Last week i went to the London School of Economics for the LSE Sociology Forum: Bitcoin, alternative currencies reloaded, a panel dedicated to the decentralized, peer-to-peer currency Bitcoin. Historian Garrick Hileman, sociologist Nigel Dodd and financial activist Brett Scott were sitting around a table to reflect on the question:
Is Bitcoin the new gold? Shaking up online and offline worlds, the online currency Bitcoin has increased its ‘value’ at immense speed in the last year. Being immune from government interference and private manipulations, it has been celebrated as a new alternative currency by some and condemned as source of unpredictable risk by others.
If, like me, you’re not sure you perfectly understand the functioning and meaning of Bitcoin, then head to Brett Scott’s blog post How to explain Bitcoin to your grandmother .
Going to that conference was probably the best move i made that week. It was engaging, smart and eye-opening. And thanks to the presentations, i think i might even sound slightly less clueless next time The Boyfriend tells me about his Bitcoin adventures.
Interestingly, the room was packed and when one of the speakers asked who among us owned bitcoins, no one raised their hand. I wondered how (if?) different the discussion would have been like if users of Bitcoin had been in the audience.
Garrick Hileman was the first to take the stage. Hileman is an economic historian at the London School of Economics and he talked succinctly and articulately about the history of alternative currencies and why all of them have failed so far.
First slide of Garrick Hileman’s presentation (Note to self: I should really get a new camera)
Why are we so interested in Bitcoin? An obvious reason is that the Bitcoin price index has gone up 56 times in 2013. Another reason is the mystery of Satoshi Nakamoto, the pseudonym of the person or persons who published the paper Bitcoin: A Peer-to-Peer Electronic Cash System in 2008.
With previous digital currencies, there is a risk of double spend, unless you get the help of the bank. Bitcoin makes it more difficult to replicate your currency and double spend it (all transactions are displayed in a public list. The validity of each new transaction is checked by confirming from the list that the digital currency was not used before.) It is a solution without a third party as it bypasses the banks.
Alternative currencies have a long history. They appear at some point (usually during periods when there is a high level of debt), survive for a short period and then they go away. Hileman identified three ways these currencies die: they die by regulation, by technology or by lack of adoption.
Freigeld: One Schilling note with demurrage stamps from Wörgl
An example of death by regulation is Freigeld. Freigeld was started by an Austrian town called Wörgl during the Great Depression to kickstart the economy. You basically paid for owning or holding currency which stimulated spending. The experiment was successful but the Austrian National Bank decided to terminate it for some unknown reason on the 1st of September 1933.
The example of death by technology are the merchant tokens used in London and other British towns because of the failure of parliament to provide sufficient small denomination coinage. Merchants were desperate to get more small change for transactions so they started issuing their own. Merchant tokens were long lived: they were widely used in 17th through 19th century
They finally disappeared with the advent of fiat money.
The third type of death is caused by the lack of adoption (or demand). The example is the UK-based barter system LETS. Started in late 1980s-early 90s following UK leaving European Exchange Rate Mechanism (ERM), the LETS still exist but are in steady decline: 350 in 1995, 303 in 2001, 186 in 2005.
Now fully virtual but previously physical currency.
People queuing to use the world’s first real Bitcoin ATM in Vancouver, Canada on October 29, 2013
Now Bitcoin faces many challenges:
Regulatory uncertainty leading to:
– avoidance by traditional financial institutions
– slow adoption of Bitcoin by consumers/merchants. Also Bitcoin has bad PR (stories of buying drugs on Silk Road, etc.)
Switching costs, real and perceived
Convenience trumps anonymity for most consumers.
Bitcoin technical infrastructure (i.e. cost, latency, it takes 10 minutes to update every transaction.)
Hoarding: desirability of Bitcoin as store of value works against use as a medium of exchange. The increasingly high value of bitcoin makes it less likely that you will spend it to buy pizzas.
But it also has many strengths:
Merchants and consumers both benefit from a change to the status quo. Makes for powerful allies.
The financial system is expensive and inefficient. The fees are high and money transfers are slow and cumbersome.
It may prove difficult for regulators to ban Bitcoin.
Bitcoin innovations go beyond currency’s role as a medium of exchange/store of value
Silicon Valley investment and track record in changing behavior and driving technology adoption on a large scale (think of Twitter.)
Check out this video of another of Hileman’s presentations
Bitcoin 2013 conference – Garrick Hileman – History and Prospects for Alternative Currencies where he explain all the above with more details and draws interesting parallels between Bitcoin and the Brixton pounds.
The next speaker was financial activist Brett Scott. He is the author of The Heretic’s Guide to Global Finance. Hacking the Future of Money (available on amazon USA
Scott reiterated that the figure of Satoshi Nakamoto is indeed important as its mythical character creates an emotional bond with the currency. Which is probably the reason behind the existence of the dogecoin.
The problem of Bitcoin is that the public doesn’t understand it. Experts explain it in reference to itself, instead of in relation and contrast to ‘ordinary’ currencies.
Another important point Scott brought about is that Bitcoin is not as apolitical, neutral and liberal as it is claimed to be. Society is neither apolitical nor neutral so how could Bitcoin be that paragon of liberality? He illustrated the comment with his experience of the Bitcoin Expo where there was a massive gender imbalance. The conference was 90 to 95% male. His talk at the conference was therefore about Bitcoin and gender.
The topic of gender-imbalance reappeared later in the Q&A. Is there something inherently male about Bitcoin that attracts males? Or is there something about Bitcoin that repels women? You can read more about the topic in Scott’s blog post Crypto-patriarchy: the problem of Bitcoin’s male domination.
Bitcoins are accepted in stadscafé De Waag in Delft as of 2013. Photo by Targaryen
The last speaker was Nigel Dodd, an Associate Professor in Sociology at LSE. His new book, The Social Life of Money, will be published by Princeton University Press this year. The main purpose of the book is to reformulate the sociological theory of money in the aftermath of the global financial crisis, focusing on the question of how money can be wrested from the domination of banks and the mismanagement of states and restored to its fundamental position as the ‘claim upon society’ that Simmel once described in The Philosophy of Money.
Dodd started by stating that he is favour of monetary liberalism and that consequently he is in principle pro-Bitcoin. Except that he thinks that something is weird behind the philosophy of Bitcoin. Bitcoin is sexy but it is also misleading. He added (in reference to one of Garrick Hileman’s last points) that if Silicon Valley is involved, it gets even sniffier.
From here my notes are getting a bit messier as this guy thinks and talk brilliantly but also very fast.
We need to see Bitcoin in the context of other monetary systems. There are 72 to 73 other digital currencies so there is a lot going on besides Bitcoin.
The monetary theory is another problem. For all its radical aura, Bitcoin rests on a backward monetary theory. It actually has a lot in common with the politics of austerity that regard money as a ‘thing’, a commodity. That’s something that Bitcoin celebrates too, whether or not it realizes it. There is a limit in the number of Bitcoin that can be generated. Just like there is a limit with gold. Also it’s mathematically possible for Bitcoin to be controlled by one computer and because of that it is similar to money.
So what makes Bitcoin different? Usually institutions protect money as if it were a commodity. Bitcoin does the same except that it does away with the intermediary. What makes Bitcoin attractive is that it’s managed by a bunch of machines. However, that there are always humans behind the machines.
Money as a claim upon society/social life. All currencies interpret this claim in their own way, whether we’re talking about time, gift giving, trust, etc. The claim of Bitcoin is technology of mistrust, you don’t need trust with Bitcoin: machine do all the job. But again, there isn’t a machine that operate without humans.
According to Dodd, every currency fulfills a different social need but which one Bitcoin fulfills is still unclear.
For Dodd, money is a process, not a ‘thing’ and Bitcoin is the only currency that doesn’t acknowledges money as a process. It’s the least sociological form of money we have.
An interesting question that emerged during the Q&A was the possibility to make Bitcoin taxable. Dodd explained that for most regulators, the number one financial obligation is tax. If Bitcoin starts to threaten that, it won’t simply evade tax but it might also stop the whole machinery of tax.
The Financial Times crowd has long been skeptical of Bitcoin, mostly because the currency is not regulated. Bloomberg even published an article titled Virtual Bitcoin Mining Is a Real-World Environmental Disaster (a theory which is obviously questionable.)
With tax, Bitcoin would receive a certain legitimacy. Business would find that very seducing. Each regulation could actually help Bitcoin. For Hileman, Bitcoin is actually the best challenge we have to the current financial system.
Photo on the homepage by Rick Bowmer.