Bitcoin is Venice

The Jolly Contrarian’s book review service™ Go Premium Index: Click ᐅ to expand: Book reviews Comments? Questions? Suggestions? Requests? Insults? We’d love to 📧 hear from you. Sign up for our newsletter.

This is a massive, magnificent, learned, contrarian work and, like that other massive, magnificent, learned contrarian work 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.

Like any communal activity in which there are things to be gained and lost — i.e., any communal activity — “financial services” is a paradigm: an intellectual structure with its own rules, hierarchies, defeat devices and articles of faith, 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. It is in equal parts benign and malign: without some commitment to the cause — some unconditional faith in the wisdom of elders — no paradigm 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 will become.

You must, therefore, either get so close to the weeds that you can scarcely see beyond them — and, weeds being nourishing, there is little incentive to look — or you don’t, in which case you never earn the intellectual capital needed to mount a challenge. It is at some stage a Catch-22. Paradigms endure because anyone with enough internal gravitas to pick them apart has too much invested not to keep them together.

Power structures therefore progressively prefer form over substance, it being assumed that, over time, the substance has been proven out by the very success of the paradigm. This is a circularity, but not a vicious one.

Now this is not to say contrarians cannot be popular or correct — Gigerenzer, Taleb, Mandelbrot, Stock, Scott, Jacobs, Sutherland and others ply a healthy trade preaching damningly about the absurdities of our institutions, which blithely carry on regardless.

Well, they do until real-world facts intrude: once it is clear an intellectual construct not only should not work but does not, the paradigm goes into a crisis from which it might not recover, and a wholesale redrawing of the landscape is on the cards.

But even then, paradigms have a habit of shapeshifting, reframing around their fringes and boxing on. You cannot defeat a power structure with a purely theoretical argument. You can ignore clever arguments until they punch you in the mouth.

That is not to say we shouldn’t listen to the theoretical arguments of outsiders like Graeber and 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” version of capitalism yielded by fiat currency. As a grand vision, that is pretty anarchic: more so even than than Graeber’s.

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 of Bitcoin is intensely theoretical. 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 and CZ’s prosecution, BTC is surging back toward historical highs. This is the proof of the pudding: you can’t, as 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.

Farrington and Taleb do not see eye to eye: Farrington has published an excellent takedown

On debt and assets

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

Farrington believes that bitcoin is an asset, not a just a currency , and as it is not tethered to the existence of a bank or a central bank, and has independent existence, can exist without them and need not degenerate due to central bank monetary policies or investment bank grift. Bitcoin is pure abstract, tokenised capital. It is to capital what a non-fungible token is to art. But not any particular item of capital: just “capital” in the abstract, as a shared community resource, before it is transmogrified into a particular form. This is sort of like a platonic essence, or a midichlorian life force. You know, like the force.

This is certainly quite a different thing to a currency. As Farrington describes it, currency implies indebtedness, to the extent you need it it therefore implies banks as a necessary agency for creating indebtedness. It centralises everything, makes everyone dependent on the power structure that is fractional reserve banking. It compels trust, whether you like it or not. The bitcoin ethos is, of course, not to trust trust — not compulsory trust, anyway — and to decentralise and disintermediate where possible to remove any need for voluntary trust. A permissionless decentralised ledger functions well without trust.

This view of bitcoin as a non-fungible token for capital is, I think, fundamental to getting a purchase on where bitcoin maximalists are coming from.

Bitcoin is capital, then, not currency, and therefore holds its value wherever it is. It does not depend for its viability or validity upon the implied violence of central banks, banks and intermediators.

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 it but he may say regard indebtedness as, in itself, a form of compulsory trust — trust on pain of violence — and therefore intrinsically undesirable.

Graeber might agree about currency, but not indebtedness. To the contrary mutual, perpetual, rolling non-monetary indebtedness is exactly the glue that binds a community together. It is the thing that creates voluntary trust. That kind of trust — credit — is fundamental to how any functioning civilisation works.

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

It is, on this view, not an asset, but an anti-asset: something that is no good in and of itself, but which you can only generate value with when you give it away.

There is an important distinction here between holding currency and putting it in the bank. When, and while, you hold it, for all intents and purposes money is not there. It is meaningless. Worthless. Valueless. (If you are robbed it only creates a (negative) value when it is taken away. Holding currency in person is taking actual capital off the table; completely withdrawing it from the market. Since capital’s value is a function of time, you would expect a capital instrument you have disengaged from the capital market to waste away, and so it does. Cash in your wallet attracts no interest so, relative to the value of any particular thing, it depreciates over time. That is the consequence of inflation.

Cash you put in the bank is invested. With the bank. The bank pays you interest — usually not much — but it pays you a return for your investment in its capital. It must sit on some of the cash its customers give it, but that capital reserve, too, will waste away. The rest it will punt out to its borrowers. Its bankers will find creative ways of punting out as much as humanly possible, to increase shareholder return. This is the bank’s leverage ratio. Nowadays the supply of actual printed money that can waste away in your pocket is dwindling, and now most currency exists electronically on a bank’s electronic 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 cash flies around the system, perpetually depreciating as it does it is a hot potato — everyone wants to pass it on — invest it — as quickly as they can, as it weighs on anyone who holds it like a dark energy. The best thing to do is to convert it into — in the vernacular, “buy” — something that will hold its value. An asset.

The thing about assets is that they are awkward idiosyncratic fallible, not rust-proof, can go off can go out of fashion, and generally just difficult things to use as a medium of exchange. In the conventional (fairy) story of the history of money, this indeed was why money came about in the first place as a substitute for the inconvenience of barter.

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.