Many well-known Bitcoiners say that bitcoin is money for enemies: Vijay Boyapati tweeted about it; Nic Carter wrote on it; Peter McCormack and American Hold chanted this conclusion here. On these pages in January 2023, Mark Goodwin wrote, “Bitcoin simply has to be for enemies, or it will never be for friends.”
Sounds good and it’s nice, drop-mic style, but what does it do mean so that bitcoin is for the enemies? Or money for that matter? What does the decentralized and trustless nature of bitcoin bring to the table?
One answer is that bitcoin doesn’t care about your opinions, including your assessment of potential trading partners. It works whether operated by friend or foe. That’s true, but also applies to any other money: with fiat I can shop for strangers and heretics just fine. Another is that bitcoin allows people to transact peacefully without knowing each other’s status as an enemy. It’s true, but it’s also valid for any other money: we don’t check baristas for their ideological righteousness before ordering a cup of coffee in the morning.
These may be censored transactions, where both buyer and seller are happy to transact but a third party (politician, bank, payment processor, law enforcement) gets in the way and blocks the payment. It’s an improvement that bitcoin and other bearer assets like gold or cash bring to the monetary table, but that doesn’t mean traders are enemies.
In the past, I have shown that the more the bitcoin ecosystem grows, the more it resembles the established monetary system it hopes to supplant. Not that he has to escalate, get captured, or start working for a select group of ideologically suspect insiders, but that he comes up against some inevitable obstacles in our monetary world. Matt Levine at Bloomberg agrees : “[…] crypto quickly recaps history and relearns the lessons of traditional finance. I don’t particularly say that as a bad thing. Learning is good!”
Many lessons learned from deep financial history, Levine observes, are “buried tacit knowledge; the traditional financial system does a lot of things, and it does it mostly for good reasons, but often most people have forgotten what those reasons are.
In fact, almost everything that makes money workable in the normal world is also present in bitcoin. This is Why it can function as a monetary asset, why it can settle trade so well and why it can function as a global payment rail.
Introduction to Monetary Economics: How Bitcoin Does What Money Does
Goodwin’s quote above is interesting and, I guess, wrong. Bitcoin is not for friends. Indeed, an economy of friends does not need money at all. (They might want a unit of account to keep track and balance favors, but between bona fide friends, even that can be solved by barter.) That’s why GA’s famous camping trip analogy Cohen works initially: Not socialism? Cohen posits a real situation where friends provide according to their ability and receive according to their need. Since we all do this when we leave together, why couldn’t the world function in these premises as well?
Many people have dismantled this idea, in the narrow example of camping trips and more broadly for a wide world where we do not do know everyone, do not do want what’s best for each other, do not do feel good about being charitable with our contributions. In fact, families are the only functioning socialist communes in the world – and they don’t run on money. Instead, they operate with trust, with mentally justified (or charitablely given) unspecified favors and undeclared responsibilities in accordance with their respective roles. In a word: credit. Friends can run on trust, and it’s cheaper (less resource intensive) than money.
Long before Satoshi, monetary economists had elaborated this point: in a world with total commitment and complete trust in each other, agents do not need money and can instead rely entirely on credit. Yes you have total commitment and trust in every member of the economy – small or large – you can avoid the cost of resources that money entails (its real in gold or bitcoin, or its indirect in monetary fiat). The imaginary accounting of credit suffices. Stefano Ugolini, a central banker at the University of Toulouse, writes in typical monetary economics jargon: “The frictions necessary to make money essential generally make credit impossible and the environments where credit is feasible are those where money is usually not essential. ”
For money to improve a rival system that runs entirely on credit and trust (like our friendship camp story above), the models that monetary economists have developed suggest that agents
- cannot have a perfect memory of former business partners (or anonymity);
- must have limited ability to commit and enforce promises; and
- have the opportunity for a unique transaction (for example, strangers coming to town).
It looks a lot more like our world than the models monetary economists play with. We are, in other words, squarely in the frame where money is essential. Money is the rules of trade when we don’t or can’t trust each other; when transactions are not repeated; or when transactional engagement arrangements with each other are not strong.
We are now approaching the familiar lines of Satoshi, whether he was aware or not that monetary economics had achieved this result decades before: “The fundamental problem with conventional money is all the trust necessary to make it work. You have to trust the central bank not to depreciate the currency, but the history of fiat currencies is full of breaches of that trust. Banks have to be trusted to hold our money and move it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts. Their massive overhead makes micropayments impossible.
One of the most fundamental articles in monetary economics is “Evil is the root of all money”, by Nobuhiro Kiyotaki and John Moore, reversing the old biblical line. They set up the long-standing money markets of commerce and investigate the double coincidence of desires condition that has been used as a rationale for money since William Stanley Jevons coined the phrase in 1875. They show that this is not the only, or even the most important, way to make money viable in an economy – especially money in forms that have no other economic use (i.e. say what monetary economists mean by “intrinsic value”). Instead, they show that the lack of commitment and the “consideration of a lack of trust” are paramount, even “the starting point of a theory of money”.
A few years earlier, Narayana Kocherlakota, then federal economist in Minneapolis, showed that “money is only a primitive form of memory”. Notice the Bitcoin connection here, because what are blocks with UTXOs but a long spreadsheet of transactions acting as monetary memory?
Without engagement, That is money or memory will do. Bitcoin, in a sense, is both.
Money overcomes trust issues because “any function that money performs can be provided by the ability to access the past of one’s trading partners”. Kocherlakota explains, “In the monetary environment, when an agent gives up resources today, it receives money that can be used to buy resources the next period. Similarly, in a memory environment, an imaginary balance sheet is maintained for each agent. When an individual gives consumption to someone else, their balance increases, and their ability to receive future transfers increases. When he receives consumption from someone else, his balance goes down and his ability to receive future transfers goes down. In the monetary environment, money is only a physical means of maintaining this balance sheet.
This shows how, when money does its job well, it expands the achievable opportunities for all of us to trade. Good money improves the trades available to us in the absence of money. Appropriate currency provides us with truthful signals about scarcity and need, what is economically available, and what people demand. The purpose of intangible tokens, or even shiny metals that seem to do nothing, is to be a technological innovation that facilitates trade, as William Goetzmann so aptly illustrated in his great book, “Money Changes Everything: How Finance Made Civilization Possible”..”
So talking about the resource cost of money has always been a red herring. By developing exchanges and the division of labor, overcoming the problem of trust, memory or imperfect commitment, money and a sound monetary system adds value for society. It improves our economic well-being rather than depriving us of it unnecessarily.
Another monetary knot that bitcoin gracefully resolves is Armen Alchian’s justification of monetary institutions as lower-cost inspectors of the monetary token: “Anyone who buys used paper also has to verify its authenticity, which slows down the of transactions. […] Ignorance leads to the use of money and how money requires simultaneous exchange with specialized, expert and highly reputable intermediaries.
Bitcoin bypasses the middleman and realizes in the modern digital world the lack of trust of bearer assets of centuries past. It is instantly verifiable, its inclusion in an earlier (valid) block is trivially easy to inspect. This East the much improved technology that Kocherlakota identified in the 1990s and that Goetzmann has chronicled more recently: a collective memory, a record of past transactions.
Memory Good money pays
If we think of enemies as those we don’t (fully) trust or can’t (fully) commit to – so almost everyone we meet in the modern world – Bitcoin is not for enemies. Every money is for the enemies. We trust friends, family and loved ones, and with them, we can therefore make mutually beneficial exchanges without relying too much on money.
But it’s when trust is lacking and there is no credible commitment that the money really comes into its own. To say that bitcoin is for the haters is trivial: All the money is destined for contexts where we cannot fully trust our business partners.
This is a guest post from Joakim Book. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.