To understand the level of disruption that could issue forth from crypto-currencies like Bitcoin, it is first necessary to understand the magnitude of the invention that they represent.
Understanding the innovation
Crypto-currencies aren’t merely the ability to transfer value from one person to another. Our current ways of doing this are many, low cost, and relatively easy to construct. These systems however rely on one critical factor, and this is the need to have a trusted 3rd party, conduct, verify, insure and facilitate the transfer. This has been how it has been done in many forms across all societies for over a millennium.
Traditional value transfer, or transaction communication systems like these work on the centralized hub and spoke architecture. They are often banks, or networks, or transaction facilitators like Visa and the like.
This type of “centralized” architecture has worked well for governments because it allows complete control over the money and communication systems. Governments can license and easily regulate the key players in this type of arrangement. All transactions, and deposits are tracked, their owners known, reported on and it is a system within which taxes can be easily compelled. Economic players that do not maintain political/governmental favor, will lose their license to participate in the centrally controlled economic system.
Only items of value like gold, physical cash, precious stones, or art works stand outside of the complete control by the modern government money system. These items allow for “de-centralized” value transfers and thus from a government perspective, less controllable system. These items represent the possibility for individuals to exchange value outside a transaction system overseen by the government. These items are “bearer” by nature, which means the holder is effectively the owner, and their mere existence is a threat to the current construction of the government/money system. But, because these items are heavy, hard to conceal or transport in large quantities, and also because governments are very keen to diminish or abolish their use as stores of value, or mediums of exchange, these physical items are very limited in the modern world of finance and commerce. And, in addition, centralized electronic ledgers are lower cost, faster and a more effective method for value transfers. But, what if we could have both? What if it were possible to have both the low cost and high speed of an electronic money system and the “de-centralized” money equivalent to a gold money system? A de-centralized electronic money system is what Bitcoin and crypto currencies represent. In short a massive disruption in the world for how we do money, and its implications will be massive.
The Impact of Cryptocurrencies
The emergence of crypto-currencies changes everything. Crypto-currencies are electronic, easy to conceal, transmit and impossible to control in a physical world. They enable an electronic “bearer” exchange of value, that is as easy to send as email, and effectively impossible to control. Billions of dollars worth of value can be held in the obscure pass phrase simply memorized by the holder, gone are the days of having to sew diamonds into the hems of your clothing to cross borders with items of value.
A money system which operates primarily through barter (individuals exchanging items), or through exchanging “bearer” certificates of value would put the burden of reporting (for tax purposes) for regulatory compliance, more on the individuals directly involved in the transaction. It would rely on the individuals to report or enforce transaction compliance, and this would vastly diminish all governments’ current abilities to compel legal decisions, payments, collect taxes or enforcement of regulation.
To understand what kind of world this will bring we have only to look to the past. Economies of the past were more of this kind of money system, as gold and silver or just cash were the primary methods of exchange and stores of value, not the centralized bank ledgers that we have today. As a consequence of this, individual power or personal sovereignty was much enlarged when compared to the powers of the state. There was more individual liberty for the people in relation to the state. The political implications of the emergence of this new type of crypto-currency money system are hard to overstate.
Governments in the past were in less of a position to compel compliance financially, and therefore this “bearer” type of money system required a more voluntary commitment of the citizenry towards paying taxes or governments left with collecting revenues at payment points that they could control. These governments of the past were forced to play a much smaller role in the economy than they play today. The vast bulk of economic transactions back then were opaque to governments, and beyond the reach of their governmental control, to tax or impose regulation (regulations which for the most part simply translate political power into unfair economic advantage for those who can curry favor from those at the top of the political system). A centralized money system is the primary method of control for modern governments over people, corporations and even foreign states.
Crypto-currencies represent the historical pendulum swinging back toward the more de-centralized money systems of the past, systems where governments have less centralized control over the economy and economic players within it. The emergence of crypto transactions mean we have seen the zenith of centralized governmental money systems. This will be a big disruption for the governments and corporations of the world.
The crypto-currency wave is more correctly understood really as the cryptography wave. Recent advancements in the science of cryptography are the underpinnings for the emergence of crypto-currency but they also empower new forms of better encrypted personal communications. These advancements are bringing back the opportunity for actual individual privacy and expanding the scope of individual sovereignty relative to that of the state. These advancements allow for secure private communications between people, as well as enabling crypto currencies which allow for the free exchange of value unmediated by the state, and uncontrolled by its politically protected corporations. For statists this is a potential disaster, but for Libertarians it is a potential renaissance.
The Internet Is the Largest Economy
The largest economy in the world is not the U.S. or China, it is the Internet, and the Internet has for the first time, just invented its own money. This change is potentially more significant than the invention of the Internet itself.
Despite their potency and I would say inevitability, right now the crypto-currency wave has slowed down and has been stymied to a major degree for lack of one critical thing, jurisdiction.
No major government in the West or East has seen fit to provide legal jurisdiction, legal contract and definition for crypto-currency. These governments are all smart enough to understand it isn’t really in their interest. Their support for crypto now would be all downside, from the almost perfect control they enjoy today over their money and banking systems. In the meantime, crypto-currencies have been forced underground, into the darker parts of the world economy both on and offline. Yet despite this repression, crypto transaction volumes continue to grow, and the technology and it users continue to slowly expand.
Cryptocurrency – The Genie Is Out
The technological advancement that crypto-currencies represent is a genie, which will not go back into its bottle. Eventually governments no matter how hard they try will be unable to prevent their rise and some aggressive governments will see the opportunity in taking advantage of this new system by granting crypto’s protection within their jurisdiction. The first large governments that grant jurisdiction will reap big rewards over other governments that lag behind. This same first mover advantage will be true for corporations as well, those that adopt this new paradigm shift first, will stand to gain at the expense of slower players in their markets.
Crypto-currencies will slowly change the money world. And I would call that disruptive!
Michael Carrier – Bay Area Crypto Entrepreneur
You can find Michael on Twitter @michaelpcarrier