March, 1851. In that month, the Kabylia was shaken by an insurrection; Emperor Tự Đức of Vietnam ordered the execution of Christian priests; a concordat in Spain entrusted the Catholic Church with control of education and the press; Rigoletto by Giuseppe Verdi was staged at the La Fenice in Venice. Nobody paid much attention to what happened in Chicago on 13 March. London for one was busy preparing for the Great Exhibition, while the debate over abolition was raging in the US itself. What had happened on that day in the Windy City? The first forward contract had been signed for 3,000 bushels of grain (a bushel was roughly equivalent to a hectolitre) to be delivered the following June. This agreement signalled the dawn of the futures market, which came to play host to a whole range of derivatives, eventually becoming the dominant instrument of international finance (and indeed its curse). In 2019, 33 billion derivative contracts were registered around the world amounting to a total value of $12 trillion (though their nominal value was $640 trillion).
158 years later, on 3 January 2009, another event went unnoticed, one perhaps of similar historical consequence to that exchange on the shores of Lake Michigan: the first cryptocurrency, Bitcoin, was created. Recall that it had been just over three months since the bankruptcy of Lehman Brothers on 15 September 2008, which triggered the most acute financial crisis since 1930, a crisis caused by derivatives (in this case, subprime mortgages).
That the creation of the first completely virtual currency in history went unnoticed is understandable: the planet had substantially bigger fish to fry. But the absence of political reflection on this new financial product became more and more inexplicable as the number of cryptocurrencies soared, and as their capitalization transformed them into a new branch of global finance equipped with its very own diminutive: DeFi (decentralised finance). According to CoinMarketCap, as of 16 November there were 14,289 cryptocurrencies in existence. The total capital of the companies that created them exceeds $2,600 billion: Bitcoin’s value stands at $1,138 billion, whilst Ethereum’s is $503 billion. In an editorial from September, The Economist observed that the volume of transactions overseen by Ethereum alone in the second quarter of this year amounted to $2,500 billion, equal to the value of Visa’s quarterly worldwide transactions.
Perhaps it’s this maelstrom of billions and trillions that prevents us from grasping the weight of the issue, for numbers of this kind are alien to everyday life; they exist in a stratosphere belonging to the world of magic. In this way, cryptocurrencies become one of the many forms of financial wizardry that determine our lives without us realising (on this numerical rhetoric, see what I wrote in June on the ‘Avalanche of Numbers’).
Yet cryptocurrencies pose a serious political problem, not to mention a theoretical one. Put bluntly, cryptocurrencies constitute an insidious attack on the very idea of the state.
This political import is evident from the growing list of countries that have banned their use: Bangladesh and Bolivia in 2014; Iraq, Morocco and Nepal in 2017; Algeria, Egypt, Indonesia and Qatar in 2018; and most notably China, which declared all transactions with these financial instruments illegal last September. Other states – South Korea, Turkey, Vietnam – have passed partial bans on specific types of transactions. Noticeably, no Western financial power features in this list. Only in September this year did the US make initial moves to regulate the sector, a good twelve years after its emergence.
The fundamental characteristic of cryptocurrency is its absence, at least in theory, of any guarantee from a central authority. Money has always derived its value from a convention based on trust. But this fiduciary quality has taken a radical turn ever since the Bretton Woods system (agreed upon in 1944) pegging the dollar to gold was abandoned in 1971. Since then, currencies have become known as ‘fiat money’, defined as ‘government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it’. Modern currencies are therefore based on trust in the central authorities that issue them: the Federal Reserve for the dollar, the ECB for the euro, the Bank of England for the pound and so on.
With cryptocurrencies the fiduciary role played by central banks is replaced by the mutual consent of exchanging agents, whose agreement is verified by the algorithms that decipher the double-key encryption in which the currency is codified. This mechanism of exchange and verification is made possible by a database known as the blockchain, a series of transactions represented as blocks, where any given block is marked by the one preceding it in the chain in such a way that it cannot be modified or duplicated. Thus, as The Economist noted, ‘transactions on a blockchain are trustworthy, cheap, transparent and quick – at least in theory’. Conversely, ‘conventional banking requires a huge infrastructure to maintain trust between strangers, from clearing houses and compliance to capital rules and courts. It is expensive and often captured by insiders: think of credit-card fees and bankers’ yachts’. Cryptocurrencies are like chips on a poker table: their worth is assured by an agreement between the players to assign them a particular value.
This is precisely how Bitcoin was born in 2009. Here’s how the New Yorker (wittily) describes it:
There are lots of ways to make money: You can earn it, find it, counterfeit it, steal it. Or, if you’re Satoshi Nakamoto, a preternaturally talented computer coder, you can invent it. That’s what he did on the evening of January 3, 2009, when he pressed a button on his keyboard and created a new currency called bitcoin. It was all bit and no coin. There was no paper, copper, or silver – just thirty-one thousand lines of code and an announcement on the Internet. Nakamoto, who claimed to be a thirty-six-year-old Japanese man, said he had spent more than a year writing the software, driven in part by anger over the recent financial crisis. He wanted to create a currency that was impervious to unpredictable monetary policies as well as to the predations of bankers and politicians. Nakamoto’s invention was controlled entirely by software, which would release a total of twenty-one million bitcoins, almost all of them over the next twenty years. Every ten minutes or so, coins would be distributed through a process that resembled a lottery. Miners – people seeking the coins – would play the lottery again and again; the fastest computer would win the most money.
Just like players at a poker table, ‘miners’ began selling ‘tokens’ they had won in lotteries in exchange for fiat money – dollars, euros or yuan, that is – until a market was created for bitcoins. Currencies emulating Bitcoin then appeared; a deluge that led to the over 14,000 currencies we have today including, to name only the most important: Ethereum, (ETH), Binance Coin (BNB), Cardano (ADA), Tether (USDT), Solana (SOL), Terra (LUNA).
But even though it began as a lottery, or as a game of poker, Bitcoin was since its inception conceived as a political instrument. In fact, with extraordinary – almost suspicious – timing, the elusive Satoshi Nakamoto published his online ‘manifesto’ in the most dramatic phase of the financial crisis – a month and a half after Lehman Brothers’ crash. In February 2009, he would confirm his reasoning behind the creation of Bitcoin, a system,
completely decentralized, with no server or trusted parties, because everything is based on crypto proof instead of trust… The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve.
Naturally, one hardly needed to spell out the reasons for mistrusting conventional finance in the winter of 2008-09. Moreover, for several decades central banks the world over had been shielded from any ‘democratic’ control since the guarantee of their full ‘independence’ from political power. Bitcoin thus presented itself as a tool that could render the state superfluous in its guise as a guarantor of currency of last resort, the final creditors or creditors, that is to say as holder of one of its two remaining monopolies (the other being the monopoly of legitimate violence). Bitcoin was a way of realising Robert Nozick’s ultra-minimalist state in the economic and financial realm, well beyond even the most audacious Friedmanian vision, with the supply of money entrusted to the market. The fascination it provoked in stubborn anti-statists was understandable. For instance, Peter Thiel, founder of PayPal, who, as we learn in a recent article in the London Review of Books,
predicts the demise of the nation-state and the emergence of low or no tax libertarian communities in which the rich can finally emancipate themselves from ‘the exploitation of the capitalists by workers’, has long argued that blockchain and encryption technology – including cryptocurrencies such as Bitcoin – has the potential to liberate citizens from the hold of the state by making it impossible for governments to expropriate wealth by means of inflation.
But anti-finance and anti-bank left radicals – not to mention crypto-anarchists – were also susceptible to its appeal.
Of course, utopias don’t come that easy. The problem with cryptocurrencies is that as more and more are ‘minted’, the code of the subsequent block on the chain becomes increasingly complex, requiring ever more powerful computers to decrypt it. This means that whoever possesses the most advanced computers is able to mine the most tokens.
As a result, a digital arms race began, a fierce contest within the world of nerds. This variegated galaxy of libertarians, anti-finance leftoids and ‘cypherpunks’ has gradually developed into a fully-fledged sect with its own rites and lexicon, its believers, heretics and enemies.
For rather less mystical reasons, Bitcoin’s independence from state control made it irresistible to the world of crime for exchanges on the black market. In recent years, Bitcoin has sometimes been used as a means to sidestep US sanctions and the global tyranny of the dollar (though Iran has a complicated relationship with cryptocurrencies).
Bitcoin and its followers have enjoyed a remarkable proliferation. In 2018 it was calculated that 5% of Americans owned bitcoins. Certain hotel chains began accepting payment in bitcoin, as have PayPal. Cornerstones of finance such as Fidelity and Mastercard have embraced digital assets, and, as The Economist describes, ‘S&P Dow Jones Indices now produces cryptocurrency benchmarks alongside venerable gauges like the Dow Jones Industrial Average’. To come full circle, cryptocurrency futures and other derivatives are now traded on the stock exchange.
At the same time, the very success of cryptocurrency as an idea has undermined its political project – for physical, commercial and conceptual reasons.
The physical problem is the result of the ever-increasing number of ever-more powerful computers required to guarantee both the anonymity of users and the non-duplicability of the object of exchange as the number of tokens rises. This consumes a monstrous amount of energy. According to the Cambridge Bitcoin Electricity Consumption Index, bitcoin mining uses 133.68 terawatt-hours (tera indicates thousands of billions) of electricity, a little more than Sweden’s annual consumption (131.8 TWh), and a little less than that of Malaysia (147.2 TWh). Projections say that Bitcoin alone could increase the world’s temperature by two degrees over the next thirty years. Cryptocurrency creators claim to be searching for less energy-hungry algorithms. Ethereum in the meantime marks up its commissions (not coincidentally called ‘gas’) depending on the energy a transaction requires to process. But the problem remains thanks to Bitcoin’s dominant position on the market, and is only aggravated by the growth of its value against the dollar: today a bitcoin is worth $67,000, whilst in September 2011 it was worth just $5. This makes it worth consuming a lot of energy to mine a Bitcoin. And of course, miners install their computers wherever electricity is cheapest: this partly explains China’s hostility to cryptocurrencies; the abundance and affordability of coal there meant that in 2019 it provided 75% of the energy consumed to extract bitcoins. As it turns out, a bitcoin mine is more profitable if it digs next to a coal mine. In short, these imaginary currencies have a devastating impact on our planetary reality. Faced with this undeniable state of affairs, Greenpeace was forced to reverse its decision, made in 2014, to accept donations in cryptocurrencies.
The commercial difficulty lies in the volatility of cryptocurrencies: it is difficult to pay for a cup of coffee with a currency that has a different value when I drink the coffee than when I left home. But stabilising the value in fiat currency would mean losing what is its most coveted asset: its absolute independence from state monetary authorities.
Conceptually, too, there are issues. They lie in the figure I mentioned at the start: the 14,289 existing cryptocurrencies. Their very number demonstrates an inability to rise to the role, proper to every currency, of ‘universal equivalent’. Even more intriguing is the number of extinct cryptocurrencies, the dead coins, which are around 2,000. To be sure, no currency is eternal, but this figure indicates a veritable monetary pandemic. Their frenzied multiplication and fleeting existence reveal them to be far more crypto than currencies, where crypto signifies not so much cryptography, but rather what is ‘hidden’, ‘covered’, ‘subterranean’ (crypts). Two stories exemplify this.
The first is that of Dogecoin, a cryptocurrency brought to prominence by Elon Musk in 2020 when he announced his decision to invest $1.5 billion in it (the previous year, Musk had announced he would accept cryptocurrencies as payment for Tesla cars, then changed his mind due to ‘environmental concerns’). Dogecoin had been invented in 2013 as a joke by two engineers – Billy Markus at IBM and Jackson Palmer at Adobe – to mock the wild speculation that cryptocurrencies were generating. The perverse result of the joke is that today Dogecoin is valued at $31 billion (thanks above all to Musk). We aren’t far from the tulip mania that gripped the Dutch Republic in the 17th century, or what English speakers call a Ponzi scheme.
The others story is that of the mysterious Satoshi Nakamoto himself who, in addition to inventing Bitcoin, wrote a series of texts that have been religiously collected into volumes – today on Amazon you can find no less than 64 that bear his name. All of a sudden in 2011, he disappeared from the scene. It is not known whether he was an individual, or whether his name was used by a collective. His writing makes clear that his English was excellent – more likely British than American – and that he was familiar with the most advanced academic publications in the field of cryptography. Many have tried to track him down, and various names have been suggested. The point is that there aren’t many people in the world capable of designing a program like Bitcoin, a couple of hundred at most, with all evidence of their activities monitored by the militaries and intelligence services of the global powers, since much of the war in cyberspace is fought with the weapons and the defences they provide. Nakamoto knew this world well: the Economist reports that ‘to register Bitcoin.org, he used Tor, an online track-covering tool used by black-marketeers, journalists and political dissidents’– and by intelligence services, we might add. We’ve moved from the realm of the Internet of Value into the murky depths of the darknet. Without resorting to conspiracies, it would be extraordinary if national agencies (as well as large banking groups) were not perfectly aware of what led to the creation of Bitcoin and other cryptocurrencies. If not, we’d be obliged to think of them as completely inept. The acquiescence of the great Western financial powers to the opening of this new $2.4 trillion front should give pause for thought. What’s clear is that whoever he is – person, group, company, military apparatus – Satoshi Nakamoto is one of the richest entities on the planet. If current estimates that he owns 5% of all hitherto extracted tokens (18.78 million) are correct, then at the current price his assets would amount to around $60 billion. So much for idealism.
Considering all these limits we’ve mentioned, in fact, cryptocurrencies appear as only one amongst many means of payment that modern capitalism has been generating for more than half a century. The fact that cryptocurrency derivatives are now being traded only undescored their function as chips in international financial poker. And just as players at the end of the night convert their chips at the cashier, so too do the partisans of cryptocurrency regularly cash in for fiat money – that is to say, they remember that without the state, there is no market. But by building this new house of cards – even if it ultimately collapses – they have taken home a lot of old-fashioned pennies with which to buy skyscrapers, fleets of ships, grand estates, industries and commercial chains. Better still, they’ve undermined the autonomy of the state by using the method favoured by neoliberals, that of starving the beast: stealing its fiscal resources so as to compel it to either reduce services or get in debt not to do so, thereby forcing it to submit to blackmail.
Translated by Francesco Anselmetti.
Read on: Victor Shih, ‘China’s Credit Conundrum’, NLR 115.