UNGOVERNED OR ANTI-GOVERNANCE? HOW BITCOIN THREATENS THE FUTURE OF WESTERN INSTITUTIONS.

• Author: O'Sullivan, Andrea
• Position: Report

For about as long as humans have gathered to exchange goods and services, humanity has been plagued by the question of how to secure and transfer value. Through a long process of trial and error, human societies eventually coalesced upon mutually-valued media of exchange to cut down on transaction costs and more seamlessly facilitate trade. (1) The greatest of these was gold, and later, gold-backed notes, managed by governments or banks and backed by the trust that they would be accepted by third parties in exchange for real goods and services. But as the scale of human societies grew ever more complex, the task of issuing, managing, and securing currency to facilitate trade grew ever more susceptible to manipulation, human error, and control. (2) The transition to a mostly digital financial system has amplified these weaknesses.

To engage with today's system of international finance, individuals must place trust into third party authorities. First, they must trust that the governments and banks that create and manage currency will do so responsibly, and not manipulate the currency to achieve some political or economic end that does not serve the public interest. Next, they must trust that third party payment processors will faithfully execute their transactions as intended, and not bow to government pressures to block transfers, make errors, or leak their financial data to unwanted parties. Recent experiences in the wake of the global financial recession demonstrate that this trust can be unearned.

The global financial system is largely managed by Western institutions. Thus, Western interests are most able to put pressure on these trusted third parties in order to further their own ends. Any tool that undermines the power of these trusted third parties can by extension undermine the power of existing Western institutions.

What Is Bitcoin?

Bitcoin is the world's first peer-to-peer digital currency, or cryptocurrency. Its core value proposition is that it allows individuals to directly transfer value to an intended recipient online without the need to rely on a trusted third party to reconcile balances and manage the currency supply. This may seem trivially simple. Yet the processes needed to achieve this are complex indeed, and were the subject of decades of inquiry by cryptographers and computer scientists. (3)

The technology at the core of this cryptocurrency overcame two longstanding problems in computer science known as the double-spending problem, or how to maintain scarcity without a central authority, and the Byzantine General's problem, or how to achieve trustworthy distributed consensus. (4,5) Rather than relying on a single trusted party to manage the money supply and reconcile transfers, Bitcoin employs distributed computing power, cryptography, and open source development to keep a verified ledger of all transactions, called the "blockchain," and maintain and secure the network. Furthermore, the total supply of Bitcoin is hard-coded into the protocol to grow at a predetermined rate that is inelastic to the vicissitudes of demand. This means that Bitcoin users do not need to fear unanticipated monetary manipulation. These properties empower Bitcoin users to transfer value directly to recipients without the need to rely on a trusted third party, such as a central bank or payment processor, to mint currency or validate transactions.

An exhaustive description of how the Bitcoin network operates and maintains itself is beyond the scope of this article, and many comprehensive explainers are available to the curious reader. (6) For our purposes, we simply need to understand that Bitcoin replaces centralized reconcilers with a decentralized network, where no one participant may unilaterally manipulate the ledger of transactions or mint unauthorized currency units. It is thus sometimes described as a "trustless" system. Because Bitcoin transactions are not linked with any single user identity, but can rather be received and sent from newly-created addresses at will, it is called a "pseudonymous" system--not quite anonymous, but similar to how an individual can create email addresses at will to conceal their real-life identity.

Not much is known about Bitcoin's pseudonymous creator, known only as Satoshi Nakamoto, who launched the network in 2009. Satoshi's few forum posts and email conversations mostly discuss the technical dimensions of the network. Yet he does provide a few clues about his political thinking. In the initial email chain where Satoshi introduces the Bitcoin white paper to the Cryptography Mailing List, he notes that the technology is "very attractive to the libertarian viewpoint if we can explain it properly." (7) He also points out that other decentralized networks have been impervious to government control. (8)

But perhaps the clearest indication of the Bitcoin vision can be found in the coinbase parameter of the Genesis Block, or the first Bitcoin transaction that Satoshi broadcast: "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks." (9) The message referenced the headline of The Times on the day that the first block was mined. (10) Due to the headline's relevance to the ongoing financial crisis, and Bitcoin's potential to replace what many view as a corrupt and unstable global financial system, many have speculated this message to be a kind of mini-manifesto indicating Satoshi's intentions and alignment. (11)

Like attracted like. Early adopters of Bitcoin technologies were often sympathetic to the "cypherpunk" or "crypto-anarchist" movements as catalyzed by activists such as Tim May and Eric Hughes. (12) Anti-government, anti-corporation, and pro-individual, this ragtag group of hackers and idealists formed a bedrock "Bitcoin philosophy" that has imbued the resultant community with an individualistic and contrarian ethos, even as more mainstream investors and professionalizing projects took the limelight in 2013. (13)

This philosophy is intrinsically linked to the implications of the underlying technology. In simultaneously overcoming the double spend and Byzantine general's problems for the first time, Bitcoin introduced the first truly distributed online transfer system to the world. This fundamentally threatens the control that established trusted third parties and governments can exert over individuals and groups. Most of them have yet to truly understand this extreme shift in the balance of power. In particular, Bitcoin impacts Western governments' monetary controls and regulations on social activities.

Bitcoin as Money

Bitcoin is a kind of money, which means that it serves as a medium of exchange, a unit of account, and a store of value. Not all money is created the same.

Aristotle outlined four properties that constitute good money. First, the currency must be durable, and not waste away through the ravages of time. Next, it should be portable, so that traders can easily bring money wherever they wish to exchange value. Third, it should be divisible, to allow more precise exchanges of value for like value. Finally, it must have some kind of "intrinsic value," increasing what...