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Tuesday, April 28, 2015

Misfit Bitcoin, Flag Money, and Currency Wars

Cryptocurrency is a supranational game changer

Ever since the end of the gold standard, world currencies have free-floated in value against each other. This system has created a zero-sum competition among currencies that, when enhanced by nationalism, becomes a global proxy war for domination.

The value of currency is neither intrinsic nor related mostly to purchasing power. Instead of focusing on competitive industries and mutually beneficial trade, many countries today use their currency as a weapon to tilt the trading field in their favor. By manipulating currencies, usually through devaluation, governments can simultaneously juice the earnings of large corporations, erode and lighten the national debt, and destabilize the economies of rivals. In the process, they also destroy the value of savings for their own citizens.

But right in the middle of this global currency war, bitcoin was born. And it is set to undermine everything we thought we knew about currencies.

Flag money

By now, several generations have grown up with a concept of money that is closely associated with a national identity and that implicitly or explicitly competes against the moneys of other nations. Currency is no longer scarce, but the right to originate currency is scarce — that is, it’s the purview only of nation-states. The prevailing assumption therefore is that for a “new” money to arise, it must replace an old currency. There are 194 currencies in the world, each a “flag-money” of a nation, a notion as anachronistic as the airline flag-carriers of the 1970s.

Aligning currencies with national borders has a certain rationale to it in a world of paper bills, travel restrictions, trade restrictions, and national banking regulations. The national boundaries mean territory for the banks, border crossings for the citizens, and natural monopolies for the currency. To most people who have been raised in this context, it would appear that geography and borders — monopoly and limited choice — are inherent characteristics of money.

Nothing could be further from the truth.

The bitcoin misfit

The introduction of decentralized, non-national, instantly global, and entirely digital currencies such as bitcoin directly challenge these basic assumptions.

The artifice of borders melts away when currency is instantaneously global, fluid, electronic, and decentralized. Bitcoin ignores borders in exactly the same way that the Internet ignores borders. In the context of national flag-currencies, a borderless, non-nation-state currency is an aberration that shatters the dominant context. If money is borderless, then suddenly competition among national currencies is irrelevant. Bitcoin doesn’t have to “replace” anything because it’s not part of the zero-sum game of gaining flag status.

Currency that was once a geographical constant becomes a consumer choice instead.

When nations establish monopolies for their airlines, TV networks, and newspapers, the flag-carrier monopoly status is anachronistic, but it could be worse. Commercial monopolies erode competition in airfares and the truth, but at least they don’t start wars.

In currencies, however, nationalism and national monopolies are very harmful and are directly connected to war. Currency wars have become the proxy wars of this century, with dozens of countries locked in a devaluation spiral to externalize their debt. Currency wars can even be the precursor for kinetic wars (read: lethal combat), and even when they don’t lead to bombing, they can still devastate economies.

In this context, non-national currencies like bitcoin are not just revealing the quaint, anachronistic simplicity of state monopoly over currency; they are also offering a safe haven and relief valve for the citizens of the currency-war-torn nations.

Bitcoin and other decentralized digital currencies are not trying to displace other currencies, dominate a country, or establish a monopoly. They are supranational from the moment of their inception and stubbornly resist being constrained to the existing regulatory and nationalistic structures. But the prevailing context of nationalistic currency is apparent in the questions that surround these digital currencies. For example: Which nation will be the first to adopt bitcoin? The first “place” to adopt bitcoin is not a place, but people around the world.

Will bitcoin unseat the US dollar as the world’s reserve currency? No. Bitcoin will coexist with all national currencies, offering a global, non-national alternative to people everywhere.

Can bitcoin become the universal currency? The very concept of a universal currency is as meaningless as that of a universal language. After all, currencies are a form of language, a means of expressing value to each other. Bitcoin represents a new choice of currency, and in offering that choice globally, it leads to a world of currency pluralism, not a dystopian one-world-currency caricature of the currency wars of the 20th century.

A misfit like bitcoin shatters the whole context and allows us to see a nationalist currency for the caricature it is.

  • Andreas M. Antonopoulos is a technologist and serial entrepreneur who advises companies on the use of technology and decentralized digital currencies such as bitcoin.