The Bitcoin Standard

Well, here’s another Bitcoin book. It’s probably the one that received the most attention in the past year, even beyond the crypto industry - Saifedean Ammous’ The Bitcoin Standard. Ammous is an Economics Professor at the Lebanese American University, disciple of the Austrian School and notably Friedrich Hayek and Ludwig von Mises.

Austrian Economics has a large fanbase in the Bitcoin community. Crypto-anarchists have been Austrians at heart, propagating individual freedom and despising any form of government intrusion. Bitcoin is a direct response to the mess that has been fabricated with the great financial crisis of 2008. The genesis block notably includes the London Times headline from 3rd January 2009 “Chancellor on brink of second bailout for banks.”

“The fundamental scam of modernity is the idea that government needs to manage the money supply,” claims the author. Every attempt had ended with economic disaster. Ammous mocks the two main ‘government-approved’ schools of economic thought, Keynesians and Monetarists. Notwithstanding their fundamentally opposed methodologies and analytical frameworks, they’d still agree on the fact that the government needs to expand money supply.

Before governments ruled monetary policy, the world had the ‘gold standard’, fixed exchange rates linked to the price of gold. The gold standard allowed “unprecedented global capital accumulation and trade by uniting the majority of the planet’s economy on one sound market-based choice of money.” Sound money is necessary for people to think long term and invest in the future, rather than giving rein to intemperate consumption in the present. Individuals would act rationally rather than impulsively, create capital goods, make production more sophisticated and technologically advanced, so goes the theory. 

The second half of the 19th century would be the “greatest period for human flourishing, innovation and achievement”. Until 1914, when the major economies went off the gold standard, to replace it with unsound government money. Thinking about how to finance their wars, the various regimes in charge could now easily inflate their currencies and tap into the wealth of their population.

For a short time the Bretton Woods system, orchestrated in 1944, would reinstate fixed exchange rates. The US dollar took over the role of a world reserve currency, backed by the large amount of gold reserves stored on US soil. When France and Germany started to buy back gold with their weakening US dollar funds, President Nixon ended the peg unilaterally in 1971. It was the start of an unprecedented expansion of monetary policy.

Enter Bitcoin. For Ammous, Satoshi Nakamoto was clearly influenced by Austrian theories when he was putting a hard cap on the total supply of bitcoins (21 million is the maximum number of coins that can be mined). “An asset that holds its value is preferable to an asset that loses value,” he lectures. Savers looking for a medium of exchange would gravitate towards assets that hold value over time.

Bitcoin is therefore solving the problems of salability (the ease with which a good can be sold), soundness and sovereignty. Bitcoin is sovereign, with own rules that are nearly impossible to modify for outsiders, including governments. That guarantees a high degree of economic freedom, as users don’t have to ask for permission to send money, and they can do so anonymously. But most importantly, the money cannot be confiscated. It’s a pure peer-to-peer system that cuts out third parties. (I tell you, most of those folks don’t really trust banks!)

The book is of course one-sided, reflecting the view of what is known as a “Bitcoin maximalist”, who only considers the original Bitcoin as the real thing. Ammous still makes a (small) effort to find value in other corners of the crypto space. His main point is a valid one though. With Satoshi gone, there is no owner of the bitcoin network, other than the users who are running the nodes. It’s the only truly decentralised currency. 

Saifedean Ammous: The Bitcoin Standard. Published by John Wiley & Sons, 2018.

Money of the future

One aspect that fascinates me of bitcoin and the crypto industry is to have many young founders and visionaries that are very approachable. You can just hit them up at meet-ups and they might even respond on Twitter. Singapore has a vibrant ecosystem and in the few months that I’m watching the space, I’ve already had the chance to chat with two of them - Binance’s Changpeng Zhao (CZ) and Bitcoin Cash evangelist Roger Ver. Every industry has its charismatic leaders and especially the emergence of a new technology, the great disruptions that come with it, are creating fascinating stories.

Finn Brunton’s Digital Cash is a book that tells the story of the anarchists, utopists and technologists behind the creation of bitcoin. The reader gets to know libertarians and “extropians”, a culture absorbed by science fiction fantasies and “west coast hedonic optimism”, but always with a deep-rooted scepticism of government. Back in the 80s, a loosely organised circle called the “Cypherpunks” formed a mailing list to discuss encryption, digital pseudonyms, black markets, psychedelics, experimental fiction and the collapse of governments, among other topics. Eric Hughes created the first anonymous remailer, Tim May wrote the crypto anarchist manifesto, Jude Milhon penned articles for the cyberpunk magazine Mondo 2000.

Electronic money and credit card usage had been on the rise for more than a decade and the group swiftly pointed out the surveillance problem that comes with it. States will be able to access these central payment networks and thereby control entire societies. Individuals can be profiled and cut off the system with ease. Personal privacy will soon be a thing of the past. “The real choice is between a total state and crypto anarchy,” declared Tim May.

David Chaum had a desire to preserve individual privacy and he even wanted to work together with the existing banking system. Chaum presented his ecash in 1983, as a tool for banks to turn existing currency into digital cash. Banks can create money on a physical card or in a digital wallet that can be emailed. When the account holder spends his money, public key cryptography will blind the transaction to both bank and merchant, although they can still check that the cash hasn’t been spent before. Chaum was running a pilot with Deutsche Bank in the 90s, but his company DigiCash folded at the end of the decade.

There was Phil Salin, a big fan of Austrian School economist Friedrich Hayek. Salin created the American Information Exchange, a marketplace for the free circulation of information and money, for people to trade intellectual property, patents, surveys, analysis. Xanadu, a sister project that was later acquired by the company Autodesk, had the ambition to digitise all human knowledge and to “monetise thought”. It was a network based on property and ownership, with royalties to be paid on every byte transmitted. Salin died of cancer in 1991 and was one of the first to have his head cryogenically frozen, to be revived when science would allow it. How to move money forward in time, to be able to use it in the future? That was one of the questions the Cypherpunks discussed. 

Another participant in the list was Wikileaks-founder Julian Assange, conducting his first experiments with anonymised networks. In 1993, Tim May invented the “BlackNet”, a purpose-built “non-place” where operators won’t know their users and users won’t know who runs it. It deemed nation states and national security considerations as relics of the pre-cyberspace era. John Perry Barlow later published his Declaration of Independence of Cyberspace, telling the world elites in Davos that they are not welcome. In their tradition, Ross Ulbricht created the marketplace Silk Road, to be shut down by the US government in 2013. That was when many of us heard about bitcoin for the first time.

Several ideas contributed to its foundation. Adam Back’s Hashcash and the partial hash collision algorithm, the “proof-of-work” or processing time that miners have to contribute in order to earn bitcoin. Hal Finney further developed the idea into reusable proof-of-work, effectively creating token money. Nick Szabo came up with the concept of BitGold. He was the first to suggest decentral “smart contracts” in order to solve the double-spending problem. Wei Dai’s b-money incorporated most of these ideas, a decade before the actual Bitcoin was released. Satoshi Nakamoto’s white paper was quoting Beck, Dai and Ralph Merkle, the inventor of cryptographic hashing. Eventually, on 11 January 2009, Hal Finney tweeted “Running bitcoin”. And utopia suddenly became a reality.

Finn Brunton: Digital Cash. Published by Princeton University Press, 2019.