Last week, sitting in the neon dark of a sleek Japanese co-working space on San Francisco’s Market Street, I couldn’t help but feel being a part of something special as venture capitalists pulled up a slide showing how investment in Bitcoin and blockchain related start-ups had topped $1bn over the past two years – more than had been invested in early-stage Internet start-ups during 1995-96.
Meanwhile, just a few blocks away at the historic Fairmont Hotel in Nob Hill, Jamie Dimon CEO of JP Morgan had a very different message:
There will be no real non-controlled currency in the world. There is no government that is going to put up with it for long.
The increasingly popular mantra “Bitcoin bad, Blockchain good” is not without merit as disagreements continue about how to scale Bitcoin for mass adoption. Whatever the outcome, I find myself agreeing with Jamie Dimon’s assessment that Bitcoin’s long-term fate will be determined by politicians and not engineers. I think it’s quite probable that blockchain technology will be given the freedom to flourish but a never-ending war will be waged upon Bitcoin and other censorship-resistant digital currencies. Let me explain why.
Wall Street gets the blockchain. It’s why they’re busy leading the race to rewire decades-old financial infrastructure. Banks may have only just started getting to grips with blockchain technology, but they’ve already identified opportunities to streamline processes, cut costs and market new products and services in payments, settlement and trading.
Blockchains are a new type of shared database which is huge in a world being eaten by software. Hence, growing awareness across many industries that the ideas behind the blockchain and distributed consensus, described by the Economist as the Trust Machine, could have wide-ranging applications from digital provenance to voting in presidential elections. For investors, there are plenty of positive signals for blockchain start-ups.
So what about Bitcoin the currency? On the face of it, there are reasons for optimism. M-Pesa’s growth in Kenya demonstrates that non-conventional mobile money can work. Economists are shedding light on where mass adoption of Bitcoin might occur. Industry veterans believe Bitcoin could find a role as a global trade currency. The Bank of England has even suggested that a state-sanctioned digital currency could one day become part of its monetary policy toolkit.
However, countries are showing little appetite for recognizing Bitcoin as legal tender, so bold predictions of becoming a major reserve currency seem rather optimistic. When a government cedes control of monetary policy to a foreign power, through substitution, union or peg, the motivation is to improve economic growth and stability. It’s hard to imagine a finance minister willing to bind a nation’s economic future to an uncontrolled cryptocurrency and run the risk of being taken to the woodshed.
So far, many governments have adopted a laissez-faire approach to Bitcoin which suggests its growth as a virtual currency and medium of exchange will be tolerated, at least for now. Global domination is off the agenda but this still represents a major boon for Bitcoin start-ups. Firms are getting licensed and coordinating with regulators and law enforcement to curb money-laundering and tax evasion. So why would governments want to stop Bitcoin just as it emerges from the shadow economy and falls under the purview of regulators? Has Jamie Dimon got it wrong or is there something frightening lurking in the dark which could spur a government into strangling Bitcoin in its infancy?
Here’s a clue. Borders define the nation state. They are the emotional red lines which leaders protect with blood and thunder. Anything which threatens the nation’s territorial integrity must be stopped.
Consider how in the run-up to the 2014 referendum on Scottish independence, voters were advised that leaving the UK would unleash a financial crisis, the currency would be a monetary disaster and put pensions at risk. Similar warnings of financial Armageddon – now dubbed Project Fear – were recently put to the Catalans, with the Bank of Spain warning that an independent Catalonia would be unable to use the Euro leading to capital controls and bank runs. Economics can be a powerful weapon. Who would bet against these doomsday predictions surfacing again if the secession movement in Hawaii ever got wind behind its sails?
It’s one thing to run quirky community experiments like the Bristol Pound but unsettling the status quo is serious business. The former Greek finance minister Yanis Varoufakis was accused of treason when he put together a contingency plan to introduce a new Drachma currency in the event of leaving the Eurozone. In Spain, alarm bells are ringing as the Mayor of Barcelona intends to launch a local digital currency. A successful implementation of a parallel currency could help allay economic concerns over leaving Spain and strengthen the case for Catalan independence.
This is what makes Bitcoin so problematic for governments: Bitcoin has placed a fully functioning money press into the hands of the public. If Bitcoin were to achieve mainstream adoption and recognition as a viable currency substitute, it could pour fuel onto the fires of separatism all around the world. Viewed in this light, Bitcoin is no longer just programmable money, it’s a crucial tool for emboldening the redrawing of borders and therefore Bitcoin represents an existential threat to the nation state.
If you were in government and you believed this to be true, what would you do? Investor funding means Bitcoin won’t just quietly fade away. Banning software is impractical. The challenge facing policy wonks is how to untie Satoshi’s Gordian knot and allow blockchain technology and government-backed digital currencies to prosper, whilst grinding down Bitcoin and its derivatives. With the stakes so high, it would not be surprising if a war of attrition had already begun. Repeat after me: Bitcoin bad, Blockchain good.