Synthesis of the report written (in French) by Yorick de Mombynes and Gonzague Grandval and published by Institut Sapiens on February 2018
In 2005, inventor and futurologist Ray Kurzweil, now chief engineer of Google, published a book that would lay the groundwork for most of the global debate on new technologies to date, especially artificial intelligence : The Singularity is near. What he calls singularity is the moment when exponential technological progress becomes too fast for today’s minds to grasp the consequences.
Today, a form of singularity is also approaching in monetary matters. With Bitcoin and cryptocurrencies, we are entering a new world where all the consequences can be very difficult to imagine.
Yet, there is an urgent need for alertness. In the 1990s, France paradoxically marginalized itself from the web revolution when in fact it had all the assets to become a leader of this economic and cultural revolution. It vanished from the world competition. France and Europe then committed the same mistake with artificial intelligence. Today, France is likely to suffer the same fate with Bitcoin and the technologies flowing from it.
The revolution of money
Two distressing mistakes are made when transforming Bitcoin and cryptocurrencies in a quasi-taboo and when making the “blockchain technology” a modern totem.
On one hand, we forget that in the strict sense blockchain is a relatively old technology, invented well before bitcoin. The Bitcoin protocol (with a capital letter to distinguish it from the « bitcoin » digital and monetary token), is revolutionary: with an extraordinarily ingenious integration of several technologies (blockchain, asymmetric cryptography, peer-to-peer network, mining by proof of work), it allows, for the first time, the operation of a network where transfers of value are possible in a decentralized manner, without validation from a trusted third party needed, and without any risk of censorship.
Since the protocol is open source, it is available for copying, modifying certain parameters and creating new networks, new blockchains, new digital tokens and therefore new cryptocurrencies. But the expression « blockchain technology » ultimately covers disparate realities that sometimes have little in common: « mother » blockchains like Bitcoin and Ethereum, altcoins (issued entirely in the context of an initial coins offering, either mined as part of a copy-and-paste of an original protocol), and blockchains without a token (which may represent a promising innovation within some organizations but are far apart from the decentralized model of Bitcoin).
On the other hand, we disregard the fact that money is the first killer app of what is vaguely termed « blockchain technology », while also being a key part of its operation. Money is an institution as old as humanity. For millennia, it has been transformed, especially under the effect of technical progress, but with a very slow pace: it took centuries to go from the seashells and other former trading intermediaries to precious metals, then to bank money and banknotes , and finally to digital credit card and digital money. The pace accelerated notably in the second half of the 20th century, though with cryptocurrencies we are witnessing a stunning acceleration of this pace. In just a few years, the very notion of money has almost shattered. Money is put on the network, it is converted into a platform, it becomes decentralized and programmable. It is transformed by technology in the same way that information has been transformed by the Internet.
Today, we laugh at the poor technical performance of the actual Bitcoin protocol just as we grinned yesterday at the emerging web. However, we forget that it is immersed in this very same area where progress is exponential. We disregard the current progress being made far from the eyes of the media and the public, a progress which soon will enable huge volumes of transactions, sometimes for very small amounts and within an incredibly short periods of time (a real currency in streaming, giving full meaning to the term cash flow) all performed for a negligible cost for the user, together with heightened security and with increased anonymity. These characteristics will constitute one of the aspects of the new industrial revolution seeding with artificial intelligence, Internet of Things and robots: in order to exchange value, data, legal titles and orders, these entities will use cryptocurrencies and blockchains.
Questions on Bitcoin addressing money laundering, financing illegal activities, tax evasion, speculation, volatility and environmental costs are legitimate. It is not about dodging or challenging their relevance. At the same time, it is interesting to wonder why Bitcoin and cryptocurrencies continue to develop despite their innumerable and constantly denounced shortcomings, and despite their constantly predicted death. The reality is that, unlike traditional banking and monetary institutions, they are, as defined by Nassim Nicholas Taleb, antifragile entities: adversity is a favorable context for their development. Above all, even if similar questions are addressed to the institutions in charge of traditional monetary and financial systems, they are rarely as intense, virulent and partisan. These institutions are both closely bound by the law and relatively less exposed to criticism of public opinion.
A disrupting cryptocurrency
What makes Bitcoin so bothersome? Why does it systematically fall under suspicion of all evil, condemned ahead of time? Why is it impossible to evoke it in a calm manner, without prior distrust? Why this instant presumption of culpability while, like any other new technology, it can be used for both good and bad purposes?
Of course, novelty always raises fear and mistrust. Still, beyond that, if the idea of cryptocurrency can be found troubling, it is fundamentally because, for millennia, money has been associated with power. Originally a spontaneous social creation, money was gradually monopolized by the state, until it became an instrument of control of the economy and the citizens. With Bitcoin, money escapes the clutches of governments and banks. This is a major historical point. To understand it, we must return to the roots of Bitcoin.
The crisis of 2008 undoubtedly secured the interest in a new form, in a freer kind of money. Nonetheless, by retaining only this aspect, we would let slip the fact that the appearance of Bitcoin is the culmination of several decades of technical experimentation along with philosophical and economic reflections.
On the technical side, the prowess of Satoshi Nakamoto was to organize an arrangement of incentives making it immensely more profitable to contribute to the system rather than to hack it: while some exchange platforms were hacked, the Bitcoin network never was. Unlike in traditional systems, the cost of validating transactions is negligible while that of registering them (once validated) is phenomenal. For the first time in the history of humanity, a currency has, as an underlying asset, an ultra-secure network (complemented by an industrial ecosystem and a human community). This allows the integration of a payment system and money, two elements that had always remained distinctive since the creation of money.
As for the philosophical side, since back the 1990s, the cypherpunks soon understood that the rise of the Internet, while offering individuals an instrument of liberation, would also subject them to a risk of increased surveillance. They also understood that, as a consequence of the alliance of governments and banks, the financial supervision made possible by the digitization of payments would become one of the most insidious and dangerous risks for individual liberties. The 2010s have largely proved them right.
Lastly, on the economic side, despite all the efforts from public institutions to hide the reality of the functioning of the contemporary monetary systems from the general public (Who learned in school how money is created?), the accumulation of monetary disasters throughout the twentieth century (hyperinflation, increased pace and severity of monetary crises) has convinced a growing number of economists that, contrary to popular belief, money is too important of a matter to be left to the government.
As notable economists such as Mises and Hayek have demonstrated, economic cycles are essentially created by monetary manipulations by public authorities, with catastrophic social and economic consequences. Since 1971, fiat monies are no longer based, as we often like to believe, on the fundamentals of economies and states, but simply on the legal coercion that makes their use obligatory. Since 2008, the king is naked: on one hand, the general public understands that, thanks to the immense economic privilege of monetary creation by credit, the banks are assured of the ultimate support from the governments, which allows them to behave in an excessively risky way without always suffering the consequences of their mistakes; on the other hand, ultra-expansionary monetary policies create new risks and raise growing doubts about the ability of government currencies to retain value and thus play their role as sound money.
As early as 1984, Hayek declared: « I don’t believe we shall ever have a good money again before we take the thing out of the hands of government ; that is, we can’t take it violently out of the hands of government ; all we can do is – by some sly roundabout way – introduce something that they can’t stop ”. This is what Bitcoin has done.
Dizzying consequences
This rupture leads to a series of potentially vertiginous consequences.
Firstly, thanks to the ongoing technical progress, cryptocurrencies will become easier to use, their number will probably increase in proportions unimaginable today, and governments will have more and more difficulty controlling them. Their quality as money will increase because they compete with each other. This is the end of the monopoly of monetary production (which prevented competition to benefit users), as advocated by Hayek in 1976 in his book The Denationalization of Money. Even with the maintaining of the legal tender, the rise of cryptocurrencies will represent a major challenge for the authorities. Overly restrictive regulations will only distance capital and fuel the black market, while reducing the demand (and thus the value) of national currencies. With such perspective, one may raise questions on the future of public monetary policies.
Secondly, with cryptocurrencies allowing decentralization, there has been a historic outbreak of experimentation, risk-taking and technological innovation in a field that until now was largely devoid of it. The centralized nature of the monetary and financial systems, coupled with the lack of competition, hampered technological progress in money and banking. This is one of the explanations for some ridiculously archaic aspects of the banking sector when compared to certain sectors that have been revolutionized, for the benefit of their consumers, by digital transformation. With all Bitcoin technologies, the currency becomes programmable, which opens a new era of institutional decentralization and autonomy for individuals.
As a result, new blockchains like Ethereum have the potential to help transform virtually every industry, starting with banking, insurance and connected devices. Financing innovation is already revolutionized by initial corners offerings (ICO). These operations are currently going through a period of excesses and speculative frenzy, yet they are an objectively interesting innovation and probably destined to last. The various blockchains currently being tested will also allow new forms of organization that are still difficult to grasp today, such as decentralized autonomous organizations (DAO), without central authority and without a national base. The challenge to traditional law remains largely to be explored. It is therefore not just an economic phenomenon but also a societal, cultural, almost civilizational one.
Supporting innovation
In the face of this Bitcoin revolution, regulators should adopt an open-minded attitude. The burden of taxation and regulatory obligations on entrepreneurs, investors, innovators and consumers should be kept as low as possible. It is also important to facilitate business activity by clarifying the legal and accounting treatment of these new activities and instruments. Innovation is a sufficiently risky process without the public authorities adding unnecessary risk through vague or varying regulations.
The world competition is on. Capital and talent are largely mobile. It is impossible at this stage to know how many jobs this revolution will destroy and create. The regulation dilemma that we face is identical to that encountered during each « innovations clusters » in the sense of Schumpeter. On one hand, we focus on the supposed risks of technology by stubbornly refusing to recognize the promising sides, and let the government give in to the « regulatory capture » that makes it profitable for the interests in place to obtain regulations limiting the emergence of new competitors. On the other hand, trust the mechanisms that have, for several centuries, enabled the greatest creation of wealth and prosperity at the service of humanity: scientific research, technological innovation, freedom of enterprise, respect for private property, accumulation of capital, free exchange and competition.