Only a year after the financial crisis in 2008, the crypto-currency bitcoin was created as an alternative to a questionable financial economy. The founder of Bitcoin, Satoshi Nakamoto, wrote both code and protocol based on new blockchain technology. Only now, ten years later, we sense a possible economic breakthrough for cryptocurrency – ‘crypto’ for short. For many people, crypto may create alternative, non-capitalist and more solidary forms of economy. Others see cryptocurrencies as pure sabotage – undermining and stealing from bigger companies, banks and governmental institutions.
It seems fair to ask if the intrusion of cryptocurrencies on the world market changes or even deranges society – whether it is indeed a ‘disruptive technology’. And is it really as liberating as ‘crypto anarchists’, free-thinkers and libertarians want us to believe? Some people regard the new economy to be as important as the appearance of the internet, while others consider it a hype: ‘same shit, new wrapping’.
Yet the market for crypto is enormous: today there are 4–5 billion people who don’t possess a bank account, and for many of these a cheap smartphone with cryptocurrencies can serve as a ‘digital wallet’. People in developing countries who don’t belong to the upper middle class will be able to receive and pay with money that isn’t traceable by the tax collectors of corrupt governments, while also avoiding banking and credit card fees. Governments around the world will probably do their utmost to prevent or regulate the use of such new technologies – at the risk of being confronted with a billion opponents of control measures.
Photo by Pawel Janiak on Unsplash
Banking system in a crisis?
Since its humble beginnings, the value of a bitcoin has risen from 1 to about 6000 US dollars. Even if the currency dropped this year, its value would remain seven times that of its price one year ago. The fact that trust in bitcoin is on the rise also means that the dollar might be trusted less. Are we at risk of experiencing another financial crisis like the one in 2008? Without a doubt. The debt situation we have now is worse than that of 2008 before the eruption of the crisis.
As an example, let’s have a look at Norway’s financial situation. In 2017, the Norwegian state ran a deficit of 225 billion kroner, subsequently recovered from the Oil Fund, the national fund for long-term investment of Norway’s oil revenues. Private sector markets lost about 300 billion in the same period, and the trade deficit hit approximately 250 billion. Measured in GDP this equals an ‘overconsumption’ of nearly 800 billion.
Since the crisis, Norwegian households have also chosen to double their debts. Debts have increased in accordance with house prices (85 per cent of debt conforms with the real-estate market); currently, collective debt runs at about 3000 billion kroner. At the same time, Norwegian municipalities have doubled their debts to about 2000 billion kroner. In other words, a substantial part of Norway’s welfare is built on debt.
How long will the creditors keep faith that their loans will be reimbursed in the future – before the bubble bursts? If housing prices should fall during a crisis and homes are heavily mortgaged, people will be left bankrupt with no chance of settling their debts. Alas, one fifth of the Norwegian population owns 80 per cent of the assets, so these will be barely touched, neither by the tragedy nor by the protests that will follow in its wake.
Will crypto be an alternative to normal monetary value, if for instance the US dollar loses credibility? US debt has doubled nearly 20 times in a little more than 30 years, to the current, staggering sum of 20 trillion dollars. Debts are partly rising as a result of printing ‘new money’. Adding expected deficits of 750 billion dollars (roughly equalling Norway’s total Oil Fund), the ‘company’ might not be deemed reliable for much longer.
Nationally and internationally the trust in the US dollar also diminishes when the USA steps up its military budget instead of investing in products directly related to people’s needs. This may also cause a drop in the dollar. The state of the US economy is worsened by its senior citizen class: in 1995, for each pensioner, 4.9 Americans were in work. In 20 years time, about half the labour force will have to cover the expenses of the elderly – whose life expectancy is rising constantly. Will the average American tolerate sharing a third of their income with strangers in a swelling class of retirees?
The Chinese yuan is getting ready to inherit its role as a global currency, until now held by the US dollar. China has invested substantially in Africa, where many countries are considering changing their currency reserve over to yuan. In other words, the US dollar is not what it used to be, and if other countries pull out, crypto or other currencies are waiting in line to take over.
Many predict an ‘hour of reckoning’ – where the bubble will burst and trigger a new financial crisis. Loans must be renewed, there is interest and compound interest, and credit doesn’t extend into eternity. Central banks aren’t at liberty to cancel mountains of debt, since this would create negative state capital and cause the trust-based world economy to crumble.
Today, 17 million bitcoins and 4500 billion dollars are in circulation. Both units work as singular loans based on the expectation that you will get something back when you give them to someone. So long as trust prevails.
Reduced spending power
Unlike ordinary money (called fiat currency), the denomination of crypto is inscribed in the protocol itself, so that that units can’t simply be stamped or minted. Bitcoin resembles gold, in the way this precious metal worked as a currency for over 5000 years, as a limited value resource. The freewheeling of the finance market was a direct consequence of the 1933 decree making it a criminal offence to own gold, followed by the effective abolition of the gold standard in 1971. George Washington’s signing of the ‘Mint and Coinage Act’ in 1792 is a faded memory, as is the time when a 10 dollar ‘eagle-coin’ contained 16 grams of pure gold.
The monetary system is now credit-based and inflation-driven – it must grow to persist. Simultaneously, galloping inflation will water down spending power in the government’s favour. Governmental central banks are now virtually printing money in their basements. The money issued is lent with bond funds between the Central bank and the Ministry of Finance, where the state issues three per cent interest to itself. Government debt rises, even though the transaction goes from one pocket to the other.
The US hasn’t issued money since 2014 but might soon do so again. Some would see this as short-sighted, since the effect of such measures is to reduce the purchasing power of the population. Imagine that you buy some rare graphic prints but then the artist makes 100 new copies: the value of the original prints drops immediately. With crypto, such dilutions of value would be reduced.
The current crypto situation
We now have not only bitcoin, but also etherum, litecoin, tron, neo, monero, geocoin, wetrust, verge and over 1600 other cryptocurrencies. Via blockchain, ‘distributed database’ chains of transactions are extracted with freshly encrypted keys, making the systems irreversible and reliable. The transactions are civilian money transactions – contracts and agreements between individuals – where the government and larger institutions are kept out.
So far, cryptocurrency has been used on the assumption that it will increase in value. Many of the early birds who invested in crypto have harvested enormous gains. According to the news agency CoinDesk, the first quarter of this year saw more than 5 billion dollars invested in crypto – more than in 2017 as whole. These transactions are made through so-called ICO’s (‘Initial Coin Offerings’), where different startups put their own cryptocurrencies up for sale. According to The Economist (April 28), the fact that China has banned such ICOs only confirms the enormous power of the crypto-economy.
People don’t buy stocks, but rather become owners of new crypto. For example, a system called Fetch will be initiated next year to gather sets of questions and answers on the internet (The Economist, March 31). Based on Artificial Intelligence – of a slightly different mark than Google – big data will be harvested for use in searches and information-gathering. Fetch declares itself to be non-profit and will be a new ‘watchdog’ on the internet. The users of the system will be rewarded and paid with crypto – both those who ask and those who provide answers. The main investor in Fetch, Outlier Venture, asked for new cryptocurrencies, rather than stocks, in return for their investments.
It is hardly possible to put a stop to this ‘gold rush‘. I have met people who have sold crypto for almost 100 times the investment value. One such fortunate investor could afford to move into a new sailboat in the harbour of Barcelona. Today, every fifth student in the US has invested part of their student loan in crypto, according to the ‘Student Loan Report’.
But is crypto a merchandise, a currency or a tradable security? Conceiving of it as a tradable security would cause the government to demand transparency, and for this reason the preferred definition is that of a means of payment or a digital safe-deposit box. Crypto can be a reserve for savings and pension – akin to gold and silver.
Crypto can indeed take over as ‘cash’ in a society where – as already mentioned – conventional money is becoming too vulnerable: a bank’s guarantee fund only possesses about three per cent of a customer’s actual savings. In a scenario where everyone lost confidence in the banks and rushed to withdraw their money (a ‘bank run’) – or chose to change their to crypto – only 5–10 per cent of the money would be available at all.
Might crypto also suffer under a financial crisis where people’s trust in money diminishes? As of now, bitcoin accounts for less than a thousandth of the world’s debt. We are dealing with a future that is hard to predict, but where crypto has an enormous potential. Evidently crypto will be employed for a wide range of transactions beyond renting videos, car sharing and shared housing.
On a practical level, crypto works effectively. Many are keen on cutting back on the added expenses of money exchange and transactions. It seems unreasonable that you need to pay up to seven per cent of your requested withdrawal when you cash your money abroad. Bank fees also tend to consume the interest you ought to earn from your savings.
Bitcoin algorithms for crypto transactions come without fees. The transactions aren’t free, but those who contribute with processing power for the extraction of encryption keys get paid in bitcoin or other crypto directly from the system. Bitcoin has a built-in limitation of 21 million units, so what will happen when the remaining 4 million are mined – will a transaction fee need to be introduced?
Will the ‘hard fork’ of crypto, such as the newcomer Bitcoin Cash, be a way to multiply the number of units, similar to the minting of the central banks? These offshoots won’t water down an existing stock of money, as long as the market buys them. Also, the bitcoin system doesn’t depend on inflation, the way the fiat system does. Can crypto be seen as a set of exchanges between equals – peer-to-peer?
Still, normal money is needed to buy and sell in small arenas resembling auctions or trading venues, where you shop for the best offer. Some take a profit from this. Interestingly, sellers are rated based on previous transactions they have conducted, so internal regulations do exist. Anonymity is another peculiarity to crypto. Of course, the transaction needs to be made internally between different cryptocurrencies, with an encrypted and secret key, for anonymity to be guaranteed.
Whenever you want to change back to other normal currencies, you remain under surveillance. You leave traces behind. Also, transactions may come at a price, for instance if you need a so-called wallet – a secured digital purse for crypto and cryptographic-keys. Should you lose your key, you also lose your crypto. There is no bank for you to call for a new card or complain that someone hacked your account. Your crypto has simply vanished.
Also, bitcoin miners need to acquire new, expensive computers if they are to earn new bitcoins. According to The Economist (May 19) the market now offers a range of tailored computers, like Antminer, offered by the Chinese Bitmain, that specifically helps you to process bitcoins. In each of these computers, 189 small Taiwan-built ASIC-processors solve the cryptographic puzzle faster than ordinary computers. Some investors have established vast halls, for instance Hangars in Iceland, where computers are ‘chewing’ data to extract crypto that subsequently can be sold on the market. The energy consumption is vast. Bitcoin requires an enormous processing power to generate cryptographic keys, even if the 256-bit block itself is miniscule. As of now, the internet’s total monthly data traffic is about one zettabyte – enough to fill 16 billion 64 GB iPhones.
As a reaction to bitcoin, the Russian-Canadian progammer Vitalik Buterin created the new crypto-currency ethereum. The extraction of this popular crypto runs on the graphic processor of normal computers. Despite the convenience of this procedure, it takes up more space when sent online. Another crypto, litecoin, acts as ‘silver’ with respect to the ‘gold’ of bitcoin, and is suitable for small and quick transactions. Where transactions of foreign currencies take days in the heavily charged banking system, crypto accomplishes the same in seconds.
Is the crypto/blockchain technology ultimately secure? If a miner’s crypto-key or digital wallet is hacked, he or she is left in dire straits. When an etherum-based DAO (decentralised autonomous organization) with 10,000 members was hacked a few years ago, 35 million US dollars were lost. The ensuing discussion pitted those who wanted to reverse the transaction chain against the purists who preferred to keeping the ball rolling.
The currency of the future?
Criminals use crypto, no doubt. But crypto purchases aren’t untraceable, and criminals might still prefer dirty or black money to circulate as banknotes. Globally, between 750 billion and 1800 billion US dollars are washed every year (The Economist, April 28). This sum makes up 2.5 per cent of the world’s total GDP. Among the cases where crypto was used for money washing, a good example is of the case disclosed by Europol, where European drug syndicates paid for cocaine from Colombian drug cartels with crypto. The middlemen changed euros for crypto that were subsequently transferred to digital wallets in Colombia and then changed to pesos in a dozen banks – and in turn transferred in smaller amounts to the seller.
Tax evasion with payments in dirty money is generally a problem for governments as well as a motivation for many users of crypto. Understandably, governments try to control the transactions. For the same reason, they also want to get rid of banknotes altogether. This would give them increased control over state income, but also more control over their citizens’ money. In this manner, they can avoid ‘bank runs’ if the fiat money game was ever fully disclosed.
If ordinary people want to take care of their own savings and remove them from current banking systems, crypto may be the solution. The expectation must be that this system has come to stay and that crypto keeps engendering new activity, productive environments and new values. Many of the aforementioned 1600 cryptocurrencies will probably vanish. Trust and interest are finite resources. Crypto is evidently the new hype, and some speculations will end up as pure Ponzi schemes, where the last buyers lose everything. At the same time, the hope is that crypto will generate more solidary systems of payment and at some point in the future make its way into the real market economy.
Unfortunately, a financial economy based on credit is irreversible – making us all participants in the financial game. None of us can escape debt and its permanent state of exception.