Bitcoin is Venice

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Cryptopia

This is a massive, magnificent, learned, contrarian work. Few practitioners in modern financial services would not benefit from reading it, just for the challenge it presents.

For anyone who wants to hold forth on cryptocurrency, for or against — and in financial services, that seems to be most people — this is an as good a foundational text as you could ask for. It does not pretend to be neutral: this is advocacy: the case for Bitcoin, put optimistically, and without barely a sideways glance at its many critics.

There is no discussion of bitcoin’s relationship with terrorist financing and money laundering nor the widespread and pervasive fraud in the cryptocurrency sector. The authors might well say those issues are well canvassed elsewhere, and this is true, but to not mount any defence while claiming, explicitly, that “bitcoin fixes everything”, seems an oversight.

Everything? Well, according to the authors, bitcoin does the following:

• Resists and disincentivises violence
• Remediates our criminally oppressive, unsustainable and unjust social order
• Cures the slow-motion collapse of “degenerate fiat capitalism”
• Prevents markets degenerating into oligopolies
• Optimises the transmission and clearing costs of energy generation
• Fixes the internet’s fundamental architecture
• Forces long-term over short-term thinking
• Obviates regulatory incompetence

This is wishful, to say the least, but Farrington seems to realise this, and offers it up as rhetorical flourish, somewhere between punctuation, irony and gallows humour.

Financial services as a paradigm, and critiques from without

Like any communal activity in which there are things to be gained and lost — i.e., any communal activity — “financial services” is what Thomas Kuhn called a “paradigm”: a community intellectual structure which develops its own rules, language, hierarchies, defeat devices, articles of faith, and credentialisation process, usually encrusted in so much obscurant flummery that it is impossible for non-initiates to get near it without being swatted away on ground of detail — insufficient grasp of buried, esoteric intellectual constructs that only the truly learned can understand. And understanding is your ticket to the club.

This is an evolutionary design feature of any power structure. (I take it that “power structure”, “paradigm”, “research programme” and “intellectual construct” and maybe even “corporation” are synonyms describing any self-organising, bounded community of common but esoteric interests).

Power structures are in equal parts benign and malign: without some commitment to the cause — some unconditional trust and faith in the wisdom of elders — no community consensus can take wing in the first place. But once it does, the higher it flies and the more it scales — the more entrenched those elders become. The harder it is to assail them; the more there is for those with skin in the game to lose — the more ossified and moribund the research programme must become. We see this time and again, with power structures of all kinds, but financial services and law in very specific particular.

A common complaint about Kuhn’s paradigm is its liminal vagueness: where does it start and stop? At what level of abstraction does it operate? How local is it? The best answer is that paradigms are sort of fractal — they operate at every level of abstraction. Just as an ecosystem is a complex metasystem of interacting subsystems and components so is a market — however you define it — a complex metasystem of inchoate, indeterminate, undescribable subsystems, all of whom interact with and react to each other. It is necessarily non-linear and, literally, ineffable, which is why no supervising power can tame or even predict it, and all those who try eventually fail.

So nebulous, but requiring of education, indoctrination, credentialisation, so that those who enter either get so close to the weeds as to be quite unable to see beyond them, let alone inclined to — those weeds being nourishing as they are, there is little incentive to look beyond them — or they won’t, in which case they never earn the intellectual credibility needed to be taken seriously by the elders within.

The very nebulousness means it is hard to tell how far you have made it into the program, and no-one tells you. This serves as its own incentive to lean in harder, of course. It is all part of the mantra.

But enough about my disappointing career.

This is also why “cross-paradigm” arguments are so joyless and draining. They are linguistic failures — translation errors. Richard Dawkins’ amassed arguments against organised religion might be scientifically immaculate, but science poses and answers different questions than does religion. The scientific method counts for naught beyond its magisterium. It is no more fruitful to criticise quidditch for its impossible aerodynamics.

The scientist who best understood this was Dawkins’s arch-nemesis, the late Stephen Jay Gould. There is no machine for judging poetry.

It is, at some level, a Catch-22: paradigms endure because anyone with enough internal gravitas to bring change them has too much invested in keeping them together to casually pick them apart. Paradigms strengthen as, progressively, they prefer form over substance, it being assumed that, over time, substance has been proven out by the paradigm’s very resilience — shades here of the elephant joke — and can be taken for granted.

All that matters thereafter is form. This is a circularity, but not a vicious one.

On paradigms in crisis and being punched in the mouth

Everyone has a plan until they get punched in the mouth.

—Mike Tyson

This is not to say contrarians cannot be popular or correct — Gigerenzer, Taleb, Mandelbrot, Stock, Graeber, Scott, Jacobs, Sutherland and others ply a healthy trade damning the manifest absurdities of our institutions — but our institutions blithely carry on, regardless.

Well, at least until real-world facts intrude, they do: only when it becomes clear a paradigm not only should not work but, in practice, does not, does it go into “crisis”. In the worst case, it cannot recover and a wholesale redrawing of the intellectual landscape is on the cards: a new paradigm must be born, that accounts for the changed practical facts, with new rules, new elders and a new mandate. This is not a simple matter of changing theories but a deep social disruption: the extant education system must be rebuilt, its undermined credentialising institutions may collapse — what counts as a valid question worthy of answer changes. This is a dangerous period: the new structure is supple and new but not strong, and untested against the range of vicissitudes the old regime had evolved to withstand . This is the lesson of Animal Farm: the best laid plans of — well, pigs and sheep— gang aft agley — and, upon a few meaty slaps to the chops, the new boss begins to devolve into the old one.

“Meet the new boss—
Just the same as the old boss.

—Pete Townsend

But that is to presume the old paradigm lays down its arms first. But old paradigms, for exactly the same reason, have a habit of shapeshifting, reframing anomalies around their fringes and boxing on. You cannot defeat a paradigm with a purely theoretical argument: you must punch it in the mouth. In this way Karl Popper’s idea of falsification doesn’t really describe the way science progresses in practice.

But — ironically — the falsification paradigm hangs on, not yet having been punched hard enough in the mouth.

Outsiders to financial services

So we should listen to the theoretical arguments of outsiders like David Graeber and Allen Farrington, but not be surprised if they don’t carry much water with the leaders of the status quo. They can still, in their way, shape and direct the way even experts think about the world.

Bitcoin is by no means a spent force: it may not yet have thrown a telling punch, but this is not to say it won’t. Allen Farrington is clear: soon enough, it will.

David Graeber was, properly, an outsider: an anarchist anthropologist and one of the leading conceivers of the Occupy Wall Street movement. Allen Farrington is, in one sense, not — he is a well-read industry insider. He would not tear it all to the ground, but would rather “make finance great again” by restoring capitalism to its “Venetian apex”. In another sense, though, he is, because his means of doing so would be with bitcoin, and by destroying what he sees as the “strip-mining” mentality of the capitalism yielded by fiat currency.

As a grand vision, that is pretty anarchic: more so, even, than than Graeber’s.

Yet Farrington cautions against excessively theoretical approaches which, he says, got us to where we are — this may be an attempt to disarm the elders as aforesaid — but it arrives with some irony, for his own defence and exegesis of Bitcoin is intensely theoretical — to the point of being ideological — and where it stretches to its potential, charmingly, but hopelessly, utopian.

What he has on his side, for now, is Bitcoin’s sustained defiance of the elders of finance who have predicted seventeen of its last two implosions. At the time of writing, despite FTX’s collapse, Chauncey Gardiner’s conviction and with Binance at least on the defensive, Bitcoin is surging back toward historical highs. This, perhaps is the proof of the pudding: you can’t, as fellow contrarian, but Bitcoin antagonist, Nassim Taleb would say, “lecture birds how to fly”.

You can, however, supply a plausible account of why, against the odds, they do.

This is Farrington’s proposal.

On debt and assets

“Since bitcoin is a digital bearer asset and not a debt instrument — ”

Farrington believes that Bitcoin is an asset, not “just” a currency. As it has independent existence, it is not “tethered to” or dependent on a bank or a central bank for its existence. It need not, therefore , “degenerate” the way fiat currencies do thanks to — cough — central bank monetary policies and investment bank grift.

Whereas fiat currency implies indebtedness, Bitcoin is pure abstract, tokenised capital. It is the inverse of fiat currency. It is to actual capital what a non-fungible token is to art. Only generalised: whereas an NFT is a token for a specific cultural artefact, Bitcoin is a token for generalised “capital” in the abstract sense of value — a shared community resource, before being transmogrified into any particular form.

If this is what bitcoin has achieved, it is indeed something wondrous. Alchemical, almost. This is “capital” as a platonic essence: a Midichlorian life force. You know, like the Force.

Of course, we have financial instruments representing abstract capital already: shares. They reflect the net capital of a given undertaking, and take only after all the debt is accounted for, so perhaps that is not what Farrington has in mind. Perhaps it is too contingent on the grubby, fiat realities of everyday business. Perhaps it is not abstract enough.

This conceptualisation of bitcoin as capital is certainly quite a different thing to a fiat currency. Fiat currency implies indebtedness. It needs the agency of banks to create and discharge that indebtedness. It centralises everything, and makes everyone dependent on the centre: the power structure that is fractional reserve banking. It compels “trust”, whether you want it or not.

Compelled trust, as David Graeber might say, is violent extortion.

By contrast, the bitcoin ethos is, of course, not to trust trust — not compelled trust, anyway — and to decentralise and disintermediate where possible to remove any need for even voluntary trust. This was the problem a permissionless decentralised ledger was devised to solve: how to construct a financial system does not rely on trust in a central permissioning authority, or the need for trust between participants. That is its basic use-case.

Bitcoin maximalists might not trust their government, but in western economies, for the time being, the majority of tax-paying citizens do — at least with a government there is notionally someone to complain to.

Trust as feature not bug

And trust in each other is a feature of a community, not a bug, and not something that can or should be solved by technology. It is the feature, in fact, on which the whole edifice of civilisation is based. Farrington would have done well to read a bit more Graeber here.

Currency has its antecedents not in barter between strangers, as is commonly supposed, but in credit amongst friends: currency would not work between hostile strangers because it is a personal promise of deferred satisfaction, and the a hostile stranger does not trust in promises or pieces of paper or bits of metal as abstract symbols. This is a matter almost of literary, and not financial, theory. Of shared meaning. I hand over my muskets for your blankets as their respective meanings to each of us is obvious, and does not depend on the other’s. Indeed it depends on a relative divergence in meaning: you must value muskets more than blankets, and I must value blankets more than muskets, or we have no deal.

Given how fundamental this dissonance is to any market it is extraordinary how much hostility its necessary premise — there is no objective truth — generates.

We can each arrive at our own values of guns and blankets and that is a fine thing. But it is not fine for tokens of abstract tokens of value such as printed promises to pay. Those we must agree about.

In other words, for currency to work, there must be consensus as to its value. That is axiomatic. Hence, it is of no use between hostile strangers.

Bitcoin as metaphor

Bitcoin does not fix this. It is axiomatic that bitcoin’s viability depends on community consensus in its value other than its intrinsic value. We must all believe something that is, literally, not true, and wilfully suspend of knowledge of what is true. This is how we use metaphors — they are figurative tokens.

People must believe in Bitcoin as a token of value — in Farrington ’s view, of capital — whilst accepting it has absolutely no intrinsic value.

As mentioned, this is also true of fiat currency. But here the prevailing paradigm, which currency plays a fundamental part, makes a difference. Within the “degenerate fiat currency” power structure, fiat currency operates as a lawful means of discharging debts denominated in that currency. It necessarily has that value. If this feels circular, that’s because it is: the power structure defines both question and answer. By transacting in a currency you are committing to the metaphor: you are giving something of intrinsic value away for something of metaphorical value. You have bound yourself to the mast. The leap of faith has been made and completed: the economy works on the strength of promises calibrated by reference to that metaphor.

The same might be true of Bitcoin, but only to the extent debts are denominated in bitcoin. Mostly, bitcoin is traded not as a currency but as a commodity, for which the debt is denominated in fiat.

Agency as a sustaining life force

That a statement with no literal truth value can nonetheless hold a metaphorical one is by no means an impossible scenario: all literature depends on it. We do not struggle to reconcile our understanding of Oliver Twist with the fact that every word of it is, literally, false.

Fiat currency has, near enough, pulled off the same trick. Bitcoiners do not tire of reminding us of this.

Like all metaphors, currencies generate their own momentum. When enough institutions have a vested interest in maintaining a metaphor as a viable means of furthering their own interests — if they are making enough money out of it — the currency will generally carry on, because too many agents have too much riding on its success to contemplate its failure.

This is of course, the stuff that bubbles are made of: Enron was largely built of imaginative accounting for purely hypothetical cashflows. It survived for so long in part because so many of its enablers — law firms, accountants, management consultants, executives, employees, trading counterparties, academics, politicians, thought leaders, chancers and grifters — stood to gain as long as the fiction, that this time is different, carried on. You don’t even need to believe the metaphor to enable it: you just have to believe you can get out ahead of it when it fails.

Not every metaphor fails. The dollar has not. Bitcoin, too, has proven resilient so far, and has acquired its own momentum as it as acquired first miners, and then brokers, trading venues, intermediaries, futures exchanges, exchange-traded funds and their authorised participants, clearers and market makers. It even has its own ISDA definitions booklet. All of these stakeholders stand to prosper as long as someone else believes the metaphor.

This is another importance of intermediation: these intermediaries all take their skim, or earn a crust of the intellectual activity of attending to bitcoin, just as they once attended to Enron, or tranched synthetic credit derivatives, or whatever hysteria happens to have a hold of quotidian minds for the time being, and preserving that income compels them to support the metaphorical narrative.

But for Bitcoin, this is yet another irony in a phenomenon apparently constructed out of them: the very institutions that vouchsafe this metaphor’s continued viability — a set of incentivised trusted intermediaries — are exactly the institutions it is explicitly designed to undermine. The whole point of Bitcoin is to jettison the need for trusted intermediaries. That is the program.

Bitcoin as a token capital

Bitcoin is capital, then, not currency, at least not as we are used to thinking about it. Bitcoin is more like gold.

Its scarcity is more or less fixed, and it gets progressively harder to extract more of it from the earth. In this way the “mining” metaphor is correct. It holds its value wherever it is. It does not depend for viability or validity upon the “implied violence” of central banks, nor the indebtedness of investment banks nor the custody and connectivity of other rent-extracting intermediaries. You can take it, sort of, off the grid.

This view, that bitcoin is a sort of non-fungible token for platonic capital is, I think, fundamental to getting a purchase on where bitcoin maximalists are coming from. If we think about bitcoin as on-chain gold rather than on-chain cash, we have a closer starting point, though as Farrington argues, a dematerialised electronic communication can do a bunch of really useful things that a lump of metal cannot.

[confusion of the token with the real thing. Ontological looseness of NFTs.]

Nevertheless, this is where I part company with Farrington, though it may be one of those “agree to disagree” scenarios.

Perhaps this is the nocoiner’s fundamental misapprehension: have we been slating Bitcoin for lacking qualities it isn’t even meant to have? If it is not a currency, then criticisms that it isn’t very good at the sort of things currencies are meant to be good at fail, defeated by the simple objection, so what?

Farrington correctly sees a “fiat currency” as necessarily an instrument of indebtedness: a person who holds it has a promise for value from someone else. He doesn’t say so, but he may regard indebtedness as, in itself, a form of compulsory trust — trust on pain of enforcement by the state, i.e., violence — and therefore intrinsically undesirable.

David Graeber might agree about currency, and monetary indebtedness, but not indebtedness in general. To the contrary, mutual, perpetual, rolling non-monetary indebtedness is exactly the glue that binds a community together. It creates voluntary trust. That kind of trust — credit — is fundamental to how any functioning civilisation works. Discharging that sort of indebtedness releases us from our ties and obligations to each other — thereby dissolves the “community of interest”. One of the things that Graeber finds so pernicious about monetary indebtedness is that it is quantifiable: it sets a precise value for loyalty, and therefore a price at which loyalty may be discharged. The vagueness and irreconcilability of “social” indebtedness makes this a lot harder to do. There is always something on the table. These are the ties that bind.

Cash as an anti-asset

Cash, on this view, is a tokenised, accountable unit of trust. That is a glass-half-full way of describing monetary indebtedness — not financial indebtedness to or from a specific person, as arises under a loan contract, but disembodied, abstract indebtedness in and of itself. This is quite an odd concept.

A banknote is, on this view, not an asset, but an anti-asset: something that has a negative value in and of itself, and which, therefore, only generates value when you give it away. I can discharge a private debt I owe by transferring away my public token of indebtedness — cash — to the lender. We can see there that to hold cash, and not use it to acquire capital, discharge debts, or create indebtedness in someone else, is wasteful.

There is an important distinction here between holding cash physically and putting it in the bank.

When, and while, you hold cash physically, for all intents and purposes, the money is not available to the financial system. It is disengaged. You have an “indebtedness” to yourself. It cancels out. It is meaningless. Worthless. Valueless. If you are robbed of physical cash it only creates a (negative) value when it is taken away, because it deprives you of the value you could have created by giving it away to someone else, in return for an asset.

So holding cash in person is a non-investment. It is to disengage capital from the market. Since the value of capital is a function of the time for which it is productively engaged, a capital instrument you have disinvested should progressively waste away. So it does. Cash in your wallet, relative to a capital asset in productive use, must depreciate over time. That is the consequence of inflation. It has nothing really to do with central bank policy or fractional reserve banking.

Compare that to cash you put in the bank. This is invested: with the bank. You have given away your token of abstract indebtedness to the bank in return for actual private indebtedness for which the bank pays you interest — okay, not much — as a return for your investment. Prudential regulation obliges the bank to sit on a portion of the cash its customers give it — to keep that cash disengaged, in reserve to manage the demand of those investors who wish to cancel their investments — but that capital reserve, too, will waste away, while the bank must still pay interest on it to customers. This is what bankers mean when they say “capital reserves are expensive”.

The bank will lend all the cash it can to its borrower customers — giving away these tokens of abstract indebtedness in return for an investment in their actual private indebtedness. The borrowers, in turn, will want to use that physical cash quickly, because if they don’t, it wastes away, while they pay the bank interest for the privilege of holding cash.

Nowadays the supply of actual printed money that can waste away in your pocket (economists call this “M1” money stock) is dwindling. Most currency exists electronically on a bank’s ledger, but the difference between the liabilities a bank has to its depositors — a positive number — and the claims for repayment it has against its borrowers — a negative number — represents “under the mattress” cash. A negative energy until you give it away.

But let's not get distracted. That M1 money cash flies around the system, perpetually depreciating as it goes. It is a hot potato — everyone wants to pass it on as quickly as they can, as it weighs on anyone who holds it like a dark energy. The faster it flows, the better the economy performs.

Holders can stick it in the bank or give it away in return for capital — that is, invest it — in something that will be productive over time in an a way that an inert cash instrument in your pocket will not.

Bitcoin as generalised capital

The thing about particular capital assets is that they are awkward. They are not to everybody’s taste. They are idiosyncratic; fallible: they take up space, require refrigeration, can rust, go off or out of fashion. They cost money to maintain and store. They can be invisibly encumbered.They are bad things, therefore, to use as a medium of exchange. There will always be friction, cost and doubt. They will always be subject to a haircut.

But, despite the conventional (fairy) story of the history of money, money did not come about in the first place as a substitute for the inconvenience of barter. Currency was always, from the outset, a means of creating indebtedness.

This is because indebtedness is not — in the capital strip-mining paradigm, at any rate — intrinsically a bad thing.

Indebtedness is bad, in the Crypto-Venice paradigm for a list of reasons Farrington sets out in detail. If only we could find something that was both an asset and had the abstract, fungible, transparent, clear nature of a currency — but, critically, did not depreciate or imply any form of indebtedness — all would be well in our new Crypto-Venice.

But there is a paradox here. A capital asset derives its value from what it is: its shape, substance, composition, idiosyncrasy, perishability and consumability. On its power to transform: on the change it can make in the real economy.

A non-degenerative “digital asset” that weighs nothing, does nothing, has no calorific content, occupies no space; that is good for nothing but merely stands as an independent abstract symbol of those qualities by which we judge the worth of things that have those qualities — in other words, things that are “capital” — is not an asset. It might look like one, but only courtesy of a magic trick. It depends on misdirection. It depends on the master magician’s sleight of hand. Its value holds only as long as the illusion. It depends on consensus.

Now, conjured illusions can outlast your solvency, to be sure. We are no less enchanted by magicians now than were the Victorians. But more persistence does not change the fact that they are conjuring tricks. These assets are not real. Just because a theatre’s patrons emerge into the chill night air happy that they have been well entertained does not change that fact.

A thought experiment=

We can see that with the following thought experiment: imagine if everyone in the market decided to exchange its entire portfolio of traditional capital assets for universal “digital assets” of equivalent value. This could not happen: one vendor can convert its capital asset into digital assets only if another purchaser is prepared to do the opposite trade. Someone in the market has to stay long capital assets.

Farrington’s argument might be that indebtedness is intrinsically pernicious, but this is a hard argument indeed to make out, and involves tearing down more than just the tenants of “degenerate fiat currency”. For mutual indebtedness, and intra-community trust is the special quality that lifts human society out of a Hobbesian nightmare.

Trust versus trustless

The nature of indebtedness creates obligations of mutual trust. Trust in a community is a series of continuing, undefined, interlocking, and perpetual dependencies. Monetising indebtedness has the effect of financialising it, in a bad way.