Bitcon (2018)

The Cooking the Books column from the August 2018 issue of the Socialist Standard

‘Bitcoin “will never replace money”’ ran the headline of a news item in the Times (18 June) about a report by the Bank for International Settlements:

  ‘Bitcoin and other cryptocurrencies can never replace conventional money because they lack centralised backing and are riddled with problems, not least that they can simply stop working and have their value totally wiped out . . . In contrast to traditional money, cryptocurrencies become more cumbersome and unstable the more they are used.’

As the BIS is the international of state central banks, which issue conventional money, it is tempting to think ‘they would say that, wouldn’t they?’ They would, but that doesn’t necessarily mean that they haven’t got a point.

 Bitcoin was a free marketeer project, a scheme to create a currency that had nothing to do with the state, in accordance with the view that the state was a hindrance to the proper functioning of a genuine market economy. From a technological point of view, its creators succeeded – they did devise a way of making an electronic payment without using state fiat money.

 However, although dubbed a ‘cryptocurrency,’ bitcoin has never really functioned on any large scale as a means of payment. It has served two other purposes – speculation and a means of making transactions without states knowing.

People have bought bitcoins, speculating on its price rising; which is why some have suggested that bitcoin is more a ‘crypto-asset’, something to hold to keep or enhance what you paid for it like paintings or gold. Since bitcoins are intrinsically worthless the price is just a bubble that would burst if there was no other reason for holding them.

 It so happens that there is another such reason. Very few of those who use bitcoins are anti-state idealists. The vast majority are shady capitalists such as drugs barons, arms dealers, tax dodgers, sanctions busters, money launderers and others who don’t want the state to know about their financial dealings. It is their demand that determines the bitcoin price, so enabling it to be a subject of speculation. As one critic has put it, the bitcoin price is an index of money laundering. This is shown by the fact that, following state authorities taking measures to try to stop bitcoins being used for these purposes, the price of one bitcoin slumped from nearly $20,000 just before last Christmas to nearer $5000 today.

 Although a technologically elegant solution to what the free market computer geeks wanted, it is a waste of time and energy. New bitcoins are created by using computers to solve a complicated mathematical problem. This requires a huge amount of computer time and so of electricity, all pure waste from a rational point of view. Further, each time a bitcoin is used this is recorded, so the string of computer code representing it gets longer and longer. It’s as if every transaction using a particular paper note or metal coin had to be recorded. The BIS calls this ‘cumbersome’. Crazy is more like it.

 Having said this, the computer technology which is used to do this – blockchains – does have other uses. Since it is almost impossible to tamper with it could be used, for instance, to confirm the origin of meat so that horse meat can no longer be passed off as beef.

 So the BIS is right. Bitcoins will never replace state fiat money. State fiat money isn’t that stable itself of course but nowhere near as unstable as bitcoins. No doubt it will last till the time when capitalism is replaced by socialism and all forms of money become redundant.

Bitcoin-mania (2018)

From the February 2018 issue of the Socialist Standard

Bitcoin was set up in 2009 in accordance with a design drawn up by a person, or more probably a group of persons, calling themselves ‘Satoshi Nakamoto’. In a paper ‘Bitcoin: A Peer-to-Peer Electronic Cash System’ (bitcoin.org/en/bitcoin-paper), he/they stated that:

‘A purely peer-to-peer version of electronic cash would allow payments to be sent directly from one party to another without going through a financial institution.’

Libertarian money

What, you might wonder, is the advantage of such a system over the electronic payments systems such as Paypal and Visa that already exist? None as far as most people are concerned. However, those who set it up had been influenced by ‘libertarianism’ in its American sense,  such as anarcho-capitalists, ‘minarchists’ and other advocates of an unregulated market economy. They wanted a ‘cash system’ that was independent of the state and, also, didn’t want to involve a ‘financial institution’, in particular not banks, which, like the state, were accused of issuing unsound money by creating too much.

The basis of the system is a network of computers without a central server, all the computers being in direct contact with all the others. Hence peer-to-peer. The problem with such a decentralised, or, rather, non-centralised, system is how to verify that the person making the payment has not already spent the ‘electronic cash’ attributed to them. The innovation here was to apply ‘blockchain’ technology, as explained in the Pathfinders column of the December Socialist Standard:

‘When you make a Bitcoin transaction, the details are distributed across the entire network. To be sure the transaction is unique (i.e. not a 'double spend') it must be validated. To do this, the system triggers a competition in which freelance 'miners', acting somewhat like accountants, race to validate the transaction in return for a diminishing new-issue Bitcoin payment, which also helps to grow the currency at a controlled rate. Once validated, the transaction is then written into an encrypted public ledger as a permanent record or 'block'. This block is linked to previous blocks and in turn becomes the anchor or link to the next created block, forming an unbroken chain.’

The decision to call the validators ‘miners’ was another reflection of the ‘libertarian’ ideology behind the project. It was explicitly chosen to be like gold mining. As Nakamoto wrote:

‘The steady addition of a constant amount of new coins is analogous to gold miners expending resources to add gold to circulation. In our case it is CPU [computer] time and electricity that is expended.’

In this respect Bitcoin’s aim was to create the digital equivalent of a gold currency, to realise on the internet Ron Paul’s dream of a return to the gold standard.

It is not clear whether Bitcoin’s originators really intended their electronic cash to replace state fiat money or even just to compete with it. They seemed more concerned just to show that their ‘electronic cash’ could be created and that their system could work. If so, they proved their point; they did manage to transfer Bitcoins from one member of the network to another. A few cafés and other establishments agreed to accept payment in Bitcoins but more to appear trendy than for business reasons. At first Bitcoin was little more than a toy for computer whizz-kids.

Bitcoins didn’t have a price until 2010 when it was made convertible into fiat money at the rate of 1 Bitcoin = 0.003 US cents. The first recorded purchase using Bitcoins is said to have taken place in May that year when a computer whizz-kid paid 100,000 of them for two pizzas. By the following year, however, it had achieved parity with the US dollar.

The money changers come back

Bitcoins have never been independent of state fiat money or prices expressed in it. The businesses that accept payments in Bitcoins price their goods or services by converting their fiat money prices into Bitcoin ones; when someone pays for an item in Bitcoins the business doesn’t keep them. In fact, normally they don’t even receive them (what use would they be to them?) as the Bitcoins go to a Bitcoin dealer who converts them into fiat money and pays that to the business. Not that, with the price of Bitcoins as it is, many will be using it to buy anything.

From 2010 people who were not part of the peer-to-peer network began to buy Bitcoins. But why? There was a feature of the system – disguising payers and payees – that was attractive to those who prefer to be paid in cash rather than by cheques. Not plumbers and other handymen but bigger fry such as drugs barons, arms dealers, money launderers and others wanting to avoid financial regulations. This is why Blackrock CEO Larry Fink recently described the Bitcoin price as ‘an index of money laundering’. At the moment North Korea is being accused of hoarding Bitcoins to use them to get round the latest sanctions. Secrecy didn’t have to be part of the system but was incorporated into it by the designers, either because they were ideologically opposed to the authorities knowing or because they wanted to replicate on the internet the equivalent of payments in cash.

Despite the original intention of Bitcoin being a system of payment ‘without going through a financial system’, that is precisely what you have to do to buy or sell Bitcoins. Bitcoin exchanges have grown up where you can buy Bitcoins with state fiat money and where you can convert Bitcoins that someone has paid you into fiat money. For a fee of course.

And the speculators too

Technically a Bitcoin is a token enabling you to access Bitcoin’s money transfer service. Bitcoins only exist as strings of computer code, and are intrinsically worthless. But so are fiat money’s notes and coins, only behind them is the state guaranteeing their face-value. There is nothing behind Bitcoins. Yet last year the price of a single Bitcoin overtook the price of an ounce of gold and reached $19,000 in December from less than $1,000 at the beginning of the year. No wonder people are comparing the current Bitcoin bubble to the Tulip-mania that swept through Holland in 1636-7. At the moment Bitcoins are being bought purely for speculative purposes to make a gain out of their rising price. Sooner or later the bubble is going to burst and some suckers are going to lose their money and could end up holding something worth less than a tulip bulb.

It is this aspect – as an object of speculation – that has led some commentators to describe Bitcoins as a ‘crypto-asset’ rather than a ‘crypto-currency’, something people can invest in that will hold or increase its monetary value over time. In any event a fluctuating price conflicts with Bitcoin’s original aim of being a payments system. There is an irony in this. Its creators wanted to create an electronic version of gold. They seem to have succeeded in that gold, having been demonetised, is now an asset subject to price fluctuation due to speculation. Real gold would of course be a safer investment as it will always be worth more than a tulip bulb because of the considerable labour time spent finding and fashioning it.

Ironically too, governments and banks have become interested in the blockchain technology behind Bitcoins as it offers a cheaper way of registering transactions (and not just financial ones) and transferring money. To get in on the act could be a more rational capitalist reason for buying and holding Bitcoins as, at some point, the system or a part of it might be sold as has happened to other inventions by computer whizz-kids.

Bitcoins are not the only tokens to access electronic services provided by a network of computers using blockchain technology. There are over a thousand other so-called ‘crypto-currencies’. Many are offshoots of Bitcoin and the exchanges that deal in Bitcoins deal in other such tokens as Litecoin, Dash, Ripple and the appropriately named Ether.

What a waste

From the point of view of satisfying human needs, all the human ingenuity that went into developing the Bitcoin system and all the computer time and resources involved in operating it have been so much waste. In a socialist society, based on the common ownership of the means of production and access to the products according to need, there would be no need for an electronic payments system, in fact no need for any sort of payments system since buying and selling will have been replaced by giving and taking, and so need for money at all. There would, however, still be a need for computing skills and computer technology. In socialism the skills and enthusiasm of the type of people who first developed Bitcoin could be put to much better – and more satisfying – use.

Adam Buick

Bitcoin: What Would Marx Think? (2018)

From the February 2018 issue of the Socialist Standard

We have heard all kind of things about Bitcoin. There is even someone who has dared to say that Bitcoin was an alternative to the current economic-political structure and that for this reason Marx would have liked it (‘Bitcoin and Marx’s Theory of History’, Kenny Spotz, Bitcoin Magazine 26, July 2014). Oh dear!

Let us see whether Marx would have liked Bitcoin or not. Bitcoin is a ‘cryptocurrency’, ie a digital encrypted means of payment, safe, until hacked of course. According to Marx, the only alternative to capitalism is a society based upon common ownership of the means of production and products, a society with no profit and no money, not even crypto or funny ones.

Marx analysed extensively the nature and function of money in the capitalist system. This can be found in the first section of the first volume of Capital. Let us brush up on a few concepts from it.

Anything that is able to satisfy a need has a use-value, which is a utility, a particular quality. But when we look at the exchange of two things and their qualities, for example two chairs and 0.3 ounces of gold, their various use-values are not the driver for the exchange; what matters is some measurable common quantity. In the exchange, these two things become commodities and their values become exchange-value. As for the example, the 2 and 0.3 are the exchange-values. Yet, if we were to look at it from the utility point of view, the two chairs should be more useful than the 0.3 ounces of gold (let’s say a golden ring).         

But who or what decides that two chairs are worth only 0.3 ounces of gold, rather than 20 ounces, or 0.1 ounce? It is because the average amount of human labour in a society needed to produce two chairs and to extract 0.3 ounces of gold is the same. Thus, two chairs as well as 0.3 ounces of gold can be exchanged with each other, as with 8,000 apples, or 4 pairs of shoes. Every commodity therefore has equivalents, reflecting the average labour time spent on producing them from start to finish. By convention, historically, the universal equivalent form was attributed to a precious metal, gold or silver, as money-commodity, as the currency, which in itself embodied a standard of labour time in the same way and allowed all other commodities to be measured against it. 

Marx sums this up in a clear example:

  ‘Could commodities themselves speak, they would say: Our use value may be a thing that interests men. It is no part of us as objects. What, however, does belong to us as objects is our [exchange] value.’
   ‘Gold [meaning here as money] … serves as a universal measure of [exchange] value.’

In origin, money was a commodity, the precious metals gold or silver, for their property of lasting through time and their divisibility; their exchange-value was determined by their weight. At some point in order to allow smaller scale exchanges, other metals such as copper were used as tokens, substitutes for gold or silver coins. Even gold and silver coins were subject to wear and tear, thus their value became more and more conventional and less and less connected to their weight. This paved the way for a purely conventional currency as paper notes. Paper by itself is of little exchange-value, but conventionally notes are worth £20, £50, £100, etc. In Marx’s time Bank of England notes were redeemable in gold. The Bank, to which the state had given a concession to print paper notes, had to have in its safe the same amount of value in gold.

As Marx said, ‘Coining, like the establishment of a standard of prices, is the business of the State.’ Furthermore,

‘Only in so far as paper money represents gold, which like all other commodities has value, is it a symbol of value.’        

One by one, governments around the world decided to stop their currency’s convertibility to gold, making them fiat currencies. Fiat stands for let it be. That is to say, money with no gold convertibility obligations.

So today, a central bank, that can print banknotes under the state’s concession, can create money out of thin air, increasing the chances of inflation. 

Let us go back to the cryptocurrency, though, and how Marx would see it.

It is quite possible to create a ‘cryptocurrency’ out of thin air; it is all a question of convention. To become a real currency, the state would have to recognize it. In most of the world’s countries, but not all, bitcoins are legally recognized but only as a private currency. Importantly, the inventors of Bitcoin set a limit on the number of bitcoins (21 million) and this scarcity, combined with other advantages, gave it some attraction. The major other advantage is that Bitcoin guarantees anonymity, ideal for those interested in tax evasion, gambling and money laundering. Moreover, purchases are not taxed. Bitcoin does not require so many intermediaries and therefore should have lower transaction fees. Businesses can even raise money, by means of Bitcoin, with no formal stock exchange listing. Yet, these advantages do not explain the steep increase in its price.

Chicago Mercantile Exchange, the world’s largest derivatives exchange operator, is planning to start offering Bitcoins trading. This has helped make the speculative Bitcoin bubble bigger than the dot-com one of the late 90s. At the time of writing, in December, bitcoins were worth about $15,500, already on a descending phase, from a peak of about $18,000. What was it going to be worth the next day, $10,000, $500, $1? Investors were buying bitcoins because they expected somebody else to buy them, and so on. They hope for a ‘greater fool’ to buy from them, as the Economist (1 November) put it. Clearly, despite what the Bitcoin community say, this is not a currency adequate for buying everyday goods, but it has proved ideal for a huge speculative bubble, surely not a step towards the future of human evolution.

Marx would not think that Bitcoin was a good currency, because it is not a stable form of universal equivalent. Marx would equally think that neither the dollar nor any other fiat money was a good form of universal equivalent, since fiat money is fictitiously sustained by the state and when issued in excess leads to inflation. Marx would not think that a currency, invisible because digital and encrypted, was intrinsically a step forward or could change the social order. Capitalism can be surpassed only by a system where the means of production and products have become the common property of the whole society, and access to them completely free. A society where gold would not be the universal form of equivalent, nor any other type of money.

Cesco.

A Rattle of Blockchains (2017)

The Pathfinders Column from the December 2017 issue of the Socialist Standard

"Blockchains could change our world as much over the next two decades as the internet has over the last two" -  source: zdnet.com - https://tinyurl.com/mp372v5

The thing about revolutions is that it's not always obvious when you're in one. They only reveal themselves in hindsight. Now some are saying there's a new revolution on the horizon that will be as huge as the internet. They claim it will change capitalism, see banks disappear, even abolish global poverty. When we last mentioned this development (Pathfinders, October 2015) investment in it stood at around $360 million. Today it's close to $2 billion, and this may be only the trickle before the torrent (ft.com - tinyurl.com/yb5zpdeh).

This is the world of the blockchain, and it has implications for socialists too. To understand it though, it's worth understanding something about networks.

Computer networks have in the past followed a centralised model where clients are individual computers communicating via a central server. This client-server structure dates from the early days when computers were the size of basements and operated via 'dumb' terminals capable only of basic input and screen display. Even when terminals got smarter and became PCs, this structure was inherited, and many businesses still use server systems today.

But there are problems with cost and scalability. The network can only be as big and as multitasking as the server can handle. The bigger the network, the bigger the server, the bigger the costs, and the bigger the risks of catastrophic breakdown if something goes wrong. And while the server does the heavy lifting, today's smart PCs are still behaving essentially like dumb terminals.

Consider for a moment an obvious analogy with the state, and centralised state institutions, or any centralised organisational structure. If one applies a top-down exploded view, every hierarchy looks like this. Such client-server structures are historical legacies which remain universal in the capitalist mindset, yet many of the same problems of cost, scalability and risk apply. In addition, these structures are monolithic and unadaptable, and despite massive social and educational advances, smart workers are still required to behave essentially like dumb terminals.

In computing, a new kind of structure, the peer-to-peer (P2P) network, harnesses the power of modern PCs by taking the central server out of the equation. Instead files or bits of files are held on multiple distributed computers, or nodes, and can be disseminated directly to any other node independently of other network operations. Having multiple nodes means parallel processing with no bottlenecks, and it's harder to break, because if a node fails alternative routes exist. P2P is therefore faster, cheaper, more scalable and more robust than client-server systems. But is it more error-prone?

In P2P file-sharing networks, multiple copies of the same data are an advantage. But P2P is now running crypto-currencies like Bitcoin, increasingly popular because unlike bank-mediated digital money the transactions are untrackable. Clearly, multiple copies of the same money cannot be allowed (the so-called 'double-spend' problem), so with no central control or validation, and in an anonymous public network where trust cannot be assumed, what prevents Bitcoin inflating and collapsing in chaos?

Enter the blockchain. Strictly speaking, 'blockchain' is the specific Bitcoin application of a thing called Distributed Ledger Technology (DLT), but as Hoover came to mean 'vacuum cleaner', blockchain is now being used to describe any DLT application.

When you make a Bitcoin transaction, the details are distributed across the entire network. To be sure the transaction is unique (ie not a 'double spend') it must be validated. To do this, the system triggers a competition in which freelance 'miners', acting somewhat like accountants, race to validate the transaction in return for a diminishing new-issue Bitcoin payment, which also helps to grow the currency at a controlled rate. Once validated, the transaction is then written into an encrypted public ledger as a permanent record or 'block'. This block is linked to previous blocks and in turn becomes the anchor or link to the next created block, forming an unbroken chain. Any subsequent attempt to tamper with an individual block disturbs the whole chain and results in a network-wide alert. 51 percent of the network, acting in concert, is enough to prevent interference. In plain terms, you can't buy product X on Wednesday and then pretend you didn't buy it on Thursday, at least not unless a network majority allows you to. System integrity is thus maintained, not by central state or bank control but by what could be called a distributed democracy. Barring a direct and unprecedented hack of the block-creating code itself, it's hard to see a weak point in the system. The strong point is that it offers to cut out all the financial middlemen in capitalist commerce. Business gains would be spectacular, which is why investors are throwing money at this.

DLT can in theory be applied to any field where data validation, transparency and integrity are important. Think big and local government, supply lines, transport systems, food quality and provenance, voting procedures, carbon trading, maybe even accreditation of news stories to prevent fake news.

The truth is, nobody is really sure what it can do, and this has provoked some reckless hyperbole. For example, the claim about abolishing global poverty is patently ridiculous. As tends to happen with emergent technologies, DLT is at the centre of a hype storm while still barely developed and little understood even by its investors. Aside from Bitcoin, no blockchain system has progressed beyond pilots and beta tests, although there are more than 400 start-ups. Small wonder some pundits are now saying that it has already reached the peak of expectations and is about to freefall into the 'trough of disillusionment' with its investment bubble bursting.

Yet there remain implications for socialists. DLT suggests a mechanism for a dynamic and decentralised model of socialist democracy and production which avoids the 'double-give' problem in distribution while offering a flexibility and adaptability not associated with traditional centre-periphery structures. More immediately, it could change how workers today understand the word 'organisation'. In the same way that a future subscription-based capitalism could alter mindsets over the need for money (Pathfinders, October), DLT shows how you can decouple regulatory oversight from centralised authority. If you don't need a state to ensure that things work properly, but can utilise the 'power of crowds', then an important prop in capitalist ideology is kicked away. Leaders and centralised elite structures engender cronyism, corruption and monolithic thinking yet many workers remain wedded to the supposed need for them, convinced that anything else would result in chaos. DLT may make them think again by showing them the power and flexibility of distributed democracy in action, and not just in socialist theory.

PJS

Bitcoin or Bit Con? (2013)

The Cooking the Books column from the June 2013 issue of the Socialist Standard

‘Don’t write off Bitcoins as just another bubble,’ wrote Matt Ridley in the (London) Times (19 April), ‘Demand for the virtual currency proves people don’t trust governments with their money.’ But what are Bitcoins?

The Bitcoin scheme is an attempt to create a digital means of payment which has all the advantages of cash and none of what are seen by its supporters as the disadvantages of being issued by the state.

When a note or a coin is used in payment it passes physically from one person to another who can in turn use it to make another payment. In other words, cash circulates and is untraceable in that it doesn’t bear the mark of who happens to own it at any time. The Bitcoin scheme aims to create this for electronic payments (electronic payments do of course exist today but are not untraceable).

This was a technical challenge but the geeks who thought up the scheme (maybe only because it was a challenge) solved it by requiring anybody buying or selling with their electronic money to adopt a pseudonym and by incorporating into the software encryptions and procedures to confirm transfer of ownership and to prevent double spending as well as to create new bitcoins until a total of 21 million is reached.

So, technically, it works. In fact there are claims that, being untraceable, it works too well in that it allows money laundering, drug dealing and tax evasion (just as cash does but not ordinary electronic payments). Also, people have reportedly been speculating on the exchange rate between bitcoins and conventional currencies going up or down, leading to the bubble Ridley mentioned.

But there’s also the ideology behind it. Because it’s a means of payment that has nothing to do with the state, it is being touted by free marketers (or ‘libertarians’ as they are called in America), of which Ridley is one. They have visions of it replacing state-issued money and solving the problems of depreciation, inflation and financial crises which in their view go with it. Currency cranks see it as a way of ending both the US Federal Reserve and the commercial banks’ supposed power to create additional purchasing power out of thin air.

This is not going to happen, if only because bitcoins can only be used via the internet, but also because capitalism cannot do without a state and because for most people cash and identifiable electronic payments are more convenient. But suppose that it did. This, as the Gegun Kapital und Nation Group have pointed out in their excellent article on Bitcoin (http://gegen-kapital-und-nation.org/en/bitcoin-finally-fair-money), would not solve the economic problems of capitalism since these are not caused by some flaw in the monetary system but by the very nature of capitalist production and of money capital. A fixed money supply, as envisaged under the Bitcoin scheme, would not prevent booms and slumps but it would constrain the accumulation of capital:

 ‘While clearly a state intervention, the central banks’ issuing of money is hardly a perversion of capitalism’s first purpose: growth. On the contrary, it is a contribution to it. Systematic enmity of interests, exclusion from social wealth, subjection of everything to capitalist growth – that is what an economy looks like where exchange, money and private property determine production and consumption. This also does not change if the substance of money is gold or Bitcoin. This society produces poverty not because there is credit money but because this society is based on exchange, money and economic growth.’