Cryptocurrency is just a minor threat to the state: CoinDesk

Are cryptocurrencies a new form of money, and if so, do they threaten state power?

Our friend Nic Carter recently commented on these questions in dialogue with the Federal Reserve Bank of New York. We would like to add our perspective and reflections on this, as we believe there is value to be drawn from the in-depth discussion of these topics. For better or for worse, we believe that blockchains like Bitcoin, Ethereum, and Handshake (which I am involved in) have characteristics that make them a new threat to the powers that states derive from issuing currency, but only a very marginal threat. This fairly bland conclusion derives from more controversial premises.

New York Fed writers name three types of money: fiat money, intrinsic value money or commodity, and money backed by claims. Without getting lost in the weeds, we think this complicates things. All the money we can think of falls into two categories: either it has intrinsic value (like edible grains) or it doesn’t. If not, its value comes from the assumption that someone else values ​​it.

This mysterious “someone else” may be totally unspecified, as when we assume someone will pay us for gold; or it could include a specific party, such as a state, that promises to take the money in exchange, for example, for fulfilling tax obligations. Bitcoin, like gold in the post-gold standard era, falls into the first category. It has no intrinsic value and no one in particular has promised to trade it. Let’s just imagine that someone will.

But we shouldn’t be surprised that the most popular types of money in the world are the ones that states explicitly promise to honor. For states, such promises are an extremely important instrument of their power. For example, by accepting only dollars as tax payments, the United States forces its hundreds of millions of people to make sure they have dollars on hand. For this reason, everyone in the world knows that they can sell their dollars to someone (for example, to residents of the United States). Plus, everyone knows that by accumulating dollars they gain some leverage over the United States. This situation allows the United States to print its own money and, in so doing, project its power around the world.

The power to print money also gives states another kind of power: it allows them to maximize their productivity. By increasing the money supply, they can drag more people to the margins of the economy in the production process. But this comes at the expense of the scarcity of money and, as it puts the newly minted money directly into the pockets of the less powerful, it tends to diminish the power of those who have already amassed a lot of money. Hence, artificial money supply constraints, such as the gold standard, are often associated with extremely conservative policies. Limiting the money supply harms productivity but preserves social hierarchies.

This is where the more benign hopes of transcending nation-states mix with the darkest fantasies of the so-called bitcoin maximalists. On the one hand, a meaningful alternative to national currencies could allow people in abusive regimes not to rely on their governments’ useless “promises”. On the other hand, a mechanically fixed money supply could put an unequal social hierarchy beyond the reach of democratic power, as the gold standard once did.

Read more: Trump’s security hawks call logs distributed in US-China tech arms race “critical”

Bitcoin, in this respect, is very similar to gold. And like gold, it poses no active threat to state currencies or state power. Since the value of state currencies – as described above – is based on the actual and practical power of states. Throughout modern history, the main reserve currency has been the currency of the world’s most important military power. Only if states lose their status as major world powers are their currencies likely to follow suit.

Cryptocurrencies are only playing on the edge of this reality. However, they can play an interesting role because they have characteristics that previous non-state currencies did not have. For example, they can facilitate coordination and communication between their owners. Imagine if all gold holders could, for example, vote whether to mine more. Additionally, some cryptocurrencies have intrinsic value, such as ether (which pays for using a distributed network) or HNS (which pays for domain names on a decentralized ledger).

The continuing improvements in global cooperation taking place in the bitcoin / crypto private sector stem from the many players ensuring that a proof-of-work (PoW) system remains secure.

The complexities that go into hashrate manufacturing, such as power and chipmaker pricing, manufacturing, international sales and marketing, mining pools, and hashpower secondary markets. All are playing a role in strengthening relationships locally and internationally.

Therefore, an adequately protected chain has then made its way into regional regulations and labor, becoming a localized economic staple over time as it approaches the scale. And the second-order effects that come with that built-in incentive chain include a secure public blockchain, not only technically but socially and politically as well. The safer chains that possess such widespread economies of scale become powerful economic tools of finance and political social progress (albeit slowly, but each new large public chain accelerates this emerging process, thankfully).

Essentially, although these systems may at first seem averse to state power for their own project, if you look closely you will see that they inherently (slowly) improve diplomacy through scalable trustless cooperation and international affairs over time.

To learn more about the “PoW hashpower alchemy” and how it naturally draws incentives for international business cooperation, see this ongoing series from Anicca Research. The trustless systems we implement globally have powerful consequences and it is important that we as an industry understand how to continually scale down the positives of decentralized monetary systems, without amplifying the negative effects such as centralized financial influence.

States are not wrong to be threatened in some way by these hard-to-evaluate possibilities. If many people decide that they would rather hold cryptocurrencies rather than state-backed currencies, the ability of states to project power through their currencies will diminish.

Learn more: The Crypto-Dollar Surge and the American Opportunity

But states still have armies, police and – on a good day anyway – democratic legitimacy. All of this still matters and will be for a long time.