Peace by Bitcoin

using bitcoin as a nonviolent method for nonviolent movements

Andrew Bailey, Bradley Rettler, and Craig Warmke discuss what money is and what it should be. These discussions are inspired by the fact that Bitcoin challenges the status quo hence elicits such questions about money.

The author give a preliminary note before diving in the matter at hand: the article focuses on monetary than non-monetary uses of cryptographically-secured distributed ledgers because they have a longer track record of success

Non-monetary blockchain uses include voting, prediction markets, supply chain management, file storage, legal identities, foreign idea, video game collectibles, medical records and so on.

The authors state the fact that for blockchain to be secure and healthy, it needs to incentivise its users with token rewards to maintain the network. Thus, a non-monetary application could succeed if it were (1) built on top of a secure cryptocurrency network with strong settlement assurances, and (2) incentivised by an asset that ultimately settled on such a network. That is why people build such decentralized applications on Ethereum and Bitcoin.

In short: any success of these [non-monetary blockchain] applications would be parasitic on the success of the cryptocurrencies and their host networks.

The authors proceed to give an overview what cryptocurrency is, how it works, and how it relates to conventional views of money.

First, they argue that cryptocurrency is money to the extent that it fills functional roles, which conventionally are medium of exchange, store of value, and unit of account.

Second, they argue that because cryptocurrencies have distinct technological, economic, and political features, it would not make sense to make generalisations. Instead, one has to examine each cryptocurrency on an individual basis.

Third, they argue that there are three kinds of questions about money: actual question referring to the the extent cryptocurrency does fill key money roles; modal question referring to the extent cryptocurrency could fill key money roles; and normative question referring to the moral perspective whether a cryptocurrency that is assumed to have key money roles should or should not fill them in the first place.

On the first argument, one can turn on the technical properties of cryptocurrencies, and then on the empirical evidence about what people in fact do with their cryptocurrency. For example, there are significant but not necessarily insurmountable obstacles like volatility, scaling, unfamiliar security measures, and policy issues that impede actual uses of cryptocurrencies.

On the second argument, one can think about what money must be. Theories like Credit and Commodity Theories of Money are popular theories on what money is. For example, according to credit theory, debt is needed in order to be money. Thus, cryptocurrencies by that definition cannot be money.

On the third argument, one must think about the costs and benefits of using cryptocurrencies as money instead of state-issued fiat currencies, precious metals, or something else entirely. The authors argue that cryptocurrencies are supplements rather than replacements in the monetary landscape.


Next they talk about monetary policy, namely issuance, inflation, and related matters.

Thus, the questions pertaining to monetary policy include: (1) the frequency of issuance, (2) who is issued the new money, and (3) who makes the decisions regarding questions one and two. All cryptocurrencies answer these questions differently.

Authors talk about the Quantity Theory of Money and relate it to Bitcoin. Accordingly, under conditions of real economic growth, Bitcoin-style issuance schedule predicts deflation of prices. Whether deflation is worse or better than inflation is not discussed.

Regarding the three questions, (1) Bitcoin has a predictable issuance schedule that is programmed to the software, (2) new money is issued to miners who secure the network through block rewards that include transactions fees and a coinbase reward, a newly mined bitcoin, and (3) there is effectively no particular person or group who can decide to change the Bitcoin protocol.

Then, authors describe five problems with inflation:

Inflation entails a loss in purchasing power, inflation is a tax, inflation is hidden, inflation is subject to capricious political processes, and inflation penalizes savings or investment over consumption.

Next they argue why these arguments are weak.

1. inflation entails a loss in purchasing power

There is a nominal loss in purchasing power but it need not involve any loss in real purchasing power. Confusing these two refers to inflation fallacy. They give an example: inflation makes money worth less, but it also means one is paid more when selling goods or labor.

This assumes that money is uniformly distributed. Cantillon effect says that the flow path of new money matters because those closest to the source of new money benefit first. Regular people often come last.

2. inflation is a tax

This anarchist political theory driven argument by cryptocurrency proponents does not convince vast majority of political theorists or philosophers, who think that some state taxation is justified. The authors do not give their own view, but they suggest that should this argument be sound there has to be a special moral feature that shows it.

3. inflation is hidden

Just because many taxes are hidden from those who pay them, they are not bad or harmful for that reason. Furthermore, inflation is not all that hidden: everyone knows that ice cream used to cost under one euro.

4. inflation is subject to capricious political processes

The authors argue that cryptocurrencies, too, are influenced by politics. For example, miners, developers, users, and advocates “fork” projects over disagreements, petty and real.

5. inflation penalizes savings or investment over consumption

Authors compare penalizing savings and penalizing consumption under inflationary and deflationary economies respectively, and lean more towards penalizing savings. They do not give further arguments.

Lastly, the authors give three more problems on why inflation is problematic, but this time strong ones.

6. unpredictable inflation is problematic

The problem is not that inflation happens or that it is too high, because that can be hedged against. But the problem is when it is unpredictable. They don't say why.

7. inflation is a debt-forgiveness program for the global rich

Inflation disproportionately rewards those who take on nominal debt. Those are the wealthy people and the wealthy countries. They don't say more than that.

8. inflation begets inflation

Inflation risks an inflationary spiral that leads financial institutions to adjust policy in their favor, which often leads to more inflation. They argue that non-state-issued alternatives like Bitcoin provide a competitive check—their existence incentivises policy-makers to behave responsibly.

That is huge assumption that they would behave responsibly because of Bitcoin or any other cryptocurrency that are currently seen as investment vehicles. Be that as it may, the case may turn around in the future where they may indeed be “a competitive check”.

The authors conclude that it is good to use cryptocurrency as money, because doing so promote sound monetary policy.


Reference Philosophy, politics, and economics of cryptocurrency I: Money without state. https://www.resistance.money/MoneyWithoutState.pdf

David Blaazer (2020) open the article with a quote by Julia Tourianski who said Bitcoin, and more generally cryptocurrencies, pose an existential threat to states.

Bitcoin is inherently anti-establishment, anti-system, and anti-state. Bitcoin undermines governments and disrupts institutions… Bitcoin needs not entities of authority to acknowledge it, incorporate it, regulate it, and tax it. Bitcoin does not pander to power structures, it undermines them… Bitcoin means to channel economic power directly through the individual. @Julia Tourianski

He then presents his two arguments of the article: (1) cryptocurrencies are not money and cannot be money, and (2) state's current role in the creation and regulation of money is not dependent but necessary actually.

According to Blaazer, cryptocurrencies like bitcoin can be money assuming that anything that can be used as a medium of exchange is money. But bitcoin's volatility makes it practically useless for purchases, which is why it is more of a speculative investment. Because of this volatility, it is unable to fulfil store of value and unit of account functions. Thus, they are not money.

But Blaazer also mentions that

Such arguments are vulnerable to the possibility that cryptocurrencies may become money at some point (albeit unlikely) event that price instability turns out just to be an initial phase.

In his view, the problem is not the price instability (volatility) per se but the fact that bitcoin has price at all. Bitcoin shouldn't have a price like a commodity, because money itself has no price; it is the price.

His second argument is followed by historical account of money. Indeed, throughout history money has born and died as a result demonetisation or replacement through a new political authority, war, revolution, or monetary union. Historically then, money is state's responsibility.

Blaazer argues that these debates about money depends on its origins. He says that there are two stories: The traditional story entails a barter economy that realized it needed money to be more efficient, thus a political authority was merely appointed the role to ensure the functions of money.

The second story posits that a political authority was not “merely” appointed the role but has always been essential to money.

The first story, barter story, emphasises medium of exchange function whereas the second story, political account, emphasises unit of account function, which is according to Blaazer “temporally as well as logically prior to the medium of exchange”.

To my understanding, his second argument posits that money needs a central authority because historically it has been so. His essay and arguments fall short on further explanation and language that is understandable by laymen. For now, I do not buy his arguments that Bitcoin cannot be money because it is not state-controlled and because it is volatile and has a price.

In my view, precisely because Bitcoin is not state-controlled, it must go through the initial phase of volatility. And as far as I understand, bitcoin's volatility is decreasing. Furthermore, all currencies have a price when exchanged to another currency. So in a way fiat currencies like euros and dollars “have a price”, and exchange rate, just like bitcoin has.


Reference Bitcoin in the Longue Durée: Money, the State and Cryptocurrency. http://australianhumanitiesreview.org/wp-content/uploads/2020/05/AHR66_14_Blaazer.pdf

Karl Wüst and Arthur Gervais describe instances when you need and do not need to implement blockchain. There are three options: open, permissionless blockchain (e.g. Bitcoin, Ethereum), closed, public and private permissioned blockchain, or no blockchain at all which means a typical central database.

Blockchain allows two or more parties who cannot trust each other to exchange financial value and interact without relying on a third party. Distributed ledgers like permissionless and permissioned blockchains provide public, verifiability, transparency, privacy, integrity, redundancy, and a trust anchor.

Because of these properties, it can be utilized in distributed cloud storage, smart property, Internet of Things, supply chain mangement, healthcare, ownership and royalty distribution, land titles, e-voting, interbank payments, trading and fair exchange protocols, decentralized autonomous organisations, non-fungible tokens, and decentralized finance.

In a permissionless blockchain writer and reader can participate at any time, whereas in permissioned blockchain they can if they are authorized to do so. In this regard, permissioned blockchain raises the question whether such an arrangement is needed since it resembles a centralized database.

blockchain

  • the name originates from its technical structure, a chain of blocks
  • blocks are linked together with a cryptographic hash
  • a block stores a list of transactions
  • transactions are created and exchanged by peers of the blockchain network and modify the state of the blockchain
  • transactions can be thoughts of as monetary amounts but not necessarily
  • a writer writes a state to the blockchain, effectively grows the blockchain size
  • a reader does not extend the size of blockchain, but simply reads, analyses, and audits it

open permissionless blockchain

  • open and decentralized
  • anyone can join and leave the network as reader and writer
  • no central entity to manage membership
  • no one can ban illegitimate readers or writers
  • privacy is pseudonymous (e.g. Bitcoin) but technically possible to be anonymous (e.g. Monero)
  • makes sense to use when multiple mutually mistrusting entities want to interact and change the state of a system, and are not willing to agree on an online trusted third party

closed permissioned blockchain

  • limited set of writers and readers
  • central entity decides participants and their rights
  • privacy solutions exist by running interconnected, parallel blockchains
  • better performance in terms of latency and throughput

Their paper was the first to present a methodology that takes into account requried trust assumptions, application requirements, involved parties, and technical requirements.

The authors conclude that both permissioned and permissionless blockchain technologies have their real-world use cases beyond the traditional centralized database. They give further reference to two articles, one that compares consensus algorithms and the other on blockchain properties.


Reference Do you Need a Blockchain? https://eprint.iacr.org/2017/375.pdf

Bitcoin is a tool for freeing humanity from oligarchs and tyrants, dressed up as get-rich-quick-scheme”. @Naval Ravikant

Armin Krishnan writes about the technologies blockchain and decentralized autonomous organisations (DAO) and how they bring about social resistance and terrorism. I leave out the redundant term 'blockchain', and not talk about DAO which is more relevant to Ethereum. I focus solely on Bitcoin.

Krishan explores how transparency advocacy groups, pro-democracy groups, hacktivists, revolutionary movements, and even terror organisations and criminal syndicates can make use of Bitcoin.

He argues that bitcoin allows resistance/terror organisations to easily receive donations globally that cannot be confiscated. I argue that this is not so much of a problem related to bitcoin than to the system itself that created these people in the first place. Bad people will do bad things regardless of the tools that are available to them. Tools like bitcoin can of course make it more probable that the bad thing happens eventually. But does it make sense to take away a powerful tool like bitcoin from the good people because of the potential bad things that may happen because of the bad people?

While Bitcoin was used as a payment method in Silk Road where illegal drugs were transacted, and hackers have used Bitcoin in numerous ransomware attacks, RAND study found that “there is little indication that terrorist organisations are using cryptocurrency in any sort of extensive or systematic way.” Still many academic studies have focus on the dangers of Bitcoin, money laundering and terrorist uses.


Reference Blockchain Empowers Social Resistance and Terrorism Through Decentralized Autonomous Organizations https://digitalcommons.usf.edu/cgi/viewcontent.cgi?article=1743&context=jss

Bill Maurer, Taylor Nelms, and Lana Swartz (2013) studies how Bitcoin is communicated and symbolized by goldbugs, hippies, anarchists, cyberpunks, cryptographers, payment systems experts, currency activists, commodity traders, and the curious.

They describe how other people have described and perceived Bitcoin. It is attractive to people for many reasons. People who want to avoid government control, surveillance, and currency debasement. People who prefer free (as in freedom) software. People who emphasise libertarian politics that challenge fractional reserve banking, and fiat currency.

In their view, Bitcoin is meaningful because it challenges the status quo. It is a wake-up call to people to start think why things are the way they are. Nature of money, credit and capital, monetary policy and so on.


Reference “When perhaps the real problem is money itself!”: The practical materiality of Bitcoin https://escholarship.org/content/qt7w616491/qt7w616491.pdf?t=nz4ywm

Gina Pieters describes how decentralized virtual currencies (e.g., Bitcoin) can eventually change the way central bankers operate their monetary policy by letting users circumvent capital controls and managed exchange rates.

She explains the difference between electronic money, digital currency, virtual currency, centralized and decentralized currency, game currencies, and cryptocurrency.

She continues and explains the trilemma of international finance and how it relates to Bitcoin. The trilemma is a triangle where a state has to pick two and leave the third one out. The options are to (1) give unrestricted international capital markets, (2) a managed exchange rate, or (3) an independent monetary policy.

She argues that if and when Bitcoin becomes big enough and states transact national currencies through the Bitcoin network, all states have then defaulted to unrestricted international markets.

So described, there are two options left for a state to do. On one hand, if a state chooses (1) and (2), then it must have a reactive monetary policy to achieve managed exchange rate. On the other hand, if a state chooses (1) and (3) then it must have a floating exchange rate.

Currently U.S allows (1) and (3) and Hong Kong (2) and (3), but cases like Argentina and similar countries cannot use capital controls anymore because of Bitcoin.

Thus, I see that Bitcoin affords people to not only exchange their currency to Bitcoin but through Bitcoin to another currency. People can now nonviolently and with ease switch to other currency because Bitcoin forces states to default to unrestricted international capital markets.


Reference The Potential Impact of Decentralized Virtual Currency on Monetary Policy https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2976515