Code, Debt, and Bitcoin

frontOnce upon a time in the late nineties, the internet was a crypto-anarchist’s dream.  It was a new trans-national cyberspace, mostly free of the meddling of any kind of government, where information could be exchanged with freedom, anonymity, and (with a bit of work) security.   For a certain strain of crypto-anarchist, Temporary Autonomous Zone was a guiding document, advocating small anarchist societies in the blank spaces of existing society temporarily beyond the reach of government surveillance or regulation.  This was a great idea with some obvious drawbacks: On the one hand, TAZ served as a direct inspiration for Burning Man.  On the other hand, it eventually came out that Peter Lamborn Wilson (who authored TAZ under the pseudonym Hakim Bey) was an advocate of pedophilia, which had clear implications as to why he wanted freedom from regulation.  It’s a document whose history highlights the simultaneous boundless possibilities and severe drawbacks of anarchism.

Against this background, Lawrence Lessig’s Code made the case that the internet TAZ was in fact temporary.   Lessig argued that the internet’s behaviour is determined by a combination of computer code and legal code, and that while the legal code hadn’t been written yet, it would be soon.  His prediction (which has largely been realized) was that the internet would lose its anarchic character through government regulation mixed with a need for security and convenience in commercial transactions. (In addition to these forces, social media also came along, in which people largely sacrificed their anonymity willingly for the convenience of being able to easily communicate with their meatspace social networks.)

In thinking about Bitcoin, it’s useful to see how the regulation came to change the internet.  The prediction (again pretty much correct) was that regulations would target large companies instead of individual users.  Companies are compelled to follow the law under the ultimate threat of not being allowed to operate at all.  Because of the tendency for people to glom onto just a few instances of working solutions, it becomes easy to target a few large entities to enact regulation on a broad base of users.

This is instructive for Bitcoin, which has amongst its supporters a large contingent of extreme libertarians.   We could call these libertarians fisco-anarchists, who see in Bitcoin an opportunity to free economic transactions from government regulation in the same way the crypto-anarchists wanted liberated communication channels in the nineties.  It’s currently 1999 for Bitcoin: The law simply hasn’t moved to regulate Bitcoin yet, and when it does it will likely target larger players like Coinbase, Circle, and BitPay instead of trying to regulate individual users.

In fact, the state of New York is in the process of implementing a ‘Bitlicense’ law which will work in exactly this way. The law will require registration of any businesses transacting in Bitcoin or other virtual currencies, and will require, for example, reporting any transactions over $10,000 in value.

I personally expect that we’ll see another successful crypto-currency come into existence, which should capture most of the actual benefits of Bitcoin while avoiding at least some of the major pitfalls.  To my mind, the primary advantages offered by the cryptocurrencies include that they are:

  • Trans-national, and allows free movement of currency internationally, and have
  • Low/No transaction costs, which enables micropayments and will help to remove parasites from the commercial internet, while they
  • Provide a space for experimenting with new notions of currency.

While this list looks short, these functions are important and potentially transformational for the economy of the internet specifically and the world more broadly.  Indeed, Scott McCloud’s ‘Reinventing Comics’ suggested micropayments as a way to move comics to the web all the way back in 2000, but transaction costs with PayPal and Visa never fell low enough for microtransactions to be viable.

Meanwhile, the biggest problems with Bitcoin are:

  • Deflation: The deflationary design is a huge long-term problem, encouraging people to sit on large hoards of Bitcoin instead of using them for small transactions.  (Much as dragons like to sit on hoards of gold.)  As the value of the Coin increases, the incentive to use it for small transactions decreases.  This could eventually lead to a liquidity problem.  For comparison, Europe in the middle ages suffered sever bullion shortages, which led to entire shiploads of cargo going unsold when no one at the destination city had any money to buy things.
  • Power consumption: Aside from the obvious ecological problems, the cost of electricity becomes a barrier to mining, which will further concentrate the distribution of Bitcoins in the hands of a few large mining outfits.  There area  few existing crypto-currencies which have fixes for this problem, most notably LiteCoin.
  • Prevalence: As Jessamyn West put it, you still can’t use Bitcoin to pay your rent.
  • Security: The best choices for securing you Coin for some time involved either giving them to an untrustworthy exchange, or doing the digital equivalent of hiding your cash in a mattress.  I think CoinBase is helping with this, or at least they seem more trustworthy than MtGox…
  • Scalability: There are well-documented scalability issues, and a number of ideas in circulation for fixing them.

The deflation and power consumption issues are both architectural problems with Bitcoin, which probably necessitate a successor coin, or at least a major modification of the current architecture.  I’ll emphasize that Bitcoin does have real utility and advantages over current payment networks, so we can expect some real interest in making a cryptocurrency which addresses Bitcoin’s shortcomings. Of course, commercial and government organizations will also have an interest in making sure that a successor is more convenient, secure, and regulable.

What might the successor coin look like? Let’s first think about how to ensure that people sign on for the new currency.

Interestingly, the deflationary aspect of Bitcoin has served as one of the primary ways to get people involved, in the form of speculators who view the currency itself as a kind of investment. A good question, then, is how to get people into a new Coin without having a deflationary structure.  David Graeber’s book on the history of Debt suggests to me two easy ways to solve this problem:

  • It turns out that colonial Europeans often found cashless societies in their travels, which was fairly inconvenient from their perspective.  As they set up the colonies, they would require that farmers start paying taxes which could only be paid in the currency of the colonialists.  Meanwhile, they were happy to pay out this currency in exchange for their favourite crops or labour.  This quickly led to general circulation of currency.  For us, it’s easy to imagine, for example, the Amazon Cloud requiring that all payments be made in NewCoin, creating an instant need for those coins.
  • Alternately, a conglomeration of large players could directly solve the prevalence problem by announcing at launch time that the Newcoin will be accepted (and possibly preferred or discounted) at their sites.  Again, sites like Amazon would be a natural choice of member in such a coalition.

We can wager that a non-deflationary successor to Bitcoin will be announced in a top-down way, with a number of players signed on at the outset: you need a strong incentive of one kind for another to adopt an inflationary currency.

The architecture for a successor coin should solve many of the current issues with Bitcoin, and if its coming from large commercial players, we can expect an architecture that will enhance security and convenience.  My guess is that a successor currency would greatly reduce anonymity to help with these concerns, possibly requiring that users explicitly tie their identities to their accounts. As Lessig points out, commercial interests often coincide with measures that increase regulability.

There are interesting moves in this direction occurring even as I’ve been writing this essay. Square has been running an experiement with Bitcoin, and recently published an extremely interesting article on cryptocurrencies as a kind of infrastructure for the digital commercial space. And just today they’ve endorsed Stellar, a group working on creating easy interchange of cryptocurrencies with other currencies. Stellar has their own cryptocurrency, which seems to be centrally generated and strongly encourages users to tie their identity to their accounts through Facebook sign-in or associating an email address. As always, though, it will take time to see how these developments hold up.

Interesting times.


Thanks to John Mardlin for offering revisions and insight as I was working on this post.

4 thoughts on “Code, Debt, and Bitcoin

  1. Tyrone Johnson August 4, 2014 / 3:55 pm

    It is an interesting thought that an open frontier where people can go and be left alone by government to do whatever they choose is such an enduring human need that, in the absence of an open frontier in physical space, we invented one in cyberspace. Frederick Jackson Turner wrote about the “Closing of the American Frontier” and how that fundamentally changed American culture, politics, and even ethics.

    Within one generation of that frontier closing, we had Prohibition, one world war that led to another, the regulation of dozens of industries, a “Federal” reserve system to create endless money to finance it all, and an ever-increasing government. It is certainly not coincidental that at roughly the same time, Horace Mann’s enthusiasm for Prussian education concepts had become very widespread, and the ideas of Frederick Taylor had caused people like Louis Brandeis to talk about “scientific” management. Prussian education means dividing the students into age groups, and separating within each age group the smartest students who would qualify to be officers of factory managers from the mass who are to be trained as cannon fodder and factory drones. Taylor opposed the idea of having workers do any thinking, even if the thought a worker had led to greater efficiency, because workers were only to obey, never to think. You can see these themes coming alive, or bringing about mass deaths, in the work of Bismark, Leinin, Stalin, Hitler, Mao, Pol Pot, and being enthusiastically adopted by “leaders” of business like Henry Ford.

    The truth, though, is that the economy cannot be managed by a central plan. The problem of economic calculation makes it impossible for planners to set prices; prices must be found in a free market. Like the weather, the economy is unpredictable because large numbers of people are unpredictable. The mathematics involves chaos, so if you change initial conditions a very small amount, you get enormous shifts in end results. And that truth means that people cannot be managed.

    Yes, there does seem to be powerful evidence, including a number of international treaties, deliberately closing off frontiers in Antarctica, the sea beds, the sea surface, the Moon and other celestial bodies – to prevent people from having anywhere to go where they would be free from government rules, of some government, and the desire of the ruling powers to consolidate regional and supra-national power into continent- and globe-spanning government, to make government unavoidable. Not because having power over everyone is simply fun (though for some, it seems to be) but because it pays better. If you control markets everywhere, you can write rules that make you wealthy, or that find you a cushy job after you “retire” from the government.

    Is it inevitable that the future be ruled by those who have power to do so? I don’t think so. I think it is possible that people can choose to be free, and that if they aren’t free to go to frontiers, they will invent frontiers – in game platforms, in new country initiatives, in cyberspace. People will invent ways to avoid being ruled, because for a great many people, being ruled is not any fun.

    Or, to quote from that very nice film about the tall Scot played by that short Australian actor, “Braveheart,” “I have never told a lie, but I am a savage.”

    • sdenton4 August 4, 2014 / 7:17 pm

      There’s a funny balance here, though: The function of government isn’t entirely to keep people from having any fun or just telling people what to do. Government ideally should be working to improve the lives of its citizens, a radical idea in the modern US, but not so strange in other parts of the world. Ultimately, this improvement happens through certain kinds of policy (free public schools!) and regulation (no rats in hamburgers). It’s easy to be a white male technocratic libertarian, precisely because such people are in a position where they need government protections less than just about anyone else. But for less fortunate people, government protections are quite important, whether in the form of free schools or prohibitions on slavery and pedophilia.

      In the end, we have a choice of the architecture of our society, and I think the refusal to make a choice is a huge mistake. But it takes quite a bit of work to ensure that the architecture that we arrive at doesn’t concentrate power in the wrong places and is ultimately working for the greater good. Refusing to engage in the process of crafting a beneficial architecture, however, is almost a guarantee that the government will end up catering to the interests of those who aren’t so shy about grabbing power. For example, Monsanto.

  2. Tyrone Johnson August 4, 2014 / 7:42 pm

    So, because I don’t want the government to pretend to solve my problems, I must be a white technocratic libertarian? I find that sort of racism to be deeply offensive.

    The United States has had a prohibition on slavery for quite a long time, and you might be surprised to learn that a great many people I’ve met who *are* white, technocratic, and libertarian (I am, by the way, none of those things) have expressed consistent enthusiasm for the prohibition of slavery, and for the language in the Declaration of Independence asserting that all men are created equal. However, the government has been arresting about 13.6 million people every year in recent years, including for a large number of victimless “crimes” such as possessing some plants or plant extracts. You may be aware that people who are black and Hispanic have a statistically greater chance of being arrested in the United States, and also a greater chance of being convicted, which doesn’t exactly make the governments of the several states and of the national government free of racism. Although the current attorney general has indicated that he is aware of these problems, he hasn’t proposed to stop the drug war to end them, either.

    Not only is the United States government a key supporter of the slavery of the prison industries (which can “hire” people for far less than minimum wage and sell their labour at market rates) but also it has been notorious for failing to do anything about rape in the military, sex slavery in the major cities, and other forms of human trafficking, including human trafficking motivated entirely by that government’s blockade of the free flow of labour at the borders. I’m reminded of the very Progessive policies of Woodrow Wilson and Theodore Roosevelt that severely restricted immigration, segregated the civil service, and promoted racist policies against “narcotics trafficking,” all of which represent enslavement of the human spirit. If you want to convince me that government is ending slavery, you might want to marshall a few arguments about that one, please.

    Free schools are great. But government schools aren’t free. They are paid for by taxpayers, so they end up costing whatever the government charges. One ends up paying for quite a lot of bureaucracy along with the education. If you look at the recent scandals in American education, about declining test scores, declining literacy, and if you look at the recent VA hospital scandal, you get a sense of what can be expected when the government of the United States runs things: waiting lists, low quality results, and people literally dying while they wait for help.

    Engaging in the process of demanding that the government regulate things doesn’t keep groups like Monsanto from having power. Rather, it plays directly into their hands. Once you agree that the government is going to put its blood-covered hands all over the bitcoin industry, you’ve already abandoned your power.

    Yes, blood-covered. The government has made possible, since 1970, an enormous consolidation of the finance industry, so the top five banks (Citigroup, Wells Fargo, Bank of America, Goldman Sachs, JP Morgan Chase) have control of over half the financial assets of the country (according to the 2011 annual report of the Dallas Federal Reserve). In exchange, those banks have lined up to finance the USA governments wars of intervention all over the world, and finance the USA’s military support of Israel, Saudi Arabia, Qatar, and many other countries with very bad human rights records. You didn’t think that taxing gold and silver coins was going to be enough to finance the wars since 1913, do you?

    So, if I’m a white, technocratic, libertarian American because I don’t agree with your ideas of a violently interventionist government, and your government supports the racist, slave-holding, and autocratic government of Qatar, what’s the point of this discussion? You throw racist epithets at me, making assumptions about my race, education, politics, and nationality, while ignoring your government’s terrible record of racism, slavery, war mongering, support for dictatorships, overthrow of democratically elected governments, and shameful national results in health care and education, and I’m supposed to pretend we’re having a thoughtful discussion of ideas. Really? I don’t think so.

    I think you want to paint me as a bad person because I disagree with you. But I hate pedophilia, bad education, and Monsanto, too.

    • sdenton4 August 4, 2014 / 8:09 pm

      Hi, Tyrone;
      I didn’t make any assumptions about who you were or where you were coming from; I was just commenting on a certain strain of libertariansim that I’ve often encountered. I also don’t really disagree with you here; repression and over-regulation are terrible things, that we need to work against. The US prison system is indeed a complete mess, and the treatment of minorities is increasingly abominable. In fact, I think the US is slipping steadily in the direction of endorsing slavery, just as it’s come to find torture acceptable in recent times. But I would argue that rejecting politics and engagement with government ultimately speeds this process. We may disagree on that particular point, but I have no reason to think you’re a bad person!

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