Bitcoin is Venice

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Cryptopia

This is a massive, magnificent, learned, contrarian work and, like most massive, magnificent, learned contrarian works (for example, David Graeber’s Debt: The First 5,000 Years) 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 everyone — this is an essential text.

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 detail 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 know.

This is an evolutionary design feature of any power structure. (I take it that “power structure”, “paradigm”, and “intellectual construct” are essentially synonyms, describing any self-organising, bounded community of common but esoteric interests). It is in equal parts benign and malign: without some commitment to the cause — some unconditional faith in the wisdom of elders — no bounded community consensus can take to the air in the first place. But once it does, the higher it flies and the more it scales — and the more there is for those with skin in the game to lose — the more ossified and moribund it must necessarily become. We see this time and again, with power structures of all kinds.

You must, therefore, either get so close to the weeds that you can scarcely see beyond them — and once you do, those weeds being nourishing as they are, there becomes little incentive to look beyond them — or you don’t, in which case you never earn the intellectual credibility you need for anyone inside the power structure to take your challenge seriously. This is why cross-paradigm arguments are so joyless and draining. They are failures of translation. Richard Dawkins’ amassed arguments against religion might be scientifically immaculate, but scientific method do not hold within the magisterium of religion. 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 pick them apart has too much invested in keeping them together to do so. They therefore progressively prefer form over substance, it being assumed that, over time, the substance has been proven out by the very resilience of the paradigm, and can be taken as a given. All that matters thereafter is form. This is a circularity, but not a vicious one.

On paradigms in crisis

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

Well, they do at least until real-world facts intrude: only once it becomes clear an power structure not only should not work but, in practice, does not, does that paradigm go into a crisis. In the worst case, the paradigm cannot recover, and a wholesale redrawing of the landscape is on the cards. A new paradigm will be born that accounts for the changed practical facts.

But before that, paradigms have a habit of shapeshifting, reframing anomalies around their fringes and boxing on. You cannot defeat such a power structure with a purely theoretical argument: you can ignore clever arguments until they punch you in the mouth. In this way Karl Popper’s idea of falsification doesn’t really describe the way science progresses in practice.

Outsiders to financial services

That is not to say we shouldn’t listen to the theoretical arguments of outsiders like David Graeber and Allen Farrington. They can, in their way, shape and direct the way even experts think about the world.

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-schooled industry insider who would not tear it all to the ground, but would rather “make finance great again” by restoring capitalism to its Venetian apex — but in another sense 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 version of 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, have got us to where we are — this may be an attempt to disarm the elders as aforesaid — but there is some irony, for his own defence and exegesis of Bitcoin is intensely theoretical, 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 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 continue to do so. 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 and as it has independent existence it is not tethered to a bank or a central bank, it need not “degenerate” the way fiat currencies do thanks to central bank monetary policies and investment bank grift.

Bitcoin is pure abstract, tokenised capital. It is to actual capital what a non-fungible token is to art. Only generalised: whereas an NFT is a token for a specific item, bitcoin is a token for just “capital” in the abstract sense of general value — a shared community resource, before it is transmogrified into any particular form.

This is “capital” as a platonic essence: a Midichlorian life force. You know, like the Force.

It is certainly quite a different thing to a fiat currency. As Farrington describes it, fiat currency implies indebtedness. It therefore implies banks as a necessary agency for creating indebtedness. It centralises everything and makes everyone dependent on the power structure that is fractional reserve banking. It compels “trust”, whether you like 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. A permissionless decentralised ledger functions well without trust. That is its basic use-case. That is the problem it solves.

Bitcoin as capital

Bitcoin is capital, then, not currency, at least as we are used to thinking about it. It 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. You can take it out of the system. It does not depend for viability or validity upon the “implied violence” of central banks, investment banks or other rent-extracting intermediaries.

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.

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 say 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.

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 is so pernicious about indentedness is that it is precisely 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.

Currency as an anti-asset

Currency, on this view is tokenised, accountable unit of trust. That is a glass-half-full way of describing 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.

Currency is, on this view, not an asset, but an anti-asset: something that has a negative value in and of itself, and which, therefore, you can only generate value from by giving 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 a bad idea.

There is an important distinction here between holding cash and putting it in the bank. When, and while, you physically hold currency, for all intents and purposes, the money is not there. You have an “indebtedness” to yourself. It cancels out. It is meaningless. Worthless. Valueless. (If you are robbed of 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 invested, you would expect a capital instrument you have disinvested to progressively waste away while it is disengaged, and so it does. Cash in your wallet — a loan to yourself — generates no return (how could it?) so, 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 the bank your token of abstract indebtedness in return for actual private indebtedness under which the bank pays you interest — usually not much — as a return for your investment in its capital. It must sit on a portion of the cash its customers give it, 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 punt out all the cash it can to borrowers in the form of loans — giving away these tokens of abstract indebtedness in return for an investment in 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 have to 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.

They can pass it on by sticking 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. Capital. An asset.

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 go out of fashion. They cost money to maintain and store. They are bad things to use as a medium of exchange.

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 an intrinsically bad thing.

Indebtedness is bad for a list of reasons Farrington sets out in good 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.

We can see that with a thought experiment. Imagine if everyone in the market decided to exchange its entire portfolio capital assets for universal “digital assets” of fixed equivalent value. This could not happen: vendor X can convert its capital asset into digital assets only if another purchaser Y 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.