Recently, Washington Post writer Henry Farrell took the opportunity to declare a bleak future for Bitcoin, but more specifically its revolutionary transaction network. His article “Bitcoin’s financial network is doomed” was responding to an article in Vox where the author proclaims that despite the adoption difficulties of Bitcoin as a currency, the long-term success of Bitcoin lay in its technology, that is, the block chain and the seamless global transaction network.
Farrell argues that the network is exactly the reason Bitcoin’s future is nothing but trouble and litigation:
Now, imagine the likely response of the U.S. (and the E.U., and, for that matter, China) to a payment network which is designed from the ground up to be decentralized, so that it is impossible for any specific intermediaries to really control payment flows from one actor to another. Such a network would be impossible for states to control. The U.S. wouldn’t be able to use it, for example, to squeeze Iran out of the world financial system. If such a network ever showed signs of really becoming established (rather than being a relatively small-scale thought experiment, and money suck for libertarians with more ideology than good sense), the U.S. would ruthlessly act to isolate it from the international financial system. […] And that is the story of Bitcoin. Up to this point, regulators have largely tolerated Bitcoin as a curiosity and experiment.
Bitcoin Is an Outlaw?
He then goes on to categorize Bitcoin – an instrument of instant transfer based on the trust placed in the block chain, impervious to counterfeit and accessible by all – with Hawala, an ancient system of moving funds through friends and family which is known to have been used in the financing of terrorist activities.
Regulators still don’t know quite what to do with Bitcoin. But if Bitcoin were ever to threaten to become a truly decentralized payments network, owned by no one, and with no one e.g. capable of implementing Know Your Customer rules, regulators would know very well what to do with it. They’d introduce regulatory guidances and pass laws to freeze it off from the regular financial system. Very possibly, Bitcoin could still survive at the margins (as the Hawala system has survived).
Quick research – accessing the very link that Farrell himself provides, actually – illuminates the fact that Hawala and Bitcoin have very little if anything in common. For starters, Hawala always involves a third-party to escrow, move the funds, take a risk, and collect a fee. The way that it benefits the sender – the way the element of anonymity is provided – is that the third-party’s ledgers focus on what is owed to the receiver, not on what is received from the sender. This system is so radically different from the way Bitcoin transactions operate, which is more like sending cash through the mail, that it seems bizarre to mention it in the same breath as Bitcoin at all. It speaks to the author’s viewpoint, certainly, or maybe more accurately to his goal with the article in this very mainstream, very reputable publication: to trivialize and defame that which he does not take seriously.
The Dollar (~1/300th of a Bitcoin) is Superior?
Back to the article Henry Farrell was writing in response to by Timothy B. Lee, there are issues to be addressed with it as well.
[I]t would be easy to write Bitcoin off as a fad whose novelty has worn off. […] After all, dollars seem superior in almost every respect. They’re accepted everywhere, they’re convenient to use, and they have a stable value. Bitcoin is an inferior currency on all three counts.
Convenience is, of course, a matter of degrees. Bitcoin is superior to any currency when it comes to international transactions because there are virtually no fees by comparison. The notion that the dollar is accepted everywhere is loaded with contention and seems ignorant of present financial analyses which see it long-term going the way of the Ruble – for more reasons than one, but in large part due to serious mismanagement by the authorities who issue it. Since Bitcoin has no such issuing authority, it has a brighter future than any fiat currency which relies on institutions to be everlasting. After all, it’s no mistake that people flock to precious metals in times of economic distress. There have been situations in the US in the past decade where some of the largest holders of dollars have very nearly removed all their wealth from that currency in response to instability on the level of insanity. Calling Bitcoin “inferior on all three counts” might be easy and acceptable today, but in a nearer future than people like Lee or Farrell might imagine, it could seem ridiculous if not nefarious.
Bitcoin is a Bad Investment?
Elsewhere, in Quartz, Matt Phillips declares that Bitcoin was the worst thing to invest in during 2014. Such a broad statement could be addressed simply by saying, “Guess you didn’t hear about Dell or Boeing. Or the Russian Ruble, for that matter.” However, let’s not take the easy way out. Let’s address some of this tirade:
[S]ome of the shadier usages of the currency—say for evading taxes and buying drugs—have been tougher to execute as governments increasingly try to clamp down on the “dark web” sites where bitcoin quickly became the cryptocurrency of choice. Collapses of large, unregulated bitcoin exchanges—such as Mt. Gox—have done little to instill confidence in the currency either. [S]ome of us have argued that bitcoin actually never was a currency, but rather a plaything of speculators. […] Maybe conventional payment systems will come around someday and start incorporating some of the structural advantages that transacting in bitcoins provides. [B]ut in the meanwhile, the saga of relentlessly sagging bitcoin prices—as well as stagnant usage indicators—underscores an unpleasant fact for libertarian technologists. Money derives much of its value from its government support, in that the government has the power to make it legal tender
Phillips is insinuating here that the value of Bitcoin ever was or ever will be attached its ability to purchase drugs. Like in most of his viewpoints, he makes no mention of the fact that dollars and every other currency out there are also used in the procurement of illegal drugs. Everything from firearms to cars to rare paintings have been traded to drug dealers. Should we consider those things less valuable, valid, or acceptable as a result?
Government-Backing Is the Source of Value? Doesn’t the Russian Gov’t Back the Ruble?
Phillips goes on to state the obvious but writes off the possibility that a government may indeed come along and decide to use Bitcoin as its national currency and only way to pay taxes. There’s certainly nothing stopping such a thing from happening. And is value really an issue when it currently takes over 300 of these precious dollars to make one Bitcoin? That’s without a government to clamp down and force adoption. That’s without an archaic system prone to error and positioned to benefit a select few. It seems that articles like this one will be laughable in the future, but in the near-time they are damaging in that they press those who are on the fence about Bitcoin to stay that way.
Luddite economists have been predicting the end of Bitcoin ever since it took off. Even Wired magazine declared the “rise and fall” of it a couple years ago. Bitcoin has survived all of this with a spirit of positivity, growth, and openness. So while the end is always nigh for those who are comfortable with the status quo and we are all about to lose everything in their eyes, those who keep amassing Bitcoin and other cryptocurrencies will likely be the ones laughing in the not-so-distant future when these same voices are moaning about the death of the dollar.
Images from Shutterstock.