Fi­nance and Tech­nol­ogy

The Bit­coin threat

Financial Nigeria Magazine - - Contents -

The ex­tra­or­di­nary vo­latil­ity of Bit­coin and other cryp­tocur­ren­cies has be­come a threat not just to the international fi­nan­cial sys­tem, but also to po­lit­i­cal or­der. The blockchain tech­nol­ogy upon which cryp­tocur­ren­cies are based prom­ises a bet­ter and more se­cure pay­ment method than any­thing seen be­fore, and some believe that cryp­tocur­ren­cies will re­place elec­tronic cur­rency in tra­di­tional bank ac­counts, just as elec­tronic trans­fers re­placed paper money, which suc­ceeded gold and sil­ver.

But oth­ers are rightly sus­pi­cious that this new tech­nol­ogy might be ma­nip­u­lated or abused. Money is part of the so­cial fabric. For most of the his­tory of hu­man civ­i­liza­tion, it has pro­vided a ba­sis for trust be­tween peo­ple and gov­ern­ments, and be­tween individuals through ex­change. It has al­most al­ways been an ex­pres­sion of sovereignty as well, and pri­vate cur­ren­cies have been very rare.

In the case of metal­lic money, coins typ­i­cally bore em­blems of state iden­tity, one of the ear­li­est ex­am­ples be­ing the owl sym­bol­iz­ing the city of Athens. Usu­ally, how­ever, there was some con­fu­sion about whether the em­blems on coins rep­re­sented sovereignty or di­vin­ity. Whose head is on this coin? Is it Philip of Mace­don or Alexan­der the Great, or is it Her­cules? Later, Ro­man em­per­ors would ex­ploit this am­bi­gu­ity, by stamp­ing coins with their own “di­vine” vis­age. And even to­day, Bri­tish coins have em­bossed words link­ing the monar­chy to God.

What­ever the case, there is a clear pat­tern through­out his­tory: bad states pro­duce bad money, and bad money leads to failed states. Dur­ing pe­ri­ods of in­fla­tion or hy­per­in­fla­tion, rad­i­cal cur­rency de­val­u­a­tion would de­stroy the ba­sis of po­lit­i­cal or­der. For ex­am­ple, the Thirty Years’ War in Cen­tral Europe dur­ing the sev­en­teenth cen­tury was fu­elled in large part by so­cial dis­in­te­gra­tion fol­low­ing a pe­riod of mone­tary in­sta­bil­ity.

Sim­i­larly, dur­ing the French Rev­o­lu­tion, spec­u­la­tion in a paper cur­rency pegged to “na­tional” prop­erty that had been con­fis­cated from aris­to­crats and the church un­der­mined the Ja­cobins’ le­git­i­macy. In the twen­ti­eth cen­tury, pe­ri­ods of in­fla­tion dur­ing and af­ter the two world wars de­stroyed Europe’s po­lit­i­cal in­sti­tu­tions and fanned the flames of rad­i­cal­ism. In fact, Vladimir Lenin re­garded the cur­rency press as the “sim­plest way to ex­ter­mi­nate the very spirit of cap­i­tal­ism” and bour­geois democ­racy.

In ad­di­tion to be­ing one of the main fac­tors be­hind the dis­in­te­gra­tion of states, bad money has also been a key fea­ture of in­ter­state con­flicts. For bel­liger­ent states, cre­at­ing or ex­ploit­ing mone­tary tur­moil has his­tor­i­cally been a cheap way to de­stroy op­po­nents. Even in peace­time, some states have re­sponded to de­te­ri­o­rat­ing re­la­tions by plant­ing fake money to sow dis­cord be­yond their bor­ders.

The best-known ex­am­ple of such mone­tary war­fare is Nazi Ger­many’s scheme to print the ban­knotes of Al­lied pow­ers dur­ing World War II. Coun­ter­feit notes could of course be used to pur­chase scarce re­sources or pay spies. But Ger­many also en­vi­sioned us­ing long-range bombers to drop forged ban­knotes over Bri­tain. Just imag­ine the de­mor­al­iza­tion and chaos that would have fol­lowed. Any­one with a large amount of money would au­to­mat­i­cally be sus­pect, and pub­lic trust would quickly erode. Drop­ping money could very well be more dev­as­tat­ing than drop­ping bombs.

Money is even easier to ma­nip­u­late when it is in­ter­na­tion­al­ized. In the mod­ern era, rogue states such as North Korea have reg­u­larly forged ban­knotes, par­tic­u­larly those of the United States. And cross-bor­der elec­tronic trans­fers be­tween banks are of­ten used for ma­lign

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