Template:M intro crypto Bitcoin is Venice

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 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 therefore no discussion of Bitcoin’s relationship with terrorist financing, vice or money laundering nor the pervasive fraud in the cryptocurrency sector.

As far as Bitcoin is an ultra-libertarian project, the authors might say it is people, not cryptocurrencies, who finance terrorism — but to take that position to its extreme, why have any laws (ultra-libertarians would, of course, agree). They might also say that fiat currencies have hardly been much better, and that is certainly true. And nor are cryptocurrencies half as untraceable as would-be subversives would like. (As to this see Andy Greenberg’s excellent Tracers in the Dark.)

But for less ideological types, these are weak objections. To mount no better 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 flaws in the internet’s fundamental architecture.
• Rewards long-term over short-term thinking.
• Obviates regulatory incompetence.

This is wishful, to say the least, but the authors seem to realise this, and offer up “Bitcoin fixes this” as a rhetorical flourish, somewhere between punctuation, irony and gallows humour.

Financial services as a paradigm, and critiques from without

Paradigms generally

Like any communal activity in which there are things to be gained and lost — that is, any communal activity — “financial services” is what Thomas Kuhn called a “paradigm”: a community intellectual structure which has developed its own rules, language, hierarchies, defeat devices, articles of faith, and credentialisation process, all of which is 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 learned can understand. And understanding is your ticket to the club.

Defensiveness about core tenets — systems and processes for keeping outsiders out — is an evolutionary design feature of any paradigm.

Paradigms are in equal parts benign and malign: without some commitment to the cause — some trust and faith in the wisdom of elders and “what is laid down” — no community consensus can take root in the first place. But once it does, the deeper it goes and the more it scales — the more entrenched those elders and deposited articles of faith become.

The more those elders have to lose — the more skin they have in the game — the more ossified and moribund the paradigm becomes. We see this time and again, with paradigms of all kinds, but in financial services and law in particular.

Liminal vagueness

A common complaint about the paradigm concept 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 unbounded, 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 yet requiring education, indoctrination, credentialisation, so that those who enter either get so overwhelmed by weeds as to be unable, let alone inclined, to see beyond them — as nourishing as they are, there is little incentive to look beyond the weeds — 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 ever tells you. Eventually, you just know. This serves as its own incentive to lean in harder, of course: incentivising and rewarding “true believers” is part of the self-defence mechanism of a robust paradigm. For all their mealy talk of “fostering challenge” and “championing diversity of thought” the foster parents and champions at the upper end of the paradigms aren’t really fond of middle rankers who piddle inside the tent. Hence the world’s Cassandras, contrarians, crabby idiosyncratists rarely get to positions where they can make any difference. But enough about my disappointing career.

In the same way, any permissionless cryptocurrency has its own set of reinforcement mechanisms rewarding “true believers” encoded into it. By necessity: a permissionless ledger has no money to pay anyone that it cannot generate itself: that is cryptocurrency — and it depends for its success on a class of believers — “hodlers” — who are prepared to exchange freshly-mined cryptocurrency for “real world value”: without this step no-one would to devote the necessary resources to the work required to “mine” it in the first place.

Hodlers will only hand over greenbacks if they deeply believe a bootstrapped cryptocurrency has intrinsic value. That so many have been brought round to that belief is quite the Vulcan mind-trick. But, we are where we are: there is now enough trad-fi institutional machinery invested in the Bitcoin project just to intermediate for fees — futures, ETFs, exchanges, market makers — that the magical beliefs are going to take some stopping.

Transcendent incoherence

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 — the questions he poses and the answers he gives — might be scientifically immaculate, but within a religious paradigm they are not even well-formed questions, so Dawkins’ answers are, to religious, incoherent. We know this because none of them have as yet carried any water.

The scientific method counts for nought beyond its own “magisterium”. It is no more fruitful to criticise quidditch for its impossible aerodynamics, nor debate whether wizard wands or light sabres are better weapons. To even try is to make a category error.

Credentials and investment

It is, at some level, a Catch-22: paradigms endure because anyone with the internal gravitas to change them has too much invested in keeping them the same. 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.

Indeed, there is a view that the very point of a paradigm is to relegate matters of substance (intractable, hard) to ones of form (solved, rule-bound). All that matters thereafter is form. This is a circularity, but not a vicious one.

Collapse and revolution

Paradigms can go into “crisis” and may collapse, but necessarily not from within. Some exterior impetus is needed to change the landscape so the paradigm’s set of valid questions and answers are no longer as satisfying to those inside the tent as an emerging alternative. Alternatives only start bubble up when the dominant paradigm struggles to give answers, and adherents look for better tools to frame the problems they encounter.

Kuhn’s magnificent book The Structure of Scientific Revolutions was about this revolutionary process.

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, Mandelbrot, Stock, Graeber, Scott, Jacobs, Sutherland and others ply a healthy trade damning the manifest absurdities of our institutions — but, per the above, 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 and carrying on. It is a deep social disruption: as Kuhn labels it, a revolution. The many officeholders of the old regime have tight bonds, deep connections, and strong common interests from which they draw their strength. They are highly motivated to preserve as much of the old order as they can, however wanting it may outwardly be.

And there are practical challenges: rather than adjusting, the undermined institutions of the research programme may collapse altogether. In that case the educating, credentialising, publishing and regulating agencies that police the research programme’s borders and are essential for its ongoing success will have to be rebuilt from scratch. This is a dangerous period: the new programme is supple but not strong, and untested against the range of vicissitudes the old regime had evolved to withstand. There may be fatal flaws and zero-day vulnerabilities. This is why degenerating paradigms are not usually dropped immediately: the better-tested the rising programme is, the more comfortable insiders will be about letting the old regime go.

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 back into the old one.

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

—Pete Townsend

And all this is to presume the old paradigm will meekly lay down its arms. Fat chance.

Old paradigms, with all those vested interests, have a habit of shapeshifting, reframing anomalies around their fringes and boxing on.

Hence, you cannot defeat a broken paradigm with just a reasoned argument: you must punch it in the mouth.

In this way, Karl Popper’s oft-quoted idea that knowledge progresses by falsification doesn’t really describe what happens in practice. Falsification may be abstractly rational, but the human systems it describes are not.

Ironically, the “falsification” paradigm itself 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, immediately, carry much water with those invested in the status quo.

Bitcoin might — might — have the advantage in theoretical terms; it hasn't yet won the hearts and minds.

Allen Farrington is clear: soon enough, it will.

Perhaps not in the way he anticipates. For, sure: cryptocurrency poses new questions: how important they are and how good are its answers remain to be seen, but we do know that after more than a decade Bitcoin is not a spent force: it may not yet have thrown a telling punch, but this is not to say it won’t.

Bitcoin maximalists can still, in this way, shape and direct the way even experts think about the world. But even if they pose new, valid, unanswered questions — and even if they answer them — the “old boss” is not yet done; the system will go about assimilating this new narrative as best it can while keeping everything else.

And the trad-fi system seems to be doing a fine job of exactly that.

Witness Blockchain as a service. Bitcoin custodians. Bitcoin futures and ETFs. Cryptocurrency exchanges. According to Satoshi’s original concept, crypto was meant to make this kind of systemic intermediation redundant. To fix it, not get subsumed by it. Bitcoin was supposed to emasculate the class of rent-seeking intermediaries that the trad-fi economy enables.

If this is a fight to the death (on this, point, opinions are divided: Bitcoin maximalists say it is, capital strip miners say it isn't) trad-fi seems to be winning it hands down right now.

Of anarchists and revolutionaries

David Graeber was, properly, an outsider: an anarchist anthropologist; one of the founding protagonists — antagonists? — of the Occupy Wall Street movement.

Allen Farrington is, in one sense, not — he is a well-read finance industry insider — so expect no tent-dwelling, jazz-hands, kumbaya nonsense from him. He’d not tear the financial system to the ground, but rather cut out the rotten bits, cauterise the wound and “make finance great again”, thereby restoring capitalism to its “Venetian apex”.

In another sense, though, he is, because his means of doing so would be with Bitcoin, and it would involve destroying what he calls the “capital strip-mine” mentality rendered by fiat currency. That particular philosophy of credit creation and extension, on which the whole edifice is built, is, Farrington would say, the heart problem.

Getting rid of it is going to be hard.

As a grand vision, doing without dollars is pretty anarchic: more so, even, than Graeber’s. It must have seemed pretty hypothetical, too, in 2011, and for all Bitcoin’s roaring success, not much has changed. Maybe the dollar is under pressure as a global reserve currency, but the heat isn’t coming from crypto.

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

What Farrington has on his side, for now, is Bitcoin’s sustained defiance of the manifold predictions of its doom. As at September 2024 Bitcoin remains close to historical highs, though these sort of observations tend to have a short half-life. Exceptionally short, in Bitcoin’s case.

This, perhaps is the proof of the pudding: you may not be able to “lecture birds how to fly” but you can offer an account of why, against apparent odds, they do.

This is Farrington’s proposal.

On debt and assets

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

Signified
ˈsɪɡnɪfaɪd (n.)

The meaning or idea represented by a sign or token, as distinct from the the token. The underlier.

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

So whereas fiat currency implies indebtedness, Bitcoin does not. It is pure abstract, tokenised capital — the inverse of fiat currency: to actual capital what a non-fungible token is to the artwork it represents, only generalised. Whereas an NFT is a token representing a specific cultural artefact, Bitcoin is a token representing generalised, fungible “capital” in the sense of abstract value — this is a vision of capital as a shared community resource, before it has been transmogrified into any specific form. Bitcoin shares this investable “fungibility” characteristic with fiat currency — and also other traditional tokens of capital like shares — but we should not be misled by that superficial similarity into treating them alike.

In this way, Bitcoin is anticurrency.

The token and the signified: Bitcoin as transubstantiation

Transubstantiation
/trænz'səbˌstænʃiˈeɪʃᵊn/ (n.)

A Christian doctrine that during Holy Communion, that stale dry wafery thing the priest stuffs in your gob and the horrid sweet sherry you get a glug of to wash it down is, in the moment, transformed into the actual body and blood of Jesus Christ — even though it still looks, and tastes, for all the world like the inside of a bottle cap and cooking wine.

The NFT panfire, now extinguished, speaks to a common conceptual confusion between the token — a ledger entry representing ownership — and the signified — the owned artwork itself that the token represents. This confusion reached its nadir when one NFT owner went so far as acquiring and then destroying the signified artwork, ostensibly to fully and finally commute the signified artwork’s qualities onto the blockchain token.

But it doesn’t work like that.

Now this was, most likely, an expression of irony — an artistic statement about our modern absurdities in its own right — though it is really hard to tell who is joking in the crypto world.

In any case the proposition, “Bitcoin is liberated capital” seems to make a similar category error. A cryptoasset is, and can only ever be, a token for the capital it signifies. You cannot imbue an electronic token with the productive qualities of plant, machinery, receivables and real estate.

For if this is what Bitcoin had achieved, it indeed would be something wondrous. Alchemical, even: “capital” as never before experienced: a Platonic essence: a Midichlorian life force. You know, like the Force. An electronic token humming with radioactive energy, radiating bottled prosperity. This seems to be the argument Farrington is making — Bitcoin represents some kind of transubstantiation.

As noted, we have financial instruments representing abstract capital already: shares. They reflect the net capital of a given undertaking, and take only after all the organisation’s debt is accounted for. This is specific, not generalised, and plainly, a common stock it is only a certificate proving entitlement to a net excess of assets over liabilities: no “transubstantiation” is implied. So normal equity capital cannot be what the authors have in mind (if it were there would be no need for Bitcoin). Perhaps share capital — which, too, is recorded on a digital ledger, only not a distributed one — is too contingent on the grubby, fiat realities of everyday business. Perhaps it is not abstract enough.

But there is that category error again. Distributed ledgers are still just ledgers. They may be “smart” but they are not magic.

Anticurrency

Quite aside from its technological form, this conceptualisation of Bitcoin as capital makes a very different thing to a fiat currency. Fiat currency implies indebtedness. It needs the intermediation of banks and lenders, to create and discharge that indebtedness. It centralises everything, and makes everyone dependent on the systemically important institutions of the centre: the paradigm that is fractional reserve banking. It compels us to “trust” and have risk to inherently levered intermediaries, whether we want it or not.

Compelled trust, as David Graeber might say, is violent extortion. Because Bitcoin can be a unit of account, and does not imply indebtedness, the argument goes, it is the currency of emancipation.

And 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 that does not rely on trust in a central permissioning authority, or 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, however hard substantive complaining may be.

Trust as feature not bug

And trust in each other is a feature of a healthy market, not a bug. It cannot, but more importantly should not, 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. Or Adam Smith.

For its many sceptics, Bitcoin’s unique selling point — its ability to function in a permissionless, trustless ecosystem — is its biggest conceptual flaw.

We should not want a trustless system. We should not build for system in which people do not have to trust each other, because of its corollary: if you don’t have to trust, nor must you be trusted. You do not have to behave in a trustworthy way.

Any system designed to accommodate “defector” behaviour will devolve, quickly, into a low trust system. The surprising finding of game theory is that ’’high’’ trust systems produce better economic outcomes for everyone than low-trust systems.

Levels of community trust may be historically low — this is highly doubtful, actually — but even if they are that is no reason to give up on trust altogether. Quite the contrary: we should be incentivising trust in the systems we build, not deprecating it.

David Graeber’s observation is credible: currency has its antecedents not in barter between hostile strangers but in credit amongst friends: currency would not work between perfect strangers because it is a personal promise of deferred satisfaction, and a hostile stranger should not value the abstract promises, pieces of paper or bits of metal as abstract symbols of trust issued by people she does not trust. It is only once that state of pure alienation dissolves (as inevitably, among social animals, it will) and groups of “foreigners” develop certain shared assumptions, that the conditions for tokenised credit emerge.

Certain economists, notably George Selgin, who was kind enough to comment on this article, take issue with Graeber’s simplistic reading of Adam Smith here. Currency may not have originated from barter among totally isolated strangers, but “complete strangerness” between isolated groups once they are in contact is not a stable state and naturally dissolves upon ongoing interaction. Diplomatic missions quickly arise. Alien froideur morphs by degrees into increasingly dynamic and sophisticated relationships. Groups develop and build upon shared values and conventions. Before long the conditions for credit arise.

This is a matter almost of literary, and not financial, theory. Of shared meaning:

In a low-trust exchange: I hand over my muskets for your blankets. Their respective “meanings” to each of us is obvious, and do not depend on each other’s evaluation. Indeed, they 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. This is true of any exchange, trusted or not.

IOU

Now: we can each assign our own values to muskets and blankets and that is a fine thing. But it is not fine for abstract tokens of value like currencies and gold. The value of those we must agree about. A market requires both a plurality of opinion about what has value, and a consensus about how to measure value.

In high-trust communities I can hand over muskets now for blankets — or an equivalent — later. For I might not need blankets, or whatever it is that you have to trade, so you give me instead a token reflecting your undischarged obligation to me in connection with our trade. You will honour your promise against surrender of that token.

But that token has value to me immediately. It is evidence of a receivable. Before you come to settle your undischarged obligation to me, I might deliver your token to acquire goods or services from someone else. Your token is “negotiable”. I can, effectively, buy things with it from anyone who recognises the strength of your word. Whoever holds for the time being can surrender it to you against performance of the stated obligation, or just themselves on-trade it as an abstract “currency” for goods and services.

You will recognise this token as an IOU — bankers would call it a “promissory note” — but it is in any case a transferable token of private indebtedness. “I accept that I must deliver a certain value if asked at some point in the future.”

It does not have a term and does not bear interest. It is a lot like a privately issued currency. Its value no longer references the muskets originally exchanged, but has a notional abstract value, perhaps referencing and abstract index value in the community such as a specified weight of precious metal. The price at which it changes hands may differ from the value of that index to reflect the likelihood the instrument’s issuer will be able to honour it. This is a credit spread.

The difference between a private currency and a public one is really only the person issuing it.

In any case — back to Graeber’s observation — for it, or any currency, to work there must be consensus as to its value. It must have, you know, currency.

Thus, the odd dissonance of Bitcoin: for all its technological novelty it still depends on mutual trust. An abstract token of value is no use between hostile strangers who do not agree on that value — who do not trust it.

Bitcoin as metaphor

Despite this being its central design impetus, Bitcoin does not fix this. Bitcoin’s viability depends on community consensus in an abstract, metaphorical value. All users must share a collective believe in 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.

Just as they must for cash, people must believe in Bitcoin as a token of value — in Farrington’s view, of capital’s worth — whilst putting aside the manifest fact that a ledger entry in an electronic database has no intrinsic value. There is no transubstantiation but, pour encourager les autres, it doesn’t hurt to suggest there might be.

Yes, this is all just as true of a fiat currency. But here the prevailing paradigm, of which currency plays a fundamental part, makes a difference. Within the “degenerate fiat currency” paradigm, fiat currency operates as a lawful means of discharging debts. It necessarily has that value. If this feels circular, that’s because it is: a paradigm provides not just answers but the criteria for well-formed questions.

And fiat currency aspires to represent — “signify”, if you like — not the variable, necessarily divergent valuations of traded assets but the stable, necessarily consensual measure of their abstract worth. Yes: currencies are prone to central bank shenanigans and government fiat — but in a hard currency these actions are largely directed at — or at least constrained by — the need to maintain a stable measure of value. Central banks cannot just freely print more money without the inflationary consequences Farrington alludes to. That is a control in itself.

By transacting for an asset in a currency you commit to the metaphor: you give something of intrinsic value away in exchange for something of metaphorical value. The currency amount indicates the divergence between your value and the counterparty’s. You have both bound yourself to the same mast. You have made your leap of faith. The currency is your yardstick. By articulating the value of Bitcoin in dollars — even hodlers do that — we confess we are not quite ready to give up the fiat currency metaphor.

Agency as a sustaining life force

That a statement with no literal truth value can nonetheless hold a metaphorical one is not news. All literature depends on it: we do not struggle to reconcile our understanding of Oliver Twist, or the value we assign to it, 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 a critical mass of institutions have enough of a vested interest in maintaining the metaphor to further their own interests — that is, if they think they can reliably make enough money out of it — the metaphor will carry on, because too many agents have too much riding on its success for it to fail.

This is the stuff that bubbles are made of: Enron was largely built of imaginative metaphors, too. 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 carried on.

You don’t need to believe the metaphor yourself to profit from it: especially if you’re paid in fiat. You just have to believe you can get out ahead of everyone else when it fails.

Not every wishful metaphor fails. Bitcoin has proven resilient so far. It has its own momentum. First, it acquired miners then brokers, trading venues, intermediaries, futures exchanges, exchange-traded funds, 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 take their skim, or earn a crust from the intellectual activity of attending to Bitcoin, just as they once attended to Enron, or tranched synthetic CDOs, or whatever hysteria happens to grip quotidian minds for the time being. Preserving that income, siphoning it out in fiat, compels them to support the metaphorical narrative, in Bitcoin, to which (if they are smart) they will have no market exposure.

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 apt. Its value, however, it might pogo around from month to month, is not at the mercy of the “implied violence” of central banks or 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 understanding 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, dematerialised executable electronic code can do a bunch of clever things an inert lump of metal cannot. (It can introduce a bunch of dangerous vulnerabilities an inert lump of metal cannot, too.)

This is where I part company with Allen Farrington, but 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: 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. On the contrary, mutual, perpetual, hard-to-completely-discharge, rolling non-monetary indebtedness is exactly the glue that binds a community together. It creates voluntary trust. That kind of trust — social “credit” — is fundamental to a functioning civilisation.

To discharge that sort of indebtedness would be to release each other from our mutual moral obligations: to thereby dissolve the “community of interest” and revert to a condition of strangerness. To call time on the game of iterated prisoner’s dilemma we call society. We would never do that. We would never want to. The intrinsic vagueness of social indebtedness makes it resistant to exact accounting. This is its great strength: there is always something on the table. We are always somehow morally obliged to each other. These are the ties that bind.

One of the things that David Graeber finds so pernicious about monetary indebtedness is that it is so precisely quantifiable: it sets an exact value for a bond of loyalty, and therefore an exact price at which that loyalty will be fully and finally discharged. There is a point where nothing is left on the table.

Cash as an anti-asset

Cash, on this view, is a tokenised, abstract, accountable unit of trust. It is a measure of indebtedness. Not specific indebtedness, to an identified person, as arises under a loan, but disembodied, abstract indebtedness in and of itself. This is quite an odd concept. Loans are expressed in monetary units, but are not monetary units themselves: they are contracts to pay and later return monetary units. The monetary unit itself — cash — is the subject of a particular class of contract called a loan. Cash is weird stuff. A banknote is 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 withdrawn from 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 take capital out of 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: they may affect the rate of wastage, but they do not cause wastage. Cash itself necessarily wastes away.

This is why cash in your wallet is different to cash in the bank. Cash in a bank account 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 credits you interest — okay, not much — as a return for your investment, and promises to pay you an equal amount of cash when you ask for it.

A bank deposit has exactly the characteristics is a loan, that is. A contract settled and discharged by the payment of cash. Cash is the subject, not the substance, of the contract. A bank deposit is, properly speaking, a loan.

Why capital reserves are expensive

Prudential regulations oblige banks to sit on a portion of the cash their customers deposit — to keep that cash disengaged, in reserve, as “liquidity” to manage the demand for withdrawal from customers who “want their money back” —who want to terminate their deposit loan contracts, that is — but that capital reserve, too, being disengaged, will earn nothing and, in the way of all cash, 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 out as much of its deposit base as it can to other customers (“borrowers”) — giving away these tokens of abstract indebtedness in return for an investment in the borrowers’ 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 must pay the bank interest for the privilege of holding the cash.

Nowadays the supply of actual printed money that can waste away in your pocket (economists call this “M1” money stock) is dwindling. It is not impossible that it might disappear altogether. Technology has facilitated this change. We are permanently connected to a network, we have personal devices for instructing our banks to settle our payment obligations directly. We don’t need to hold wasting cash in our wallets any more.

In any case, M1 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 a way that an inert cash instrument in your pocket will not.

Bitcoin as generalised capital

Mr. P. Bentos of Cheltenham: How is it a man can stab his wife eighty times with a meat cleaver and not even get a crease in his trousers, while I nearly cut my bloody finger off trying to save the cat from starvation?

The very rev. Andy Simpson: God gives us a choice, doesn’t he? A choice to use our gifts wisely or foolishly.

Bentos: Ah, I see, so it’s my fault, is it?

Simpson: I’m reminded of the parable of the nine virgins. Eight of them were wise and used their tin-openers diligently, but the ninth was a clumsy, loudmouthed virgin who kept wittering on about —

Bentos: Hang about, you’re making that up!

—Not The Nine O’Clock News, Does God Exist?

The thing about particular capital assets is that they are awkward. They are not to everybody’s taste. Different people value them differently in different circumstances. The market is complex: fluctuations in asset valuations are not linear.

Assets are idiosyncratic. They take up space, require refrigeration, can break down, rust, go off or out of fashion. They cost money to maintain and store. Assets, too, can be invisibly encumbered with pledges, charges and equitable interests. The person who holds an asset might not outright own it; the person who owns it might not have unfettered control over it. Ownership and title can be separated. By contrast, it is a fundamental, deep philosophical quality of a currency that its title and ownership cannot be separated. It cannot be owned.

Assets are bad things, therefore, to use as a medium of exchange. Even if we can agree on their value — and it is an operating assumption of a free market that, as a general principle, we won’t — it is hard for me to be sure how clean your title is. There is peripheral risk: there will always be friction, cost and doubt. If used as a measure of exchange — as part of a barter — Specific assets will always suffer a haircut. Cash’s abstract un-ownability, that negative energy, is the reason it does not suffer a haircut.

Now money did not come about in the first place as a simple substitute for the inconvenience of barter. Currency was always, from the outset, a means of creating indebtedness which 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.

Bitcoin, in Farrington’s vernacular, fixes this: it is an abstract, fungible, transparent token of capital’s worth.

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 when deployed in the real economy. Can that be abstracted?

Different assets have different values. The same asset generates different values depending on how it is used. Profit is not a linear function of the deployment of capital. Not all virgins are equally wise. Not all use their tin-openers diligently.

So what does this measure of abstract capital do? How does it work? How is it connected to real capital? What difference can it make?

A non-degenerative “digital asset” that weighs nothing, does nothing, has no calorific content and occupies no space; that is good, in itself, for nothing but merely stands in 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 doesn’t even signify an asset: part of its design criteria is that it must not. If it seems like an asset, because it appreciates, that is only courtesy of a magic trick. Bitcoin depends on the shared impression — illusion — that it has somehow transubstantiated itself into capital. That is why it appreciates. Its value holds only as long as the illusion lasts.

Now, emergent illusions can outlast your solvency, to be sure. We are no less enchanted by magic 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 are the special qualities that lift human society out of a Hobbesian nightmare.

The victory of form over substance

There is a lot of foolish talk in these pages about form and substance. Our resident librettist Otto Büchstein even wrote a play about it. There is as much about linearity and complexity.

I can’t prove it, but they seem to be different ways of pointing up the same distinction: ordered versus chaos, determined versus random, scripted versus improvised, finite versus infinite, complicated versus complex.

Substance is Mars, form is from Venus. Venus can seduce Mars, but Mars always wins when they fight. When all is well, Venus has the upper hand. When things go to hell, Mars does.

Substance and form are not complimentary qualities, but antagonists. They interact. They attempt to dominate each other. Substance dictates the plausible parameters of form: form constrains the behaviour of substance. Form influences substance; substance then, confounds form. The relationship is, well, non-linear. It is complex (there goes substance again, messing everything up).

Substance precedes form. Without substance, there can be no form. Form is the element; substance is the derivative.

Form is a narrative.

A “system” is substance described in formal terms. It is a narrative. The substance would still be there without the form. This is the fundamental tension in a system. This is why, as John Gall says, systems tend to oppose themselves.

The Godfather of “substance over form” was James C. Scott. The Godfather of “form over substance” was the Swiss architect Le Corbusier. Both have now gone. It is not clear who is Scott’s heir, but Le Corbusier has any number of them in the tech sector. One may be Satoshi.

Substance without form we call magic. It is a phenomenon we have not yet explained.

What is form without substance? Can there be such a thing? Is that Bitcoin?

Bitcoin as pure, crystalline form is the aspiration that, if the form can be sufficiently isolated and reified — deified — then an entirely subservient substance will emerge — will transubstantiate into capital — and all the messy, ugly features of analogue substance will be gone. This was Büchstein’s warning in La Vittoria della Forma sulla Sostanza: Form will have won.

Bitcoin will have fixed everything.

On that view, Bitcoin would be the house token of a new, post-delamination, online realm. A sort of Second Life — a Matrix — a virtual simulacrum, untethered from the messy, violent, flawed, analog, world we used to inhabit. We will have transcended our substance. This is a Platonic theory of the forms. This is Bitcoin as the currency of the simulation hypothesis, in which it finally transpires that organic life was an illusion all along. This is the simulacrum a final transubstantiation of substance into form.

The Empire strikes back

These are utopian ideals — and for “utopian” read “self-refuting, circular, and therefore dystopian”. We are not in a simulacrum — or if we are it has a hell of a sense of irony. For it tells us, by showing us, that Bitcoin cannot do away with substance. The substance will operate to confound the the formal precepts of the system. The system will oppose itself.

And so it transpires. When it became apparent Satoshi’s great anarchic thought experiment seemed to be working, the first thing the old paradigm did was to exploit it, explicitly bending it to the familiar priorities of traditional finance. There were three categories of exploiter: arbitrageurs, intermediaries and criminals.

Arbitrageurs

The arbitrageurs observed that pricing inefficiencies for the same crypto asset between markets were huge. Statistical arbitrage in the equity markets exploit tiny fractional basis point discrepancies that last for milliseconds. Irrational price discrepancies in crypto were measured in multiple percentage points and lasted for days. The opportunities to extract rent were colossal. Many hedge funds piled in.

Intermediaries

Intermediaries observed that unsophisticated players were not only largely ignorant of the structural features of the blockchain that made it special — in particular its finality, security and the peer-to-peer nature of its distribution — but did not really care for them.

“Normal” Bitcoin investors were interested only in one thing, a line, that was going up, to the moon and only really wanted to hold on to it for dear life. (Far from this being a disappointment to crypto philosophers, this was a desired outcome: a distributed ledger depends on a class of gullible speculators with unlimited faith in the project: this kind of mythmaking is core to the project.) Investors were more than happy to pay traditional institutions, and new ones, to manage their Bitcoin, to handle all this confusing business with sovereign wallets, hashed passkeys and so on, and to graft Bitcoin investments into traditional markets and venues.

And so the trad-fi market intermediaries rolled in — often ostentatiously holding their noses — to help their customers by holding, clearing, market making and managing their Bitcoin investments, setting up exchanges and creating futures and ETFs, all for their usual upfront commissions.

The prompt arrival of the entire machinery of traditional finance in the cryptocurrency space — there is even an ISDA definitions booklet — would be an outright falsification of the Bitcoin project, were it not for the fact that everyone is making so much money out of it. It has the effect of cementing Bitcoin into the traditional system, validating it, giving it institutional weight, heft and credibility. This is a bit like Mick Jagger accepting a knighthood: a young rebel makes good. But the price of success is that the young rebel must wave away his dreams of revolution. When even the fraudsters are lobbying for more regulation — a classic barrier to entry and a defence against better fraudsters — the dream is truly over.

Criminals

Criminals — not a formal feature of trad-fi but a substantive one, all the same — come in two varieties: fraudsters and vicesters.

Fraud

Outright fraud is probably the lion’s share of crypto crime nowadays. Brazen crooks contrive ways of embezzling the public in methods of varying ingenuity and blatancy: “rug-pulls”, a sort of short “long con”, are the most egregious, but “appropriating customer assets without permission to make leveraged punts on crypto in your private hedge fund” the most well known — for which Sam Bankman-Fried is spending the next few years at the pleasure of the People of the United States.

Crypto was entirely unregulated, still is largely unregulated, and regulatory agencies fight turf wars over the bits that are regulated, and in the meantime, either through ignorance or malice the Bitcoin industry has a made a point of falling down every open manhole that trad-fi ever discovered.

As Molly White’s tremendous site “Web 3 is Going Really Great ” eloquently attests, Bitcoin has not fixed this.

Vice

Bitcoin’s potential as the instrument of choice for money laundering, sex crime and terrorist financing is not all it cracked up to be, as it turns out (quelle surprise) that a permanent public record of every transaction printed to all nodes on the Blockchain is not a fabulous way of keeping quiet about what you are up to. Several aspiring crime and vice kingpins are behind bars thanks to excellent reverse engineering cryptographic transfers, as documented in Andy Greenberg’s fabulous Tracers in the Dark.

That it is not so great for carrying out crime, by the way, is not another example of how “Bitcoin fixes this”: rather, it is another example of Bitcoin failing to deliver what the crypto-anarchic utopia it was meant to deliver — anonymity — because the substance has performed a clever end-run around it.