Bitcoin is Venice

The Jolly Contrarian’s book review service™ →Go uptown File:Bitcoin is venice.jpg Index: Click ᐅ to expand: Book reviews Tell me more Sign up for our newsletter — or just get in touch: for ½ a weekly 🍺 you get to consult JC. Ask about it here.

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 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 offers 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. Expect no tent-dwelling jazz-hands & kumbaya nonsense from him. He would not tear the financial systems to the ground, but would 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.

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 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 manifold predictions of its implosion. As at September 2024 Bitcoin remains close to historical highs, though these sort of observations have a short half-life. 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 physical form in which it is expressed.

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 central bank monetary policies and, er, investment bank grift.

Whereas fiat currency implies indebtedness, Bitcoin does not. It is pure abstract, tokenised capital. It is therefore 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 for a specific cultural artefact, Bitcoin is a token for generalised “capital” in the sense of abstract value — this is a vision of capital as a kind of shared community resource, before it has been transmogrified into any particular form.

In this way, Bitcoin is anticurrency.

The token and the signified

The NFT panfire, now extinguished, speaks to great 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 to acquire and then destroy the signified artwork, ostensibly intending to fully and finally commute the artwork’s qualities onto the blockchain.

It don’t work like that. Now this was, most likely, an expression of irony — in its way 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” makes a similar category error. A cryptoasset is, and can only ever be, a token for capital. Unlike the wags and NFT grifters, I don't think Bitcoin maximalists are joking.

For if this is what Bitcoin had achieved, it indeed would be something wondrous. Alchemical, almost: “capital” as never before experienced: 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 organisation’s debt is accounted for, so perhaps that is not what the authors have in mind. 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 “trust” and risk to inherently levered intermediaries, whether anyone wants 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.

Trust as feature not bug

And trust in each other is a feature of a community, not a bug. It cannot, and 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, but 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, as Adam Smith supposed, 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.

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 does not depend on the other’s evaluation. 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. This is true of any exchange, trusted or not.

Now: we can each have our own values of guns 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.

In high trust exchanges I can hand over muskets now for blankets later. It I might not need blankets, or whatever it is that you have, and you give me I stead a token reflecting our as yet undischarged trade. We might recognise this is an IOU, banking lawyers 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, so is a lot like a privately issued currency. Its value no longer references the muskets originally exchanged, but a notional abstract value, and the price at which it changes hands thereafter reflects a discount from that value that expresses the creditworthiness of its issuer.

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

In any case for any currency to work, there must be consensus as to its value. It must have, you know, currency.

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

Bitcoin does not fix this. Bitcoin’s viability depends on community consensus in an abstract, metaphorical value. All users must 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.

Just as they must for cash, people must believe in Bitcoin as a token of value — in Farrington’s view, of capital — whilst putting aside the manifest fact that a ledger entry in an electronic database has no intrinsic value.

This is just as true of 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: the paradigm defines both the question and answer. By transacting in a currency you commit to the metaphor: you give something of intrinsic value away in exchange for something of metaphorical value. You have bound yourself to the mast. You have made your leap of faith.

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 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 enough institutions have a vested interest in maintaining the metaphor to further their own interests — if they 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 of course, 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 even need to believe the metaphor to profit from it: 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 credit derivatives, or whatever hysteria happens to grip quotidian minds for the time being. 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 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, 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 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.