Bitcoin: The Moral Imperative (2/3)
This is the second of a series of 3 articles.
The first one focuses on the current issues on the monetary system.
The second one focuses on how we can fix the money.
The last one addresses common critics of Bitcoin. Let’s fix the money!
Enough of the diagnostic, now we talk about what is better money and a better monetary system for the world. Which properties or rules do we need? How can we make a system more fair?
Wish list:
Money that can’t be debased. We want something which can’t be corrupted by design. Rules have to be set in stone from day 1 and impossible to change later.
People can get richer, but not at the expense of everyone else.
Money should be able to be used for savings, people should be able to have a tool to save at any amount. (remember the 20% down deposit?)
Everyone has the same rights with regards to money usage, whether they are rich or poor, no matter their country of origin, political orientation, etc.
People should be able to opt in and out as they please. This money should allow for a free market and competition with other currencies.
People fully own their money, no trusted third party involved would be required to own it for them
No fractional reserve, no one can profit from money they don’t actually have.
Easy and cheap international transactions, no unfair fees. Transparent worldwide fee system when fees are required.
Fast transactions. Weeks or even days isn’t really acceptable in the 21st century.
Does perfect money already exist?
So we have some ideas of what we want from our perfect money. We can skip some steps and use history as a guide to see if perfect money already exists. Maybe it was forgotten, made illegal, or hidden from us? At the very least, we could use the best current money as inspiration for a new system.
In economics, Gresham’s law is a monetary principle stating that “bad money drives out good”. From Wikipedia: if there are two forms of commodity money in circulation, the more valuable commodity will gradually disappear from circulation. So if we just take the most recent best money, we should be pretty close to the perfect money, as it should naturally be the best known to date.
Some would think the USD dollar, being the latest “winner”, is therefore the best, but we all know it doesn’t solve our first criteria: devaluation not only is possible but strongly accelerating. Indeed, the very nature of the USD changed in 1971, when it stopped representing the underlying Gold asset. This is when the Fiat monetary system was created. The Fiat monetary system being the latest currency type, according to Gresham’s law, shouldn’t this be the best money? Gresham’s law works in a free market environment. The Fiat monetary system was imposed by politics and indirectly by the US military. The petrodollar system is a political agreement whereby oil producing countries agreed to sell and price their oil in US dollars, which is presently not backed by gold anymore, in exchange for military assistance.
Given that everyone needs oil, people are effectively forced to acquire US dollars as well, artificially increasing demand and allowing the US to export inflation. It was a very smart way for the US to expand dominance and buy everything, effectively by “printing” paper. Furthermore, most money in circulation is just digital and doesn’t even need to be printed anymore.
What history shows is that as long as there was a free market for currencies, the world ended up with Gold as the best “hard” money, which later transitioned into gold certificates issued by banks.
Gold is the winner after thousands of years of humanity experimenting with various forms of money. Various commodity money was used, from cacao beans to stones, seashells, tea bricks or salt (which is where the word “salary” comes from).
All those monetary usages of those currencies eventually died. For salt, for example, industrial progress made salt extraction much easier and cheaper to scale, so salt lost the monetary fight, and lost all of its monetary premium. The value of salt today is related to its culinary or chemical use. Per Gresham’s law, the salt became bad money and it gradually disappeared in favor of gold.
What made gold win the worldwide battle for hard money? After thousands of years of history, and observing how Gresham law works, we are now able to list the fundamental properties of good money
Properties of good money
Why Gold and not Silver? Or Tungsten? Why use metal at all?
The Federal Reserve of St Louis actually made a summary of characteristics that something needs to have to potentially turn into money (functions of money). Not that we need a figure of authority to make our own decisions, but i found it interesting to use their own list of criterias for us to compare different money:
Durability (can be kept for a long time unchanged)
Portability (easy to move from A to B)
Divisibility (a unit can have subunits for smaller payments)
Uniformity (one unit is the the same as another unit)
Limited supply (Scarcity: cannot be debased easily)
To those, I’d also add “Verifiability,” as it is important for an individual to make sure the money we get is not fake, but I’d also remove “Acceptability” from their list. Indeed, I see acceptability as a consequence of good money. Once people see that something has the properties of good money, it slowly gains acceptance, first by very early and knowledgeable adopters, then by the masses.
As we can see from this list, Gold ticks almost all the boxes of good money. Why has gold failed and why isn’t gold used anymore? As mentioned earlier, the gold standard slowly turned into gold certificate standard, because a certificate is better for divisibility, portability, uniformity and later acceptability. And this is where things broke. As people accepted paper certificates, this opened up the door for breaking the scarcity aspect. People could print more certificates than they actually had gold. This was the beginning of fractional reserve.
As the US dollar transitioned into a Fiat system instead of a gold standard, it slowly but surely lost purchasing power, because it heavily lost the scarce aspect. New US debt kept being created faster than the ones being paid off, inflating the monetary supply. If we want the perfect money, we want something which has the advantages of gold, but also has the required properties for modern money which lead to the issuance of paper certificates, in a way where scarcity cannot be changed. Can we do that? It cannot be a natural material, like another metal for example, as it would still be lacking in transportability, divisibility, verifiability and uniformity. It cannot be certificate based, as those could be faked or made in abundance, therefore losing scarcity.
As it turns out, Satoshi Nakamoto actually engineered a totally new invention which solves the problem of money once for all. Let’s dig into this.
Bitcoin fixes this
Bitcoin was created/engineered/discovered specifically to solve money. Let’s see how it does for each properties listed earlier:
Durability (The bitcoin blockchain data is replicated among thousands of “nodes”, some of them even orbiting in space)
Portability (bitcoin is immaterial, so it can move as easily as data)
Divisibility (bitcoin has 2,100,000,000,000,000 satoshis, or 21M bitcoins. More than 250k units per person)
Uniformity (Theoretically is fungible, however the history of each payment is public and may be of importance to some receiver)
Limited supply (the 21 million units rule is enforced by code. Physical energy, therefore expense, would be wasted for nothing if someone wanted to change the rules)
Verifiability (anyone can verify his own blockchain data without trusting a third party)
For durability, unlike gold, we do not have thousands of years of usage to empirically confirm durability. However, with so much of our society being based on data, it seems logical to assume we would always have ways to reliably store data from this point on. There are underground vaults resisting nuclear explosion radiations, as well as satellites into space also storing and sharing the data, so we should be OK.
Uniformity isn’t ideal. The history of each payment is public, so if an address was flagged, it is possible that if someone wants to be paid from a flagged address, they may not want to accept those satoshis (smaller units of bitcoin, a little bit like what cents are for the dollar) but would prefer some other ones. However we can argue this is still better than cash bills, potentially with damaged paper. Additionally, there are other instant payment solutions built on top of bitcoin which somewhat abstract those underlying satoshis, solving the uniformity issue, The Lightning Network.”
Beside this, Bitcoin is clearly better than gold for portability, divisibility, limited supply and verifiability. Indeed, at the current mining rate, it only takes about 35 years to double the amount of gold in circulation. Bitcoin will only ever have 21M coins. It is better than Fiat currencies for scarcity, as Fiat currencies are basically printed without any upper limits, as well as divisibility (we can send as little as 0.0002 USD over bitcoin today) and portability (it is possible to move almost any amount of money to the other side of the world inless than 30 minutes via a bitcoin confirmed transaction, or even in one seconds for smaller amounts via the lightning network)
Now, it is not widely accepted, but this is part of how Gresham’s law works. It is a slow transition, and Bitcoin only existed for 14 years. In those 14 years, it managed to go from 0 USD per BTC to 30k USD today, showing that millions of people have started to partially adopt this currency in addition to their national currency. It helped many people escape the inflation death trap in countries like Lebanon or Venezuela. And It made life easier for people in El Salvador getting their money from their families abroad. They do not lose 30% over commission fees from Western Union anymore.
People in Nigeria can transact without heavy restrictions. Unbanked communities, or people in Iran or Cuba can create a wallet in a few seconds and transact anywhere in the world, enhancing their individual freedom. People all around the world now have a way to get private property that their state cannot unfairly seize. For example, in Afghanistan, people holding bitcoin didn’t get anything stolen once the Taliban took over. Some were also able to flee the country with their wealth, while bank transfers to the outside world were made impossible.
Get ready for part 3 soon. Let’s Fix the Money!
Special thanks to @luckyjujubee and Cyril G for helping out on this article review!
