Cryptocurrencies, coinage, sovereignty, citizenship… & trust
Last week China’s state planner officially signaled it wants to eliminate bitcoin and other cryptocurrencies mining in the country, in a move increasing the pressure on a sector under heavy scrutiny since 2017, when Chinese regulators started to ban initial coin offerings and close local trading exchanges for cryptocurrency.
Created just over ten years ago, the bitcoin (BTC) has been a source of fascination, fantasies and copious media coverage since at least 2013, when the FBI seized allegedly drug-related bitcoins from the dark web Silk Road website. But it was not until 2017 that financial hysteria set in, with quotes for one BTC reaching nearly $20,000 with volumes following suit and many trading houses peddling BTC-linked “investment” products... The fever subsided markedly in 2018 with a USD/BTC level ending the year under 4,000. However, the use of bitcoins has stayed solid, particularly on darknet markets where it doubled throughout 2018, its price reaching back to the 5,000 level this year.
In spite of the wild gyrations, what is the appeal of BTC and 100+ other cryptocurrencies (Ethereum -ETH- Ripple -XRP- etc.), which have followed similar trends? According to the website coinmarketcap.com, BTC and ETH alone would account for more than two-thirds of the $157Bn capitalisation, so some people put faith in them.
One reason might be some form of mistrust vis-à-vis Central Banks, States and institutions in general. The (still unknown) bitcoin creator Satoshi Nakamoto is quoted as stating that: "The root problem with conventional currencies is all the trust that's required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust." Thus, to bypass a central bank, the basic principle of BTC is to use a checking algorithm that would be very costly to tamper with, if one wanted to, based on an information chain that is spread manifold in a decentralised ledger, and which uses the codes previously validated by all the ledger stakeholders. This way, a transaction can be approved only if all participating stakeholders agree that the bits of information received match what is in the ledger: hackers who would try to randomly generate a code in order to cheat their way in the ledger would have to use an enormous computing capacity -and matching energy to run it- to attempt this, and could not recoup those costs.
The bitcoin blockchain is a public ledger that records BTC transactions. It is implemented as a chain of blocks, each block referring to the previous block, up to the initial block of the chain. A network of communicating nodes running bitcoin software maintains the blockchain: the nodes can validate transactions, add them to their copy of the ledger, and then broadcast these ledger additions to other nodes. To achieve independent verification of the chain of ownership, each network node stores its own copy of the blockchain. A new group of accepted transactions -a block- is created every 10 minutes, added to the blockchain, and quickly published to all nodes, without requiring central oversight.
“Mining” is the record-keeping service done through the use of computing power that maintains the blockchain consistent, complete, and unalterable by repeatedly grouping newly broadcast transactions into a block, which is then shared with the network and verified by recipient nodes. Highly encrypted (SHA-256), the information is easy to check for any node in the network, but very time-consuming to randomly generate as mining hackers would have to try many different values. All this ensures that participants do not have to rely on just one central intermediary, that the trust is shared and checks mutually carried out.
Some communities appreciate this freedom from central banks (and, to some extent, authorities): darknet participants, of course, but also, for instance, some citizens in countries where economic conditions cause a flight from the national currency.
Besides, some buyers of cryptocurrencies bet on a longer-term appreciation, e.g. there will only be a limited quantity of bitcoins mined: the BTC protocol specifies that the reward for adding a block (in July 2016, 12.5 newly created BTCs per block added to the blockchain) will be halved every 210,000 blocks (roughly every 2.4 years). In the end, the reward decreases to zero, and a BTC limit of 21 million units will be reached, tapering next century; then the record-keeping will be rewarded by transaction fees only. However, if the shared trust has not been breached, demand for BTC should increase and with it the price as well. It is interesting to note that out of a potential total of BTC 21 million, more than 17,5 had been mined as of February 27, 2019 : the “arms race” for the balance is fully on, and Chinese bitcoin mining hardware manufacturer Canaan which last year planned an IPO, declared sales in China worth 8.7 billion yuan ($1.30 billion) in 2017, 45 percent of global sales by value, but was forecasting quadrupled 35.6 billion yuan sales by 2020 before the latest moves by Chinese authorities...
Understandably, in view of these projections alarm has been raised on the foreseeable increasing energy consumption for structurally diminishing BTC mining returns. However, if (thanks to Moore law & quantum) computing performance keeps improving, is it really a problem, or a red rag to the media bull?
Moreover, apart from volatility and thirst for energy, cryptocurrencies can have problems too:
- Hackers can still try to crack codes or steal some wallets, and behind the computers are humans who are not failsafe;
- Sometimes, security can be too secure (death + loss of password = total loss);
- The distributed mining principle is not always implemented as BTC miners join pools to minimize their earnings variance: researchers found that in 2013 six mining pools controlled 75% of overall BTC mining power, most of it located in Asia, increasing the risks linked to concentration.
- In China, Korea, but also in Europe and America, regulators are moving to rein in and control some cryptocurrency-based initiatives (e.g. ICOs), a few of which seem to be not really trustworthy. Besides, regulators point to the risks of money-laundering and terrorism financing.
- They do not have all the attributes of most “real” currencies (can you buy a loaf of bread with them at your corner shop?)
Nevertheless, cryptocurrency is hip, so it is no surprise that a group like Facebook is reportedly working on its own coin, with an analyst forecasting as much as $19 billion in additional revenue by 2021 from “Facebook Coin”… if it works (back in 2010 similar plans failed). The appeal of this proposition lies mostly in the fact that "Facebook citizens" are now the single largest community on the planet (comparable in size to the population of China or India, or say, Christians globally). Leaving aside the “detail” of regulatory supervision or coinage control which sovereign states like China and others obviously still value, the question is: how deeply does this community share values, ideals, etc., how ready will it be to embrace the same currency to be used by widely diverging groups? And, straddling differing economic zones, how will FB juggle its currency with the dollar, euro, yuan, or rupee that Facebookers would have in their pockets? Or, to put it another way, will FB be able to find a (de)centralised way to create trust in the FB Coin?
Trust, which was at the inception of the bitcoin and other cryptocurrency projects, is the cornerstone of any monetary and financial system, but also of any mature society: in a time of “fake news” and lingering doubts on the real status of our economies or content for our societies, it is worth watching with attention some of the current experiments, provided they genuinely aim to rebuild said trust and free it as much as possible from external influence.
Beyond cryptocurrencies, the other side of the coin is the blockchain system which underpins them: it also offers wider opportunities for transactional trust in many fields, including various ESG certification possibilities (solar coin, forestry certificates, cobalt origin, animal welfare, health checks, etc.). At the same time, blockchain applications will create threats to the activities of some currently trusted intermediaries or third parties (banks, notaries, administrations, media, etc.): implications are only beginning to unfold.
Source: Beyond Ratings