that fiat is backed by the state, and that crypto-bros argue that the state is corruptible, batting that away with a Lebowski-esque ‘that’s just like your opinion, man!’ It’s not so much that ‘the state is corruptible’ – everything is corruptible. The point is that the legitimacy of the state, with its centralised power, characterised by a monopoly on the use of force is genuinely rivalled by an evenly distributed technological structure with an ever-broadening base of support. The legitimacy of the blockchain upon which bitcoin is based is designed in. The social contract upon which the state is based is theoretically supported by whatever constitution underlies the issuing power.
At the heart of the question is the role of the State, its relevance in the commercial lives of people, and its base legitimacy as an backer of currency. Bitcoin is volatile, as are other cryptocurrencies, as they are emergent. Their limitation – only having a fixed number possible – is key to their legitimation. There is a purity to cryptocurrencies that allows them to function as true functions of value exchange, shorn of the politics of fiat currency.
A final to bear in mind is that two thirds of the workers in the world work in the informal economy – within informal financial structures, informal justice systems, and informal trading schemes. Two thirds. Governments don’t tax them, don’t serve them, and they don’t expect to hear anything from governments for the duration of their lives. For them, fiat currency is another ruse to limit their freedom. Crypto is a more real store of value than anything they have ever had in the past. It’s a revelation, and offers them real opportunities to grow and make something of their lives. It’s not just real money, it’s more real than the mirage of state economic infrastructure, more tradeable, more transferrable, more fungible, and more stable than anything the State might have to offer.