Beneath all the hype of Bitcoin, a true revolution is happening. It isn’t about quick profits and market speculation, but about the technology that makes it all possible: the blockchain. It has the potential to transform society and free people from the constraints imposed on them by government and big business.
In her influential 1957 book, Atlas Shrugged, Ayn Rand posited the notion that productive industrialists, bowing under the weight of socialist government and welfare statism, might one day decamp and set up business on their own, in some hidden enclave. The rest of the world, which had claimed a moral right to the redistribution of the wealth created by the producers, collapsed, while the producers themselves thrived in isolation. The idea: producing the means to live is both necessary and deeply moral. Taking that production away from the producer, or enslaving them, is inherently immoral.
To what extent we agree with this sentiment is not today’s topic. I’d like you to consider the idea that Atlas will shrug, inevitably, and that there is little anyone can do about it.
To escape, people will not have to move geographically. They can do so in a metaphorical sense, online.
Already, Bitcoin has created a revolution in digital money. It meets most requirements of a currency: it is portable, durable, divisible, relatively scarce, fungible, and difficult to falsify. Its only shortcoming, to date, is its volatility, but there is no reason to believe this will be a long-term problem. It will either fail fast, or stabilise in a (technically ever-increasing) value range. It also has advantages that currencies, such as the rand or dollar, lack. Bitcoin is predictably limited in supply, not based on debt, and not issued by a central authority. It can, with some precautions, be anonymous and safe from arbitrary seizure. Transactions are relatively fast, cannot be repudiated, cross international borders with impunity, and attract far lower fees than traditional banks charge.
Bitcoin is money created by the people, for the people. It is becoming ever more widely accepted, ever easier to use, and there are several local exchanges that allow you to buy Bitcoin with South African rand.
Whether or not Bitcoin succeeds, the real magic is under the bonnet. To solve the double-spending problem, crypto-currencies like Bitcoin operate against a widely-distributed public ledger or transaction database. Once a transaction is verified by enough nodes on the network, it is added to the chain of transactions that goes all the way back to the very first one. This sequence is known as the blockchain. It is not impossible to compromise this ledger, but it is very difficult.
The peer-to-peer consensus-building nature of this network is the reason Bitcoin makes it so easy to transact across borders, without any intermediary to facilitate or prevent the transaction. (Though in practice, most people do store their Bitcoin with a reputable company.)
The lack of intermediaries threatens existing government-issued currencies. Without control over a currency and the ability to monitor transactions, countries cannot exercise monetary policy, or enforce a variety of taxes. The first of these may be even more important to governments than the second. Monetary policy may also cause more harm, if you believe economists not employed by governments, as I do.
Several countries, including Bolivia, China, Iceland, India and Indonesia, have already banned or placed significant restrictions on crypto-currencies. The problem is that they’re kicking against the future. It is doubtful whether a technology as robust, encrypted and decentralised as a blockchain can effectively be regulated.
Many other governments have issued anti-Bitcoin propaganda. For example, central banks and consumer protection bureaux, including the South African Reserve Bank, have published warnings about the risks involved when using Bitcoin.
A common claim is that a crypto-currency does not come with government deposit insurance. Bank deposits may well be insured in some countries, like the US, but that isn’t true for the rest of us. South African depositors are not protected when a bank fails, beyond being first in line among creditors. And banks do fail, despite the slew of laws and regulations that is supposed to prevent this. Ask Saambou customers how safe they felt when their deposits were frozen, and ask Regal Bank customers how secure bank deposits are against fraudsters.
Of course, long before the collapse of Mt Gox, the world’s first major Bitcoin exchange, the crypto-currency world was aware of the perceived risk to depositors. Several institutions that store crypto-currencies on behalf of clients, in the manner of banks, had already addressed it by fully insuring their holdings. That isn’t the only consumer protection that a crypto-currency can offer, but it’s a big one. It is revealing that central banks, governments and the financial lobby do not tell you this.
Another argument is that Bitcoin is vulnerable to price volatility because of speculation. That is true, but it is also true of the South African rand. Even the biggest currencies are vulnerable to speculation. As the crypto-currency grows, it will stabilise to trade in an ever-rising value range.
At least one South African bank has tested Bitcoin internally, developing a fully-fledged exchange and trading platform it could roll out as a service to customers. It didn’t reveal why such a product was not launched, but my guess is that the extremely low transaction fees that are usual in the crypto-currency world would undermine its more profitable rand-denominated business.
But ultimately, it’s not about Bitcoin itself. The blockchain is the truly revolutionary idea. It has the potential to fundamentally alter the way the world does business. It eliminates the middleman in all sorts of interactions. It resolves counterparty risk, but is not limited to financial transactions. It creates decentralised trust networks that can perform many other functions.
One of the most exciting proposed uses of the blockchain is to create and execute “smart contracts”. A smart contract is a computer-controlled agreement, the terms of which – including triggering payments and resolving disputes – can be executed by software. Two major startups are vying for this space: Counterparty, which uses the Bitcoin blockchain, and Ethereum, which is creating a blockchain of its own. Both allow people do dispense with all sorts of constraints in the real world that ordinarily require lawyers, banks and even courts.
When people are able to circumvent the middlemen like this, they will. There is little that governments, central banks, or the financial industry can realistically do about it if smart contracts based on crypto-currencies become widespread and easily accessible.
It gives those who distrust their government – and these days, most of us have reasons to do so – the means to free themselves. The same is true for people who don’t trust, or can’t afford, traditional banks.
There is an entire cluster of applications being built on top of either Bitcoin or alternative blockchains.
One is a truly secure messaging technology used by journalists, bankers, criminals, businesspeople and government agents alike. Another blockchain application is trying to improve group email communication.
The first major project built using the Bitcoin code was Namecoin, which registers domain names without any centralised control, thereby dispensing with the need for statutory registries ICANN or the South African Domain Name Authority.
Google has a database system that uses a blockchain to distribute data around the world and decentralise transactions. Another project removes the need for centralised authorities to issue the digital certificates your bank (and other people) use to prove they are who they say they are.
Some companies digitise physical assets, essentially issuing tradeable currency against it, while providing encrypted proof of custody to clients. Have you ever ordered something of high value online, and hoped, after payment, that the seller really had it to sell? An Ebay-like reputation system is useful, but what if it is a big once-off deal for the seller? A blockchain-based proof of existence can certify that the deal is legit.
Some applications of crypto-currencies experiment with economic ideology and social conscience, while others threaten to democratise asset exchange and financial services. After the closure of one Bitcoin stock exchange, a new, improved attempt is already in the works.
Some believe that big technology companies, just like financial services companies and governments, stand to lose out on their middleman revenue, as applications of all kinds become based on distributed, encrypted, peer-to-peer blockchain technology.
Many of these experiments and startups will fail, and some may turn out to be outright dotcom-style scams. It is likely that stability and scalability will require even newer technology. However, that such concepts are even possible points towards the tremendously disruptive power of the blockchain.
The Atlas Shrugged parallel may suggest that the rich will escape while the poor remain in bondage, except with no safety net. However, there is no reason to believe that only the rich will be able to shrug off government surveillance and banking cartels.
Bitcoin, for example, is capable of micro-payments, employed on Twitter, Github, Youtube and Reddit to tip other people for valuable content. It can also be sent via SMS, even on old feature phones, which is a crucial channel for most of sub-Saharan Africa.
One Bitcoin trading platform quotes a Ghanaian CEO: “I wanted to buy a domain name, but VISA wouldn’t process my order because I was in Ghana. I bought Bitcoins on Kitiwa, and paid for the domain name through Namecheap. Thanks, Kitiwa!”
Another proposed application is to let artists sell shares in their work. They can turn a song or an image into something akin to a fully-fledged company with shareholders, so that those who bought shares benefit from promoting and sharing the work. This might not only feed poor artists, but it could solve the copyright problem.
These are applications with massive potential. When a middleman is no longer necessary, the balance of power shifts in a fundamental way, towards the consumers and producers themselves. To remain included, third parties will be forced to lower their prices and improve their service. If they cannot prove their worth, they will become relics of a former age.
Eliminating intermediaries in this way means being able to circumvent all manner of obstacles, be it the inefficient state, its profiteering cronies, or physical limitations. These tools have no regard for why the middleman was there in the first place.
I am not brave enough to predict that this will cause the fall of the nation-state. It is plausible, in principle, but the seizure of several marketplaces that operated in the shadows, selling many things both legal and illegal, suggests that governments have enough well-paid hackers in their employ to cope for a while.
As with all real revolutions, there will be pushback from the establishment. It has everything at stake, and it wields awesome power. An egalitarian, decentralised, encrypted currency or trust mechanism threatens the very foundations of that power. While they have it, they will use it in their own defence. They will try to regulate what does not need to be regulated, suppress what cannot be suppressed, and claim to protect consumers that can arrange their own protection.
More likely than smashing the state, blockchain-based tools will create fierce competitive pressure that transforms and permeates society, and reduce the opportunities for rent-seeking of both governments and companies.
The internet was once based on democratising ideals that made developers simply assume the good faith of everyone else on the network. We now know that this trust has been violated, not by criminals and con artists, but by the very governments and companies on which we relied. The internet has become a weapon of surveillance and control, used against citizens and customers.
The blockchain as a concept is more than just a move to encrypted, decentralised transactions and applications, some of which may prove useful and sustainable. It will help to fix the internet. It will erode the power of governments and big business, in a way that makes the world more free, less expensive, and more productive.
It will return the internet to its lost ideal: a place where free exchange of speech, services and goods can flourish. It will return government to its proper sphere in a free society; one in which its affairs are public, and those of citizens are private.
To appropriate a quip about beer: “The blockchain will change the world. I don’t know how, but it will.” DM
Riding a Black Unicorn Down the Side of an Erupting Volcano While Drinking from a Chalice Filled with the Laughter of Small Children is the title of a dark cabaret album by 'Voltaire'