Encoding Value: What is cryptocurrency, and what does it mean for society?

Author: Stephanie Betz, PhD candidate at the Australian National University and a digital anthropologist researching the intersections between people and technology.  Her doctoral research is an ethnographic study of the relationships people develop with and through computer-controlled video game characters.  Her research interests include artificial intelligence and machine learning, art and images, and narrative-based communities.

Most people have heard of Bitcoin.  Fewer, perhaps, its sibling currencies of Litecoin and (my personal favourite) Dogecoin, among more than 1,900 others.  But how many people understand what cryptocurrency actually is, never mind its implications for society more broadly?

Although Bitcoin is the world’s best-known cryptocurrency and therefore features prominently in this post, it is not actually the first.  There had been previous attempts to set up an electronic cash system, including one in 2005 called ‘bitgold’. However these attempts didn’t take off in the same way that Bitcoin did when it was introduced in 2009.  The timing is significant: 2009 was just after The Global Financial Crisis, which, when it peaked in 2008, shattered confidence in the global financial system.

Fast forward to 2014 and Julia Tourianski, a prominent supporter of Bitcoin, penned ‘The Declaration of Bitcoin’s Independence,’ which was later endorsed by a variety of Bitcoin luminaries reading segments from the text in a five-minute YouTube video.  Written in response to the fear that the Bitcoin project was in the process of being absorbed by state institutions, the declaration claims, among other things, that “Bitcoin undermines governments and disrupts institutions because bitcoin is fundamentally humanitarian” and that “Bitcoin will allow us to shape the world without having to ask for permission.”  But what kind of world is Bitcoin, and its supporters, promoting?  And how does it relate to the code that makes Bitcoin, and other forms of cryptocurrency, possible?

What is Cryptocurrency?

I asked The Familiar Strange’s Simon Theobald how he would describe cryptocurrencies and he suggested “make-believe money on the Internet”, which is not a bad description, although of course, all money is fundamentally make-believe.  Other ways that people have described cryptocurrencies is as “digital cash”, “the currency of the future”, “a Ponzi scheme for the Internet”, and “a social movement.”  All have an element of truth to them.

Without getting too technical, cryptocurrencies are a solution to what has been called the ‘double spending problem’ of digital currency – that is, the risk that the same unit of digital currency could be spent twice.  Physical money doesn’t have this problem because a unit of currency can only be in one place at any one time.  If I give you a dollar, you have one more and I have one less (although, of course, counterfeiting has always been a problem associated with physical currency).

Digital currency, on the other hand, is the same as any other digital file – sending it to someone doesn’t necessarily mean that you have lost access to it. You can usually send it to more people: a fundamental property of digital media of all sorts is that they are easily copied and multiplied.  This is a problem for digital currencies, because if it can be duplicated then it is worthless as currency.

Capitalist societies have actually been using digital currency for quite some time – it is what we are doing every time we use EFTPOS to buy something – but it requires trusted third parties (banks or other financial institutions) to keep track of the accounts of each party to the transaction to ensure that the same unit of money is not spent twice.  This puts an intermediary between the buyer and the seller – an intermediary who, needless to say, takes a cut of the money that they oversee the transfer of.

Cryptocurrencies are virtual networks that allow users to transfer digital currency to one another without relying on an authorised third party to verify the transaction.  Cryptocurrencies represent a “peer to peer electronic cash system,” as articulated by Bitcoin’s mysterious founder, Satoshi Nakamoto, in the white paper that introduced Bitcoin in 2009.

Blockchain

Cryptocurrencies are built on a technology called ‘blockchain,’ which has broader applications than cryptocurrencies.

Blockchains are distributed records of transactions that are held and verified by all members of a virtual network: a public, shared (but pseudonymous) ledger rather than one held behind the closed doors of a financial institution.  People are incentivised to participate in this virtual network and contribute their computer’s processing power to completing the cryptographic puzzles that are necessary to verify transactions because there is the chance of obtaining Bitcoins by doing so (a process commonly known as ‘mining’).

I won’t go into any further detail about how the blockchain technology behind cryptocurrency works – there are some great resources out there for those who are interested in investigating further.  Instead, I will turn to a consideration of the kinds of values that are literally encoded into digital currencies based upon this technology.

Money and Trust

All forms of money require trust – trust that the money you put into banks will be there when you want to take it back out, and trust that the amount of money you have today will have approximately the same value tomorrow.

But following the Global Financial Crisis, people began to lose trust in both the banks and the state as guarantors and guardians of money.  This was the moment when Bitcoin offered a “trustless” solution.  In the post that announced the Bitcoin white paper, Satoshi Nakamoto (2009:n.p.) wrote:

The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts.

Cryptocurrencies such as bitcoin promise freedom from having to trust both states and banks by providing a money supply separate from governments, and a payments system separate from banks.  In the conclusion of the Bitcoin white paper, Nakamoto (2009:8, my emphasis) argues that Bitcoin is “a system for electronic transactions without relying on trust.”

Of course, Bitcoin is not really a ‘trustless’ currency.  Like all other forms of money, it requires people to trust that it will continue to be worthwhile to invest in.  It requires trust in the algorithm that defines it.  And it requires trust in the community of people who work on that algorithm.

For example, the value of a Bitcoin (currently sitting at USD$6,750 for 1 Bitcoin) is based in large part on its finite supply: the protocols that underlie Bitcoin specify that there will only ever be a maximum of 21 million Bitcoins in circulation – no more will be produced after this number is reached.  But unlike finite physical resources, such as gold, there is no reason that this number has to represent the upper limit and it could, in theory, be altered.  Its present value is based on trust that this cap will not, at some future point, be removed.

There have already been situations that have challenged people’s trust in cryptographic protocols as a means of guaranteeing currency.  In August 2017, disagreements among Bitcoin developers about how to deal with the problems created by the increasing number of users led to a split in Bitcoin’s blockchain protocols (a ‘fork’), with a spin-off created called Bitcoin Cash (Bcash).  The disagreement was not just technical; as David Glance has argued in his Conversation article on the split, “There are ideological and commercial interests driving the various players.”

While there have been many different cryptocurrencies created since Bitcoin’s launch, they were created from scratch, with brand new blockchain ledgers.  Bcash differed in that it copied Bitcoin’s codebase – all of the transactions that had been made through Bitcoin up to the point in which it split – leading to “a situation in which everyone that had one bitcoin suddenly also had one bitcoin cash” (Mow 2017:n.p.).   A new, fully formed digital currency had suddenly sprung up out of nowhere and was already invested with value.  As Samson Mow, chief strategy officer at Blockstream, a blockchain technology company, wrote in Fortune magazine (2017:n.p.), “Bitcoin Cash’s birth has shown that markets can be manipulated with just a bit of computing power, a participating exchange, and a healthy dose of greed.”  Not much different, then, than the trust-based currency that Bitcoin purported to replace.

In the same year that Facebook has come under increasing scrutiny for the way in which its algorithms manipulate the information that you see on your newsfeed and Centrelink came under fire for the incorrect algorithmic attribution of debt to its clients in the robo-debt scandal, it is perhaps not surprising that Bitcoin’s value has been declining, with some observers predicting that “the Bitcoin bubble will burst in 2018.”

Encoded Values

Yet the underlying philosophy of Bitcoin continues in other cryptocurrencies and some more ambitious projects based upon blockchain technology – such as Bitnation, which describes itself as “the world’s first Decentralised Borderless Voluntary Nation” and a “global marketplace for governance”.

Bitnation was founded in 2014 as a protest against state surveillance, control, and ineptitude.  By using Bitnation’s ‘Pangaea’ software, people can create their own virtual nations based on their own principles, cultures, or traditions.  Joining a virtual nation allows you to access their blockchain-based services ­– such as identification, dispute resolution, marriage and divorce, land registration, and insurance – although it is important to note that they currently have no legal existence in any traditional state.  The motivating idea is that states should have to compete with one another for citizens by offering the best price and quality of services.

When taken to its natural conclusion, Bitnation is a radical crypto-libertarian thought experiment of a truly borderless world, where geography wouldn’t define nation-states and people can pick and choose their own systems of governance.   Bitnation currently has around 15,000 citizens spread around the globe, organised into 500 registered virtual nations.  This would give an average population per nation of just 30 people.

Western-Centric Values

While there are undoubtedly useful applications for blockchain technology, the crypto-libertarian philosophies that appear to underlie the most popular cryptocurrencies trouble me for two key reasons.

Firstly, replacing trust in people and institutions for trust in code can easily obscure the way in which algorithms can, and do, literally encode bias.  While I am not suggesting that Bitcoin or any of the other cryptocurrencies or institutions based on blockchain technology have evidenced bias of this sort to date (although the developer community behind them has – like many other technology communities – problems with sexism, and cryptocurrency has been enthusiastically picked up by white supremacist groups), it concerns me that the seeming neutrality (and impenetrability) of such technology may confound our ability to hold them to account.

Secondly, and related to the first, what cryptocurrencies and other blockchain technologies do seem to encode is a Western, libertarian philosophy of individual choice within a radically free market.  The obvious benefits that Bitcoin and other cryptocurrencies provide by allowing greater access to global financial institutions for the unbanked, as well as reduced remittance costs, should give us pause to consider what kind of cultural assumptions we are exporting along with this supposedly neutral technology.

The philosophical basis of freedom from binding relationships with people and institutions that underpins Bitcoin’s current manifestation not only expresses a highly specific Western ideology but fundamentally rejects the basis of money as a form of social relation[i].  Georg Simmel once described money as a “claim upon society.”  But what kind of world does Bitcoin, and other cryptocurrencies like it, implicitly allow us to lay claim to?

Footnote:

[i] However, it is important to note that despite this radically libertarian philosophy, there is a thriving community of developers and enthusiasts that has formed around cryptocurrency.

[Feature image sourced at: https://www.pexels.com/photo/100-dollar-bill-assets-benjamin-franklin-bitcoin-843696/]

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