Welcome to the CoinDesk Weekly Review 20th December 2013 – a regular look at the hottest, most controversial and thought-provoking events in the world of digital currency through the eyes of skepticism and wonder. Your host … John Law.
No flowers, by request
“Bitnot. Bitnot. Bitnot ...” The normally affable John Law could be heard angrily muttering this strange word under his breath for much of the week, as what should have been an agreeable round of festive engagements turned into a stream of “Ah, Law! Told you that bitcoin thingy was just tulipomania! Never did trust it.”
This is all courtesy of our friend the Chinese state, of course, which has cut off BTC China’s ability to exchange bitcoin for yuan, largely shutting down the cybercurrency’s largest market and prompting a rapid halving in its dollar value.
John Law’s chortling friends - alongside quite a lot of the media - have taken that as a signal that bitcoin is following the tulip mania speculative bubble model, referring to the famous events in Holland in the mid 17th century. Hence the invention, in self-defence, of the word 'bitnot': Bitcoin is not a tulip.
Which isn't to say that recent events are not tulip-scented: people have certainly been buying bitcoin in unreasonable expectation of rapid profits, because unreasonable profits have been available. Doubtless some still smart from this week’s Chinese takeaway. But bitcoin as a whole ain’t no flower, baby.
The tulip madness - in any case, a more complex set of events than those in popular understanding - saw large swathes of the population buy and sell contracts for future delivery of bulbs.
The bulbs themselves didn’t matter: they could have been anything for which fashionable taste had ascribed an arbitrary value. But bitcoin is a fundamental invention that actually does something new; moreover, a lot of its usefulness is pretty much decoupled from whatever speculative value it has at any one time.
If you’re using bitcoin to buy and sell stuff, as opposed to heap up value, then it doesn’t matter enormously whether one bitcoin is worth ten dollars or ten thousand. The person you’re buying your stuff from will give you a price in bitcoin that’s the dollar equivalent at the time of sale, so the amount of bitcoin you send will be worth that much.
As long as you and the vendor can exchange bitcoin for dollars efficiently on-demand, and as long as the price of bitcoin isn’t fluctuating wildly over the course of the transaction, everything works without drama. Things aren’t there yet, but that’s usually unrelated to systematic issues with bitcoin.
In other words, bitcoin isn’t the tulip - it’s the tulip and the system of contracts and the money flowing through the system. While bitcoin can create the illusion of far more value than exists - and remove it, cruelly, when the fantasy topples into instability due to some outside factor - it’s not alone in that, nor is that anything more than one aspect of a much bigger picture. Which will endure.
Meanwhile, John Law is imposing a new rule for party-goers: anyone mentioning the wretched flower without backing it up immediately with an intimate knowledge of the structural failings of the Windhandel contractual environment owes him a bottle of decent claret. To be delivered on the spot. Claret futures will not be entertained.
First rule of fright club
Banks and governments alike seem to be in the same club. When it comes to official policy on bitcoin, the first rule is don’t talk about official policy on bitcoin.
This was demonstrated twice last week, first in the way that the Chinese state banking system without any public announcement put the kibosh on bitcoin exchanges, and then in the way Barclay’s seemed to be hopping from one foot to the other on bitcoin transactions.
While John Law is entertained by the parallels between capitalist banking and authoritarian state socialism - he is reminded, as so often, of the Animal Farm's ending, where pigs and humans became indistinguishable - he does recognise FUD when he sees it.
FUD is an old IBM acronym for Fear, Uncertainty and Doubt; it’s a potent weapon for paralysing the competition without having to do anything so uncouth as actually producing competitive products or services.
The way it works is simple. You find the people who may be about to go to your competitors, and make them believe that they’re about to make a really bad decision. This can be by badmouthing the competition: "Their stuff doesn’t work, and you’ll be in so much trouble if you go with it." Or by talking yourself up: "Wait and see what we’ve got coming, you’ll look really stupid if you don’t."
Or you can make vague, threatening predictions: the whole market is moving away from what you’re looking at, you’ll end up out on a limb. But the key is not to come out with any specifics: the woolier and more ambiguous your ‘information’ is, the better it sucks all the logic and evidence out of the decision making process.
Done skillfully enough, this can not only paralyse an entire market for long enough to kill competition, it can also excuse a large organisation from actually having to make any decisions, thus covering up internal conflicts and systematic lack of clue - sometimes for decades.
John Law would not like you to think that the banking system and the Chinese state are necessarily driven by internal power struggles and pervasive executive incompetence. They might be. You just can’t tell.
But the real problem with FUD is that markets don’t like stasis. IBM got tripped up after decades of controlling the mainframe computer market, because small, nimble, smart companies just created their own new market in minicomputers and used new technology to change the rules. Microsoft ruled computing in the 90s: new technology from the Internet changed the rules and lanced the FUD boil.
It might seem unlikely that anything as mighty as the interlocking global machinery of state regulation and the banking sector can be bypassed with new technology: cybercurrency must play their game or get out.
Yet while they’re reacting with FUD and not even saying what the rules of the game are, history predicts that the rest of us will get tired of waiting and jump ship sooner or later.
While the rest of the world is lollygagging about trying to work out whether bitcoin is a flower or a threat to global finance, Bitcoin is quietly ironing out its bugs and dealing with problems. Along the way, it’s showing some interesting behaviour that nobody would have predicted.
Most of this is in the areas of privacy, anonymity and criminality. Bitcoin is built on the idea that nobody needs to know who you are or why you’re doing something: what you’re doing, however, is entirely open. But can you link all of that together?
Meanwhile, straightforward theft and extortion involving bitcoin remains incredibly difficult to trace back to source.
All this reflects the eternal tension between law and freedom. Should you be banned from doing things because they might cause damage, or be allowed to do them provided you accept the consequences of the damage done?
One way will inevitably stop people from doing things that should be done, out of a surfeit of caution; the other will allow damage to happen that could have been stopped, out of a surfeit of carelessness.
In real life, across history and society, there is no one right answer: a working mix of liberty and control, privacy and publicity, is constantly tried and tinkered with. So it is with bitcoin; this week saw some detailed musings from developer Mike Hearn on keeping your salary private, and more on chasing criminals across the block chain from researcher Sarah Meiklejohn.
John Law has always learned more about the true potentials and pitfalls of cryptocurrency by reading up on what goes on in the engine room than hanging around with the Winklevii or axe-grinding doomsayers. If nothing else, you come away with some delicious little details.
Meiklejohn had a lovely one: because it’s been possible to identify the wallet the FBI is keeping the confiscated Silk Road bitcoin in, people have been able to send it tiny donations - with globally visible notes attached.
These range from spam to trenchant observations via jokes in dubious taste - but because they’re now part of the global block chain and that is designed to be an everlasting record of all transactions, these snide little snippets will last as long as bitcoin itself.
As writing itself evolved from accountancy, there is a delicious resonance here between the very latest, fantastically complex technology and the very first, disarmingly simple business of clay tablets and styluses from 3,000 BCE Mesopotamia.
Whether bitcoin will still be here in 5,000 years, John Law will not speculate – but if it is, so will people’s opinions of the FBI.
John Law is an 18th century Scottish entrepreneur, financial engineer and gambler. Having reformed the French economy, invented paper currency, state banks, the Mississippi Bubble and other ideas essential to modern economics, he took three hundred years off in a small cottage outside Bude. He has returned to write for CoinDesk on the foibles of digital currency.
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.