CoinDesk published today a dissection of the latest flare-up of hostilities between bitcoin’s different factions. It makes compelling reading, and reveals the complex web of interests behind tweeters, promoters, bots and Twitter’s administration.
“…when it comes to cryptocurrency, it can be tricky to distinguish moderation from censorship.”
Yet beneath the short fuses bubbles a tension that speaks to a deeper characteristic of cryptocurrencies: the complicated mess that is consensus.
By that I mean agreement on issues both big and small. When strongly held beliefs are challenged, history shows that humans tend to man the barricades. The weapons at our disposal these days are barbs and blocks, downvotes and unfollows. We dig trenches in the battlefields of social media, and fire away, with only our reputations and tempers to lose.
Most of us just observe, sometimes taking silent sides, sometimes just feeling grateful that we don’t care that much, often oblivious to what the map is telling us.
Leaving aside the scams for now (we’ll get to them in a minute), the Twitter battles are a public example of the force of disagreement. While good-natured debate is often a feature of Twitter controversy, the distance from which verbal weapons can be fired empowers many to throw restraint and diplomacy out the window – especially with a subject like cryptocurrencies that speaks to utopian dreams and political hopes. And the intransigence of all sides is racking up the volume to such high levels that the Twitter administration is thinking about stepping in.
You see the irony? A protocol that automates consensus generates discord. A technology that is about not needing to trust your counterparty is rife with mistrust.
But that precisely is the beauty of bitcoin and its peers. It lays bare our human nature, and then shows us the solution. Or rather, it offers us a function, and then shows us how much we need it. Very clever.
With bitcoin, we don’t need to agree – the algorithm will figure out what the consensus is, and implement that. Whether or not we agree is irrelevant. If we don’t like how the algorithm does that, we can take the code and make a new version. We won’t have the ecosystem that the original one has, but the choice is ours: to pay the price of participating in a broader “society”, or to branch out on our own and forgo the support and access to a broader market. Blockchain technology makes sure that shouting and shadow attacks don’t impede progress or the working of the system.
So, what the Twitter crypto battles are really showing is how useful blockchain technology can be. It gets around the barrier of “consensus paralysis” by removing the human component.
The vast number of crypto scams on Twitter holds a different irony: that a technology based on the automation of trust is attracting those that rely on trust to steal. Blockchain technology says “I don’t know who you are, but I don’t need to in order to trade with you”. Scam artists say “trust that I am who I say I am and send me xxx”. And that the two concepts can uneasily co-exist in the same sector speaks to its sheer size and attraction.
Is Twitter a catalyst for the discord and the scams? No – if Twitter didn’t exist, the battles would be (and are) raged elsewhere – Reddit is aflame with fiery argument. I don’t use Facebook, but I imagine that that has its fair share of vitriol, also. And Twitter doesn’t affect human nature as much as it does display it.
Meanwhile, the premise of bitcoin and the possibility of blockchain reveal the underlying convictions and prejudices… and point to a way to minimize their impact on operations and progress.
So, let the Twitter wars rage (but stop the scams). Cryptocurrency doesn’t “belong” to any one faction. And as Twitter users, we can choose who we follow, who we listen to and who we ignore. There will never be a human-based consensus. But as the sector is showing us, at an operating level, there doesn’t need to be.
“Governments derive their just powers from the consent of the governed. You have neither solicited nor received ours. We did not invite you. You do not know us, nor do you know our world. Cyberspace does not lie within your borders.”
John Perry Barlow’s strong words echoed through the caverns of young minds high on the possibility of borderless connection. They spoke to the eternal desire for a better world, and dangled the tasty promise of empowerment.
The honeymoon was brief. We ended up finding out that, yes, the internet can be regulated. Yes, it can be centralised. And yes, the hierarchy that we hoped it would overthrow is still in control, just with different faces.
We heard similar anthems when bitcoin emerged. “Bitcoin will change everything”. “The end of the tyranny of bankers”. “Bitcoin is the currency of resistance”. And so on.
Will the same thing happen?
It already is. Bitcoin’s disruptive potential is getting channelled into a structure remarkably similar to the pre-existing one. Exchanges are becoming more and more like banks, storing our bitcoins, lending them out and collecting information. A handful are accumulating increasing amounts of clout, becoming the new “financial giants”. The promised independence and anonymity is being subsumed by, yes, the regulators, who insist on user identification. On- and off-ramps – recognizing that, on the whole, they need official permission to exist – are complying.
While this is disappointing to those of us to fell in love with the concept because it showed us a glimpse of a new structure for society (which of course would solve all of our current problems), it is not a bad thing.
“Your legal concepts of property, expression, identity, movement, and context do not apply to us. They are all based on matter, and there is no matter here.”
With affection and respect, this is one of many instances in the declaration which is factually incorrect. The internet runs on wires and nodes and packet switchers – “matter”. There is plenty of matter here. Just as your mind needs your body to carry it around, internet – and free exchange of information – relies on the physical world to make it work. Ideas may be slippery, but their flow can be influenced.
And anyway, regulation has never been based exclusively on “matter”.
We have seen that rules can divert the original intention of free communication (in both the “free beer” and “no limits” sense). Some areas can restrict what is accessed. Others enact policies that give bandwidth preference to more powerful websites. And a growing cohort of regulators is insisting on strict controls over the data that websites can collect. The next step is to influence business models.
Wait, how is this a good thing?
I’m not saying that restrictions are good. They can stifle innovation and communication, holding back the progress of ideas. They can also lead to direct oppression.
But, rules also protect us. And in so doing, they relieve us of the need to spend most of our energy worrying about defence, giving us freedom to pursue life, liberty and happiness.
How much regulation is ideal? That is the eternal political debate – and I doubt there is a “right” answer to that question. Most societies, communities and organisations struggle with the balance between not enough and too much centralised control. Most individuals, too (myself included) – poke away at someone’s personal map of their “natural rights”, and you uncover a nest of confusion and contradiction.
What is a good thing is the awakening – at “mainstream level” – of constructive questions around governance and freedom. This could lead to a broader acceptance that the answers are not clear cut.
How far should regulatory reach extend? How much power do we have to resist? What price are we willing to pay? What do we want, and where will we compromise? What works?
While bitcoin was created to circumvent the influence of the centralised financial system, it is slowly being absorbed… perhaps not by the establishment, but by one that looks like it. And with banks increasingly sniffing around and tentatively dipping their corporate toes in disruptive waters, the new bitcoin finance world and the pre-existing one may end up merging.
The end of the libertarian dream? Probably.
And that may end up being bitcoin’s biggest victory. When even blue-chip representatives of the “old order” give it a veneer of respectability, it moves closer to mainstream recognition. When growth and increased scrutiny of new participants bring a welcome degree of professionalism to the services that are necessary for its use, it comes closer to realising its initial ambition of being a “world currency”.
Just not as a borderless substitute for fiat currencies. Again, that’s not a bad thing. Compromise is not conceding to the enemy. It’s a step forward, from which the battle against oppression and inequality can continue to be fought.
As we have seen with gunpowder, radio waves and the internet, a powerful technology rarely ends up being used for its initial intention. Bitcoin is already heading the same way.
And by leaving its original idealised constraints and taking on a form different from the original purpose, bitcoin underlines the freedom of ideas. Even core constituents have been unable to control the evolution of its acceptance and use. Is the establishment smothering it, or giving it life? A bit of both? And was that not inevitable?
Coinbase has announced that it is incorporating SegWit. (If you don’t know what that is, I just wrote an explainer for CoinDesk.)
That is jumping-up-and-down good news. SegWit is a bitcoin protocol upgrade that will significantly increase transaction capacity without touching the block size limit, by changing the way the data is stored. Although it activated on the bitcoin network in August last year, adoption has been slow – at time of writing, only around 14% of bitcoin transactions use the new format. Since Coinbase is the largest wallet provider out there, its contribution should push that needle up.
Why is that a good thing?
Mainly because fees need to come down. The high demand for bitcoin during the December price spike pushed fees up to almost $60 per transaction. That makes bitcoin almost unusable for anything other than speculation and investment. And that is an unsustainable main use since buying something just because you think the price will go up without an improvement in the underlying fundamentals is a pyramid scheme. And they always crumble, eventually.
If, however, you expect bitcoin’s price to go up because it serves a solid function, because it is useful to society, then its increase in value will be more sustainable.
But for bitcoin to be used for transfers or payments, fees need to come down.
They have been coming down. While exact reasons are unclear, it appears to be mainly due to lower demand from speculators and investors. However, less congested blocks – whether from lower trading-related demand or SegWit or a combination – are good for the network’s users.
Freeing up space in blocks will have the effect of shortening confirmation times. Some transactions have recently had to wait hours to be confirmed, as those that pay higher fees get preferential treatment. With more space available, there’ll be less price-based selection of transactions and faster confirmations – which will offer a better service, which will attract more users.
And as SegWit rolls out across the network, more users won’t necessarily result in higher fees this time around. Hopefully.
And now for the juicy stuff…
Tucked away at the bottom of the article was the titbit that Coinbase has a full-time engineer working on Lightning adaptations (if you don’t know what Lightning is, here’s an explainer I wrote for CoinDesk). That is perhaps the most intriguing part of the entire post.
Lightning promises to multiply the capacity of the bitcoin network, allowing transactions in off-chain channels. Since these do not have to follow the bitcoin protocol, except for when they anchor to the network for net settlement, fees are set by the relaying nodes (not the miners) and confirmation times are almost immediate. Smaller transactions such as buying a cup of coffee, and even microtransactions, would go from being thoroughly impractical to possibly useful.
While the technology is still very much in beta, development is galloping along. If it continues to proceed apace, we could see it become available this year. That Coinbase is actively working on Lightning integration indicates that the spread could be fast, and the level of service offered to users of the bitcoin network could be kicked up to a new level.
Notice I stressed users. Lightning won’t affect investors or traders much. And that is what most excites me. A step forward in enhanced functionality for users.
This announcement about SegWit – while on the surface expected and no big deal – is a big step towards taking bitcoin back to what it started out to be. A step forward to go back? Yes. And about time.
One outstanding note in the cacophony of the bitcoin futures debate is an intriguing claim that I confess I didn’t understand at first: that bitcoin has no “natural sellers”. What’s unnatural, I thought, about people wanting to sell to realize profits? It turns out that’s not what the phrase means.
It means that nobody needs bitcoin. So why hedge it?
To go deeper, let’s look at why capital markets exist. They were developed to enable firms to raise money outside of bank loans. Bonds and equities pair those that need funds with investors who want a return.
Derivative markets emerged to protect cash flows. This both gives producers more security, and helps to raise funds – investors are more likely to “lend” to a company with protected income than to one subject to the vagaries of nature.
In essence, capital markets exist to help businesses flourish. Old-school capitalism.
Here’s where the “natural seller” part becomes important.
Farmers need to sell wheat. It’s what they do. Oil producers need to sell oil. Steel manufacturers need to sell steel. Gold miners need to sell gold. So, they all should protect those sales in the derivative markets.
No-one needs to sell bitcoin.
So what income flows are the derivatives protecting? Mutual fund redemptions, maybe. Pension plan payouts. But do we really think that mutual funds and pension plans should have significant exposure to bitcoin?
This question is important for whatever side of the bitcoin debate you’re on. If you’re a sceptic and think that it’s all a ponzi scheme, surely you don’t want institutional funds heavily invested in an asset that will no doubt crash. If you’re a bitcoin believer, do you really want the “money of the future” stuck in funds? Where’s the decentralizing potential in that?
So, it could be that the constructive purpose of bitcoin derivatives is to protect flows for funds that are either taking irrational risks or hijacking the finance of tomorrow. This is a far cry from ensuring that farmers can make a living and oil producers don’t go bust.
We could argue that all this started to go awry back in the ‘80s with the creation of synthetic derivatives that had as their sole aim to make a profit at the expense of others (trading being a zero-sum game). We could also argue that back then we got ahead of ourselves by letting markets run far ahead of the infrastructure. We know what happened next. (Ok, I’m simplifying, but the point still holds.)
And we could ask ourselves what good bitcoin futures will do the economy as a whole. To what productive use will their markets contribute? Are they adding stability, as per the original intent of derivatives? Or could they be adding yet another layer of complexity that masks a deepening fragility?
Of course, playing the long game, this could be what true bitcoin believers have known would happen all along. That the world will see (again) how unstable the current financial system is. And to what will people turn when widening cracks send central banks scrambling?
True, the bitcoin price would also likely tumble. But the technology would still work. People would still be able to independently transfer funds. And the advantage to having an alternative to an interconnected and unstable system would become more apparent than ever.
The financial press has been in a flutter of excitement over the launch of bitcoin futures trading on not one but two reputable, regulated and liquid exchanges: CME and Cboe.
CME Group (Chicago Mercantile Exchange) is the largest derivatives exchange in the world, as well as one of the oldest, with roots going back to the 19th century. It will launch bitcoin futures trading on December 18th.
In theory this opens the doors to institutional and retail investors who want exposure to bitcoin but for some reason (such as internal rules, or an aversion to risky and complicated bitcoin exchanges and wallets) can’t trade actual bitcoin.
And that expected flood of interest is, from what I hear, part of the reason that bitcoin’s price recently shot past $11,000 (which, considering it started the year at $1,000, is phenomenal).
I’m missing something. I don’t understand why the market thinks there will be a huge demand for bitcoin itself as a result of futures trading.
First, a brief primer on how futures work: let’s say that I think that the price of xyz, which is currently trading at $50, will go up to $100 in two months. Someone offers me the chance to commit to paying $80 for xyz in two months’ time. I accept, which means that I’ve just “bought” a futures contract. If I’m right, I’ll be paying $80 for something that’s worth $100. If I’m wrong, and the price is lower, then I’ll be paying more than it’s worth in the market, and I will not be happy.
Alternatively, if I think that xyz is going to go down in price, I can “sell” a futures contract: I commit to delivering an xyz in two months’ time for a set price, say $80. When the contract is up, I buy an xyz at the market price, and deliver it to the contract holder in return for the promised amount. If I’m right and the market price is lower than $80, I’ve made a profit.
Beyond this basic premise there are all sorts of hybrid strategies that involve holding the underlying asset and hedging: for instance, I hold xyz and sell a futures contract (I commit to selling) at a higher price. If the price goes up, I make money on the underlying asset but lose on the futures contract, and if it goes down the situation is reversed. Another common strategy involves simultaneously buying and selling futures contracts to “lock in” a price.
Futures contracts currently exist for a vast range of commodities and financial instruments, with different terms and conditions. It’s a complex field that moves a lot of money. The futures market for gold is almost 10x the size (measuring the underlying asset of the contracts) of the physical gold market.
How can this be? How can you have more futures contracts for gold than actual gold? Because you don’t have to deliver an actual bar of gold when the contract matures. Many futures contracts settle on a “cash” basis – instead of physical delivery for the sale, the buyer receives the difference between the futures price (= the agreed-upon price) and the spot (= market) price. If the aforementioned xyz contract were on a cash settlement basis and the market price was $100 at the end of two months (as I had predicted), instead of an xyz, I would receive $20 (the difference between the $100 market price and the $80 that I committed to pay).
Both the CME and the Cboe futures settle in cash, not in actual bitcoin. Just imagine the legal and logistical hassle if two reputable and regulated exchanges had to set up custodial wallets, with all the security that would entail.
So, it’s likely that the bitcoin futures market will end up being even larger than the actual bitcoin market. That’s important.
Why? Because institutional investors will like that. Size and liquidity make fund managers feel less stressed than usual.
The bitcoin market seems to be excited at all the institutional money that will come pouring into bitcoin as a result of futures trading. That’s the part I don’t understand.
It’s true that the possibility of getting exposure to this mysterious asset that is producing outstanding returns on a regulated and liquid exchange will no doubt entice serious money to take a bitcoin punt. Many funds that are by charter prohibited from dealing in “alternative assets” on unregulated exchanges will now be able to participate. And the opportunity to leverage positions (get even more exposure than the money you’re putting in would normally warrant) to magnify the already outrageous returns will almost certainly attract funds that need the extra edge.
But here’s the thing: the money will not be pouring into the bitcoin market. It will be buying synthetic derivatives, that don’t directly impact bitcoin at all. For every $100 million (or whatever) that supermegahedgefundX puts into bitcoin futures, no extra money goes into bitcoin itself. These futures do not require ownership of actual bitcoins, not even on contract maturity.
Sure, many will argue that more funds will be interested in holding actual bitcoins now that they can hedge those positions. If supermegahedgefundX can offset any potential losses with futures trading, then maybe it will be more willing to buy bitcoin – although why it would allow its potential gains to be reduced with the same futures trade is beyond me. And, why hold the bitcoin when you can get similar profits with less initial outlay just by trading the synthetic derivatives?
That’s the part that most worries me. Why buy bitcoin when you can go long a futures contract? Or a combination of futures contracts that either exaggerates your potential gains or limits your potential loss? In other words, I’m concerned that institutional investors that would have purchased bitcoin for its potential gains will now just head to the futures market. Cleaner, cheaper, safer and more regulated.
So, if the market is discounting an inflow of institutional funds into actual bitcoins, it’s likely to be disappointed.
What worries me even more is the possibility that the institutional funds that have already bought bitcoin (and pushed the price up to current levels) will decide that the official futures market is safer. And they will sell.
Now, it’s possible that the demand for bitcoin futures and the general optimism that seems prevalent in the sector will push up futures prices (in other words, there will be more demand for contracts that commit to buying bitcoin at $20,000 in a year’s time than those that commit to buying at $12,000 – I know, but the market is strange). This will most likely influence the actual market price (“hey, the futures market knows something we don’t, right?”).
And the launch of liquid futures exchanges increases the likelihood of a bitcoin ETF being approved by the SEC in the near future. That would bring a lot of money into an already crowded space.
Buuuut… it’s also possible that the institutional investors that are negative on bitcoin’s prospects (and there’s no shortageof those) may use the futures markets to put money behind their conviction. It’s much easier to sell a futures contract with a lower-than-market price than it is to actually short bitcoin. These investors may well send signals to the actual bitcoin market that sends prices tumbling.
And the leverage inherent in futures contracts, especially those that settle for cash, could increase the volatility in a downturn.
That’s pretty scary.
Let’s not even go into the paradigm shift that this development implies. The growth of a bitcoin futures market positions it even more as a commodity than a currency (in the US, the Commodity Futures Trading Commission regulates futures markets). And even more as an investment asset than a technology that has the potential to change the plumbing of finance.
So, while the market appears to be greeting the launch of not one but two bitcoin futures exchanges in the next two weeks (with two morepotentially important ones on the near horizon) with ebullience, we really should be regarding this development as the end of the beginning.
The Spanishpress has been reporting today on the rollout of TIPS, a payment system that allows instant reconciliation, even across borders within the European Union.
Only they’re wrong.
TIPS, which stands for TARGET Interbank Payment Settlement, launches in November of 2018. Seriously, the European Central Bank bringing forward the launch of a new payments system by a whole year would be pretty big news. Only, it didn’t happen.
Did a careless journalist just get the year mixed up?
Possibly, but it’s more likely to be a case of alphabet soup.
What does launch today is SCT Inst, which stands for SEPA Credit Transfer Instant, a different faster payments system.
Why the confusion? Because they’re similar, but not the same thing at all. And the difference may seem trivial, but it’s not.
Both promise almost instant payment finality within the Eurozone. Up until now, payments generally settled at the end of the day as totals were added up and net amounts were transferred. With the new, faster systems, settlement occurs on a transaction-by-transaction basis, generally within 10 seconds or so. Even across borders. I live in Madrid – if I make a transfer using this system to a friend in Paris, for example, it will get to her account almost immediately.
One drawback is that you can’t “change your mind” during the day, as you can with the current batch settlement system. But the benefits are many, and go beyond more immediate access to funds, a better service for clients and the possibility of new business models (more on this in a later post).
The main difference between the two systems is the promoting organization.
SCT Inst (the one that launches today) is organized by the European Payments Council (EPC), a not-for-profit group representing payment service providers (PSPs). It is not an EU institution. It was created by the banking industry in 2002 to develop harmonized electronic payments. In other words, it works for private companies, and it is these private companies that execute the payment settlement.
TIPS is organized by the European Central Bank (ECB), which represents central banks.
Private companies… central banks… not the same thing.
With SCT Inst, the private payment service providers settle the transactions, for a fee. With TIPS, the payments settle in central bank money – at 0.2 cents for the first two years, and a maximum of 1 cent thereafter. SCT Inst will have a hard time competing with that.
Plus, it’s fair to assume that the reach of TIPS will be greater, not just geographically, but also sectorially through the possible roping in of automated clearing houses (currently left out of SCT Inst).
However, SCT Inst is here today, and TIPS isn’t. Although the launch is relatively modest – almost 600 PSPs have signed up (about 15% of the possible pool), and it’s available in a limited list of countries: Austria, Estonia, Germany, Italy, Latvia, Lithuania, the Netherlands and Spain (so you’d think they’d report on it correctly?). Others are expected to follow in the next two years.
For participating institutions, it means an opportunity to offer a better service to clients. The focus is likely to be on consumer payments, at least to start with – the transfer limit is currently set at €15,000, which rules out most B2B payments.
TIPS and SCT Inst will co-exist. The TIPS documentation insists that messaging will be compliant with the standards adopted by SCT Inst. But it will be interesting to see how the launch and take-up affect the movement of funds, and which system ends up impacting the market more.
I confess that I have some more digging to do to unravel the relationship map (it looks like spaghetti), after which I hope to uncover more differences.
Meanwhile, we should focus on the big step forward that SCT Inst represents, and the bigger push that its colleague/competitor TIPS will give the payments sector. And on the removal of one of bitcoin’s supposed advantages: that cryptocurrency will replace fiat transfers because of speed.
You want to know the one thing about cryptocurrency reporting that drives me mad? It’s not just from the mainstream press either – the specialised press is even more guilty, if that’s possible.
If I counted on my fingers the number of articles a week that use an image with a physical bitcoin, I would need more hands.
Why do so many articles insist on representing bitcoin as a physical thing? It’s not.
And insisting on presenting it that way – as if us humble humans are incapable of grasping the concept unless we can see it – is condescending.
It speaks to our comfort with the visual.
Most of our development as humans has been building on what we can see. The realm of ideas has traditionally been left to the philosophers, while money and power typically went to the engineers. It’s one of the many reasons art has had such a pull on us over the centuries. Ideas that we can’t see are hard to wrap our heads around.
And everyone knows that money means coins, right? (It doesn’t.)
To be fair, understanding finance is not for everyone – ledgers and compound returns are not straightforward. And if seeing a bitcoin helps us accept that it is real (or, as real as anything gets in the money world), then, sure, let’s use images.
As long as we hang on to the notion that money has to be physical, we won’t fully understand the underlying implications. And, it puts physical boundaries around an abstract concept while anchoring us in the limitations of the past.
The very press that strives to help us understand how this new technology will impact the way we see the world, is perpetuating the old paradigm. It needs to stop.
Catching up on reading from last week, I came across an article in the FT by Izabella Kaminska, who takes issue with economic impatience.
“While there is little doubt that too much short-termism has negative effects, one should not assume that it follows that extreme long-termism is always for the best. The latter can be dangerous when long-term thinkers fall for fanciful narratives or investor cults.“
She goes on to say:
“Nowhere is this mindset more clearly displayed today than in the realm of cryptocurrencies, where narrative trumps reality on a daily basis. “
To claim that happens daily is a stretch. But overall, maybe she’s right – the cryptocurrency space is full of hype and idealism, which doesn’t last long when the window of righteousness is opened and the obstacles of modern life rush in.
Although, the claim doesn’t make sense. The problem is with the definition of “reality”. No-one seems to have a clear idea of what it is anymore.
I’m not even sure if that is possible – because isn’t reality what we say it is? And these days, with so many channels of communication available to us, to import and export, reality is a mish-mash of interpretations, theories and facts distorted by bias.
We all have our own version of reality. My reality is not the same as a Texan truckdriver, Syrian teenager, or Nepalese grandmother. Nor can it ever be. So if “narrative trumps reality”, which reality are we talking about?
What’s more, as Yuval Noah Harari points out in his seminal work Sapiens, narrative is not only the unifying force of societies – it also creates its own reality. The forging of common myths bound groups together in imagination and tradition, giving us the internal organization necessary to conquer and invent. Objective reality is the ground we stand on, the bricks that house us and the food that nourishes. Subjective reality is our interpretation of their meaning, our understanding of our purpose and our determination of “obvious truths”. Narrative breeds subjective reality.
“Large numbers of strangers can cooperate successfully by believing in common myths. Any large-scale human cooperation – whether a modern state, a medieval church, an ancient city or an archaic tribe – is rooted in common myths that exist only in people’s collective imagination.”
So, “narrative trumping reality”? It’s a great soundbite. But is isn’t true. Narrative creates reality.
I’m just back from a trip to London without my computer (hence the silence). While, there, I paid a visit to the British Museum for the first time in ages. I remembered the imposing façade, but had not seen the luminous inner court that makes you feel like you’re floating in light. I found myself doing laps in a sort of daze… And it was only morning.
Peeling off into the gloom of history, I came face to face with a surprising combination of permanence and progress that layers cultures on top of and next to each other, creating an incongruous sense of continuity. An ideal way to feel small and yet part of something important.
My main objective was to check out the History of Money exhibition, sponsored by Citibank. The room is small but packed with information, examples and anecdotes. The displays are intriguingly split down the middle into “The history of money” and “The history of coinage” – most attempts at synthesising the timeline conflate the two.
I confess that I had assumed that coins were tokens representing money. According to the curators, it turns out I was wrong – only metal tokens classify. The cowrie shells used in China are on the “money” side of the room (an interesting detail: the Chinese word for shell – bei – is still used to talk about money today).
Yet we refer to digital currencies as “coins”. The official definition (according to Google, of course) agrees with the curators, that coins are metal. Merriam Webster takes a broader view, allowing a coin to be “something resembling a coin especially in shape”, or “something used as if it were money (as in verbal or intellectual exchange)”. I’m on the side of the broad definition. But this is worthy of debate.
There is so much in the history of money that points to what money could look like tomorrow. The earliest coins (minted around 650BC in Lydia) appear to have been “authorised” by the king (central authority). But the system didn’t hold for all cultures, and in the 1600s, London saw the issuance of local, business-specific tokens exchangeable for coffee, ale, fruit, etc.
We worry today about our ability to manage a host of different tokens. But back then, without electronic wallets, people seemed to manage. True, this was during a time when the government had stopped issuing small change, so there was a market opportunity (and not much alternative). But still, it speaks to our ability to organise when there is incentive to do so.
Also on exhibit was the first global currency: the silver eight-reales, or “pieces of eight”, which later became the basis for the dollar. Issued by the Spanish empire from the end of the 16th century, they became the standard trade coins for most of Europe and Asia.
While it wasn’t the only currency in circulation at the time, it shows that a virtual alternative could end up accepted around the world for a specific purpose. Could this point to global acceptance of a niche use for bitcoin, or perhaps a specific use-case cryptocurrency?
There is so much more to unpack from the exhibition, which warrants further study. For instance, how even in some euro countries, more than one currency circulates. Did you know that in Northern Ireland some commercial banks have the right to issue bank notes, even today? And it turns out that the islands of Jersey, Guernsey and the Isle of Man issue their own versions of the British pound.
In a stroke of coincidence or perhaps insightful intent, the Money gallery is right next to another whose concept is also based on a fundamental innovation in measurement: clocks and watches. The idea of standard measures for the passage of the abstract idea of time is as fundamental to our modern world as that of measuring value and debt. Food for thought.
I’m currently reading “Money: The Unauthorised Biography” by Felix Martin, which I thoroughly recommend. Thought-provoking, illuminating and beautifully written, it debunks our preconceived notions and highlights the surprising evolution of this social technology that we use every day.
In the first chapter, Felix explains that the coins and notes that we carry around are not money. Money is the system of credit and debt that is sometimes represented by circles of metal and rectangles of paper. But usually not – most transactions are not represented by anything physical.
Rather, coins and notes are tokens that help us keep track of debts. The big innovation was to start exchanging those debts for others. Frank owes me, and here’s a token that represents that. I owe you, so here, take Frank’s token. Now he owes you. This conceptual leap is what kickstarted trade and the concept of an “economy”.
Looking back through history, that is what money has always been: a system of recording debts, and a representation of trust. That we associate money with coins is simply survivor bias – coins tend to weather the test of time better than other types of physical token.
One of my favourite anecdotes from the chapter is the siege of Malta. When the Turks cut off the fort from its supplies of gold and silver, the mint had to resort to making coins from copper – it inscribed each with the motto Non Aes, sed Fides – ”Not the metal, but trust.”
The system of recording that trust is what we call money.
Enter an entirely new way of recording that trust: bitcoin.
So, yes, bitcoin is a type of money. Perhaps not a currency – the online dictionary defines “currency” as “a system of money in general use in a particular country”. Since bitcoin is not confined to a particular country, that rules that out. (JP Koning points out that “currency” used to mean “something that could legally be used by the new owner if stolen”. So that would probably include bitcoin – but that definition has fallen into disuse, so we’ll go with the more modern one for now.)
According to the US Commodities and Futures Trading Commission (CFTC), bitcoin is a commodity. If you’re talking about bitcoin the coin, then yes, it could be. Commodities (gold, silver, cacao beans) have often been used in the past to represent money. BUT bitcoin is more than just a commodity, just as the euro is more than just copper coins. (Interestingly, paper – which also represents money – is not considered a commodity.)
The topic is tangled, though. If bitcoin is a commodity (like silver), what makes it usable as money (like silver)? An official stamp of some sort – after all, monetary systems have always been controlled (or at least overseen) by a central authority. For the first time, we have a money that escapes the traditional parameters.
Also, commodities have always existed independently of the monetary system they move on (for instance, copper is not just used for money, knots on a string can mean something other than debt). Until now, anyway.
The confusion highlights the need for a new attitude. Maybe it’s time we updated not only our vocabulary but also our understanding of the monetary system. It’s not going to be easy.