The concept of fiat money – currency that a government declares is legal tender but is not backed by a commodity – has existed for more than a millennium.
Since around 1000 AD, traders have used various items to pay for goods, including paper, metals or even carved bamboo stick, with their value assigned by government regulation or law instead of requiring traders to carry the appropriate weight in gold, silver or bronze. This trading system has been at the core of capitalism ever since, with little to threaten the status quo.
In 2008, however, a mysterious person – or group – working under the name Satoshi Nakamoto created a new software-based payment system called Bitcoin. By 2011, Nakamoto had ‘disappeared’ while the digital currency he created had started to gain traction.
Since then, a huge amount has been written about Bitcoin, albeit precious little on why it was invented or the economic and political implications. Much of the literature is based around how it works.
Two Wall Street Journal reporters, Paul Vigna and Michael J Casey, have gone some way to filling the gap with what is the most comprehensive analysis of a topic that has divided the world of finance. They begin with a brief account of the age-old debate about the nature of money.
The ‘metallist’ school views money as a commodity, something with an inherent value that governments should leave alone. By contrast, ‘chartalists’ view money as an interconnected system of credit relationships, which allows value to flow within a society. For them, currency is simply the token around which the monetary system is arranged.
Libertarians treat it as a scarce commodity that needs to be ‘mined’ – that is, created through a series of mathematical puzzles – but, for a growing number of geeks and venture capitalists, Bitcoin is less a currency than a technology that can be used to transfer money and other assets cheaply and securely. Vigna and Casey predict that its chief role will be as a disruptive payment system.
Before the arrival of cryptocurrencies, societies had to rely on banks and other centralised institutions to keep track of payments and guarantee the financial system. This allowed central banks to gain a stronghold on national economies.
The Bitcoin technology cuts away the middlemen by taking over the role of ledger-keeping. “At its core, cryptocurrency is not about the ups and downs of the digital currency market,” the authors say, “but about freeing people from the tyranny of centralised trust.”
The book is most interesting when it discusses the potential impact of Bitcoin. While not a must-use in rich countries with well-developed payment services, the currency could help the developing world’s 2.5 billion unbanked people to connect to the formal financial system.
Furthermore, because no one controls Bitcoin, it has become the foundation for numerous start-ups, while the technology may undermine other institutions such as stockmarkets and give the wider economy a boost.
Vigna and Casey do not predict this will happen overnight, nor that the technology is the silver bullet to end financial disparities. Bitcoin and other cryptocurrencies will continue to grow, they say, not alongside the offline world but attached to it, with institutions and businesses adopting it to suit their needs.
Bitcoin may change the world’s payment systems but it will do so slowly.