How Bitcoin Will Destroy Banks

We’ve got another awesome Sex and the State guest post! If you would like to submit a guest post, please fill out my contact form with an brief outline of what you want to write about.

Look past the world in front of you

Explore your time

No trust, no love, a nothing news

A cheaper dime

Ruins wrought in the present day

Your leaders glean

Don’t let the truth slip away

See the unseen

Tear down your wall of ignorance

Reach for the stars

There’s not much time; take a chance

Forget your czars

The state that feeds ties the noose

Serves you morphine

Don’t let that drip numb the truth

See the unseen

With the mainstream news picking up on Bitcoin once again, the response to this monetary innovation has been all over the map. Whether it be unstudied fear;  the informed hope of an up-and-coming Millennial; the downright bemusement of an aging dinosaur; the witty exuberance of a modern day leveller; or the cartoonish nay saying of business insiders, there are many vehement opinions on Bitcoin. In time, we will see which sentiments and predictions are correct, but for the time being, allow me to once again throw my humble hat into the ring.

I venture a greater adoption of Bitcoin will help lead to a greater understanding that freed-markets, i.e. communities based in voluntarism, are superior to the current hegemonic relationship experienced by most the of the global population in relation to state sponsored banking. This will happen for three intertwined reasons: (1) given the nature of Bitcoin as a voluntary, decentralized system whose future is reliant upon entrepreneurial activity and (2) given the nature of state sponsored banking as a coercive, centralized system whose future is reliant upon political force then (3) how both systems will act in order to maintain and justify their continued existence will demonstrate that voluntarist solutions are possible in solving problems traditionally claimed to be the sole province of the state.

The Nature of Bitcoin

Bitcoin has the potential to disrupt the prevailing monetary order of central bank command-and-control because it is its own decentralized and voluntary system with the capacity to issue, secure, and transmit money. These processes are audited automatically through an encryption process known as mining which is published on the Bitcoin network’s universal ledger, the Blockchain. Bitcoin isn’t a fiat currency such as dollars, yuan, or euros, and it’s not exactly analogous to precious metals either. Though the Bitcoin network has the capacity for frictionless, low-cost peer-to-peer transactions, it accomplishes this in a manner quite different than a traditional money-wire service such as Western Union or an online-payment service such as PayPal. Bitcoin provides services similar to all these examples, but that’s not what it is. For those who like to learn through vivid metaphor, the best I have heard for Bitcoin is the allegory, “The Island of Stone Bitcoins.”

At a fundamental level, Bitcoin is a novel way of reintroducing private property rules into a monetary space festering with political controls that are anathema to a free society. Think of Bitcoin as a burgeoning new interactive sport or video game that is slowly becoming more popular because the games of old have grown tired, stale, rigged, and self-destructive. Bitcoin’s rules are implicit in and enforced by its distributed network so that people must freely choose to play by those rules if they are to play at all. The implication of this decentralized enforcement process is that there is little-to-no need for traditional political controls associated with money and banking.

Accordingly, Bitcoin should be seen as a threat to (excuse me, savior from) the dominant monetary regime marked by state privileged central banking.

The Nature of State Sponsored Money and Banking

Contrary to conventional opinion, the current monetary regime is incredibly fragile because it is based upon a legacy of political force and centralized power rather than the peaceful individual consent of market participants. State sponsored central banking is clearly not a product of the free market; it can only exist through political coercion, as the central bank is given an exclusive government grant of privilege over the issuance of money as well as other power over the monetary system.

For example, Bitcoin is not yet money. It will only become “money” when it is voluntarily accepted as such by the global population (if they are allowed.) Central banks, however, see money as a matter of political authority: a case of ex-cathedra where whatever they say is money is money.

Here is the People’s Bank of China on how Bitcoin is not money (emphasis mine):

Some people call Bitcoin ‘currency,’ but because it is not issued by the monetary authorities, it is not truly money. Bitcoin is a virtual good, it does not have legal status and cannot and should not be used as currency in circulation in the market.

Such a pronouncement is a telling example of the fatal conceit that afflicts central planners, especially central bankers. From a free market standpoint, money is a naturally occurring phenomenon that would appear without the state’s control or diktat. Just as light bulbs, shoes, and skyscrapers have been provided by the market so to could money be produced by the market.

Yet, try telling this to most people established in the prevailing financial system and prepare for a heaping-helping of scorn and derision if not blatant laughter (the kind where they’re laughing at you.) This goes to show that though state sponsored central banking is based upon political force, it is ultimately justified by its utility to people and their acceptance of the rules, economics, and political philosophy that support the system’s continued existence.

As soon as people discover and build a market monetary system (I imagine Bitcoin to be a mere part of this endeavor,) the legacy of force central banks are founded upon will not continue for much longer, as the justification for their hegemonic power will be demonstrated to be false.

Looking Into the Future

Whether or not Bitcoin will succeed in supplanting state sponsored banking is a wait-and-see proposition; this will depend upon both the success of the entrepreneurial activity surrounding the Bitcoin space and the policy actions of the central banks and their governments.

If Bitcoin is to unseat state sponsored money and banking, the foremost reason will be the self-destructive behavior of the central banks of the world. In their hope to mitigate the painful symptoms of economic stagnation they have caused, the monetary authorities are destroying themselves; each new intervention in the market must be followed by more interventions in order to keep the party going–e.g. the issuance of more and more debt for less and less growth–which as David Stockman has put it, “is crucifying the savers of America on a cross of ZIRP.”

Slowly but surely, the drip of fiat money from of the state is numbing-to-death the heart of capitalism that is the capital markets, and as they continue to exert their power to save themselves and their deficit hungry government sponsors, the central banks will lose their power over the market. People will begin to see less and less utility in the state’s monopoly money and eventually stop believing the promises of the monetary authorities. A contemporary example of this: the interventions undertaken by the government in Argentina. As laid out at the beginning of episode 65 of Let’s Talk Bitcoin, the behavior of the Argentine central bank and the government’s increase of capital controls is leading to the greater adoption of Bitcoin to escape financial state-wreck.

If Bitcoin rises to global prominence under such state-wrecked conditions, it will most likely help to put the kibosh on the acceptance of those economic theories and public policies that support the imposition of state power to “save the free market from itself.” Economic bromides such as “deflation is bad everywhere and always” and “the paradox of thrift” would finally be shown wanting in practice. Monetary nostrums such as zero-interest-rate policy and counter-cyclical government stimulus would be seen as ineffective, destructive, or even as outright forms of legalized theft. Many people who have long been revered as “experts” in the prevailing monetary order will be seen as dinosaurs if not outright charlatans (I’m talking to you Alan Greenspan!)

Beyond these considerations of the state’s actions, there is much that needs to be done in the Bitcoin space. There are many known and unknown goods and services needed for the development of the digital economy and the larger acceptance of cryptocurrencies in general. Whether it be the greater development of wallet/security/arbitration services, more robust and sophisticated exchanges and payment processing platforms, or the development of social service networks along the lines of digital mutual aid societies, the potential for the digital economy in general and Bitcoin in particular is astronomical.

That being said, it is a fool’s errand to try and construct an abstract model of the potential Bitcoin economy in order to impose it upon the world: that would be true “rational constructivism.”  An economy can only be built through the individual human action of many participants, and to my mind, that requires a humble admission of “I don’t know where this is all going exactly.” Both true-believers and naysayers need to keep this in mind.

Bitcoin did not and will not “just happen” on its own even if all of us were to wish upon a star; leave the Jiminy Cricket economics to the politicians and their ilk. For Bitcoin to succeed, we need entrepreneurship and people with a vision of how to solve the problem of making money and banking a more equitable experience for the global population.

I am of the mind that such people do exist and if our work does succeed in bringing about a greater adoption of Bitcoin, I plan on being happily surprised by a free market renaissance that is impossible to imagine with certainty. Is it any wonder so many libertarians are interested in Bitcoin? Bitcoin is voluntarist solution to ordering an uncertain world, so while your political leaders glean ruins wrought in the present day, take the time to look past the world right in front of your face and see the unseen world of the rising digital economy.

Joey Clark is a freelance writer and political commentator. He is currently a radio producer and talk show host in Montgomery, AL. Read his blog. Send him mail.