Blockchain and the state:
Vehicle or vice?
As ultramodern as they may seem, cryptocurrencies and their underlying distributed ledger technology (commonly referred to as the blockchain), represent the intertwined evolution of two prosaic yet fundamental pillars of civilisation: money and accounting. From the earliest issuance of barter tokens, to coins of precious metal, paper notes, then digital strings of ones and zeroes - and the single and double-entry ledger accounting methods used to record transactions and ownership by trading houses and the first banks - one feature of these two pillars has been ubiquitous and constant: centralisation.
For all of these monetary systems to function an authorising intermediary has stood over issuance of currency, and stood between transactors, providing them with the capacity to trust one another. This stabilises the value of the medium of exchange, the security of the transaction, and the integrity of the record, whatever it may comprise. The intermediary accrued power via the indispensable role it played in facilitating trust, and the centralisation of authority, as corollary, literally created
civilisation as we know it. The seats of political and financial power have thus remained, to this day, with governments and central banks.
Yet in 2007-8 this manufactured structure of centralised trust was revealed as anything but trustworthy. The financial and political implosions of the GFC became a unique opportunity for an alternative to this system of centralisation. In January 2009 Bitcoin came quietly into existence utilising the blockchain, to become the first working example of a decentralised digital currency paired with a triple-entry accounting method.
Bitcoin required no intermediary for financial transactions, no central authority; the foundational underpinning of the world’s monetary system had been silently by-passed. Reaction was muted at first, and mostly dismissive. Now, almost a decade later, one Bitcoin is valued at 13 times the price of gold (at the time of writing).
Outside of a very small, specialised community, awareness of the significant potential of Bitcoin’s digital architecture was almost nil until about 2013. When commentators did weigh in, cryptocurrencies such as Bitcoin, were as likely to be hailed as the future of money and destined to sideline traditional repositories of authority, as they were to be derided as a ‘scam’ or yet another false dawn in the as-yet unrealised decline of the state, and its traditional seats of political and financial power.
Yet in only a few years, when Bitcoin failed to disappear into the ether, the state and other forms of established authority (particularly commercial banks) have spotted the potential of blockchain-based applications and have set about bastardising the concept, directly at odds with blockchain’s crypto-punk roots.
The more scholarly analyses of the disruption to these seats of power posed by digital information and communication technologies (ICT) – and its creeping disintermediation of inter-state and intra-state boundaries – has focused on the impacts on the financial and monetary relations of electronic money, 1 impacts on social, cultural, and political institutions of the digital networked age, and particularly after Snowden, the 2 impact of mass digital surveillance. 3
These avenues of enquiry clearly share a common denominator, however: the subject matter of social, political, economic, and security studies are now embedded in a digital substrate that is expanding its material form and, therefore, altering its social meaning. Blockchain is interesting because it offers the digital substrate a structure from which some forms of agency can be clawed back. In a near-term world saturated by data, this agency will be the basis from which any actor manages to sink or swim. A small number of actors may excel, with
In January 2009 Bitcoin came quietly into existence… the foundational underpinning of the world’s monetary system had been silently by-passed.
radical implications for society.
Money as ones and zeros
What much of the nascent literature tells us is that the material locus of power in international monetary relations has been undergoing significant expansion since the advent of electronic money. As the locus has shifted and expanded to include a multitude of previously quarantined forces, the power of central banks, defined in traditional terms of their control and autonomy, has been in relative dilution.
In the background, moreover, the digitisation of money has ushered in new types of materiality in relation to currency, which accommodate radical alterations to the social institutions of money. With the explosion of cryptocurrency alternatives to Bitcoin via the recent advent of ICO’S (initial coin offering), these new types of materiality exploded in 2017.
The control and autonomy of central banks now exists in the onrush of this new materiality, as does the traditional relationship between the centres of financial and political power in society. Something of an inflection point has been reached. How did we get here?
A profound shift was set in motion when money went digital. For consumers in the US, Australia, and New Zealand, this entered the flow of everyday life when EFTPOS (Electronic Funds Transfer at Point of Sale) and the associated chipped cards and readers began their accent to ubiquity around 2002.
By the middle of the decade, EFTPOS and its international iterations had begun to replace notes and coins as the dominant methods of payment in developed countries, while newer contactless methods using smart cards, mobile phones and mobile readers were quickly developing. The implications of these trends for commercial banking practices and the cost/benefit tradeoffs regarding efficiency, security, mobility, and anonymity for vendors and consumers have been widely discussed.
On the other hand, for central banks and governments these trends marked a watershed. The digitisation of money and the growth of electronic commerce directly spurred an explosion of digital economic data. Unsurprisingly, and made particularly acute in the post 9/11 era, that explosion attracted a range of stakeholders and forces previously only peripheral to the political orbit of central banks. Digital transactions leave ‘fingerprints’ able to be drawn upon, not only by economic actors such as advertisers and vendors seeking to understand consumption patterns, but for security-related surveillance of both a domestic and international nature.
The first decade of the 21st century, as a result, witnessed the unprecedented securitisation of finance, and the ‘financialisation’ of security, even before the global financial crisis of 2008. Benjamin Cohen captured the pre-cursive dimensions of this shift in 1998 with The Geography of Money, 2001 with the article Electronic money: new day or false dawn?, and 2004 with The Future of Money.
Cohen concluded of these trends that the impact of electronic money would be felt greatest by central banks whose existing capacity to control monetary
Something of an infection point has been reached
How did we get here?
supply and autonomy to manage market demand was greatest. Clearly, central banks with little of these powers would not stand to lose as much. He wrote in 2001,
“The anticipated era of electronic money… will have a profound impact on the effectiveness of monetary policy – less so in countries with weaker currencies, where control of aggregate spending has already been compromised by the accelerating deterritorialization of national monies; definitely more so in the reserve centres, where domestic monetary monopolies will be seriously breached for the first time.” 4
At the heart of this impact was the material transformation of fiat currency from paper, polymer, and metallic promises, to promises composed of digital strings of ones and zeros. Those promises remained dependent on the collective intentionality of human beings for their status and function as money, but their materiality was transformed. 5 And where materiality leads, collective intentionality follows. 6
This was not the primary concern of Cohen, however. His analysis of the impacts of electronic money remained focused in the dilution of traditional monetary sovereignty by the swarm of new stakeholders and networks of cross-border market actors. 7
The explosion in digital data precipitated by the advent of electronic money and expanded by the digital age of ubiquitous sensors, mobile devices, and hyper-connectivity pales in comparison to what is yet to come.
More recent attention emanating from the social science of finance, international political economy, and international relations has accrued to the impacts of technology and the ‘new materiality.’ 8 These inquiries raise the prospect that the new materiality represented by digitisation, forces an inside-out examination of the social institutions of money and therefore the expanded locus of power in monetary relations. 9 Explaining the erosion of state power over monetary relations, in terms of traditional hierarchies saturated by complexity and securitisation, could only partially capture the dynamics at work.
From big data to data crunch
The explosion in digital data precipitated by the advent of electronic money and expanded by the digital age of ubiquitous sensors, mobile devices, and hyper-connectivity pales in comparison to what is yet to come. An internetof-things (IOT) of connected devices is predicted to number from 25 to 50 billion by 2020. This vision anticipates an exponential increase in the amount of information generated by devices, applications, and the infrastructure itself that measure, monitor, and automate tasks. A wealth of analytics and forecasts are available.
According to Cisco, annual global internet traffic will reach 3.3 ZB10 per
year by 2021, up from 1.2 ZB in 2016 and most of it generated by mobile devices connected via Wi-fi. Most of the traffic will be video, and the amount of video surveillance traffic will increase seven-fold. 11
This has become known as the coming ‘data crunch’. Managing the flow of data, rather than owning and storing it, will become the only option for most businesses and governments. 11 Individuals, too, are changing their attitudes toward their own data, forcing the redundancy of the once ubiquitous ‘gather it now, find a use for it later’ model of the big data era. 13 Thus, the provenance over and security of data, and the capacity to relay this to consumers increasingly concerned about trust, has become pivotal to competitive survival, let alone advantage.
Blockchain and ICOS
Enter blockchain. Distributed computing systems have been with us for some time. The underlying protocols were present at the creation of the early internet, form the basis of the World Wide Web and telecommunications networks, and anything that requires the uniform synchronisation of a network of computers to function.
This uniform synchronisation is essentially a consensus between machines. As types of networked machines, nodes in a distributed ledger need to reach consensus about the contents of a canonical chain of blocks that contain data. In 2009, Bitcoin was the first application of distributed ledger technology (DLT) to transactions and ownership of cryptocurrency, or digital currency interacting with cryptographic protocols.
In 2015, Ethereum embarked on an ambitious project to expand on what many, including its creator, Vitalik Buterin, saw as the significantly underutilised potential of blockchain. Rather than simply recording transactions and ownership of a cryptocurrency, Ethereum envisions itself as a global general-purpose computer. Ethereum’s blockchain would be a record of the interactions between computer states. These interactions are known as ‘smart contracts’ whose execution occurs on the underlying architecture. Ethereum is to Bitcoin what a smart phone is to a pocket calculator.
Developers can use Ethereum’s blockchain to execute their smart contract. A novel way of funding the development of such applications has emerged in the form of initial coin offerings. A development team will issue a cryptocurrency of their own that can be bought and traded by the public. These ‘coins’ or ‘tokens’ achieve their valuation like any other security, via the mechanism of supply and demand.
Millions of dollars have flooded the cryptocurrency market very recently as investors chase the next Bitcoin phenomenon. In 2017 Bitcoin’s price increased 1600 per cent between January and December, and Ethereum was up 4000 per cent in the same period. The market cap of cryptocurrencies as a whole, is now more than a staggering US$400 billion.
The burst of highly speculative ICOS in the first half of 2017, which pushed up prices, was rapidly unwound, as many projects were over-valued and investors ran for the door, mostly into fiat also. Naturally, this snowball effect caused the swathe of new and
Rather than simply recording transactions and ownership of a cryptocurrency, Ethereum envisions itself as a global generalpurpose computer…. Ethereum is to Bitcoin what a smart phone is to a pocket calculator.
poorly informed investors to panic. The industry is almost completely unregulated. But this is only the beginning.
The ICO space looks destined to be reined in by regulators eventually, and the current crop of cryptocurrencies will inevitably shrink from this initial bloated size. The US Securities and Exchange Commission warned in July that it would categorise ICOS as securities on a case-by-case basis, thus subjecting them to federal regulation. Chinese authorities placed a ‘ban’ on ICOS in September. Observers expect Beijing to begin issuing licenses in lieu of an outright ban in the future.
Regulators face a conundrum between the impulse to control activity in this space and the imperative to cultivate innovation. Perth-based Power Ledger held Australia’s first ever ICO in September – raising $34 million – a resounding success and an exemplar that will be quickly imitated. In Australia, ASIC released guidance of its hopefully balanced approach to ICOS in September.
A false dawn?
None of this, however, heralds the demise of the blockchain. Essentially a form of triple-entry accounting, DLTS 14 enable two or more actors to verify that something happened with a high degree of certainty without the need for an intermediary. Sceptics watching this current wave of volatility have a tendency to be short-sighted.
In June, widely respected economist and editor-at-large of the Australian Business Review, Alan Kohler, labelled Bitcoin a “giant scam”. 15 The current crop of cryptocurrency miners, Kohler observes, “are hoping their ‘coins’ become money one day.” 16
Kohler notes the distinction between cryptocurrencies and blockchain technology, on which he is bullish, but reiterates the essentially anarchic nature of cryptocurrencies and their destiny to never replace the roles of the central banks and governments that print and manage fiat money.
But to be bullish on blockchain, while dismissing the tokens that will trigger the execution of smart contracts and create their own economic ecosystems, belies an inconsistency. Jamie Dimon of J.P. Morgan has also repeatedly declared Bitcoin a “fraud”, while the institution he heads is a founding member of the Enterprise Ethereum Alliance.
According to Jamie Burke of Outlier Ventures, ICOS are the much sought after “killer app” of blockchain technology, hiding in plain sight. 17
They represent burgeoning economic ecosystems in their own right, heralding the “tokenisation, fractionalisation and financialisation of The Web 3.0 starting with how it’s owned.” 18
While start-ups in this space will naturally rise and fall, the ICO model offers a truly novel alternative to traditional venture capital. Teething phases notwithstanding, the communities of interest that converge around a project via an ICO are able to evolve in a way unavailable to the VC powered start-up. The digital cryptographic token can tether the community to the project long after the VC is gone, the project iced, and the intellectual property and its network of individuals disbanded. Saying crypto-anarchists just want to replace money is like saying the internet’s inventors just wanted to replace the letterbox.
Regulators face a conundrum between the impulse to control activity in this space and the imperative to cultivate innovation.
The disintermediation of traditional forms of institutional power is built into this system. Already, financial institutions, corporations, and other powerful stakeholders of every type – including governments – are joining forces to commandeer blockchain technology for their various ends. By storing private data and keeping code closed-source, however, they seek to reproduce business models of monopoly and scarcity. These consortiums are pursuing private blockchain projects that are essentially a power re-centralisation exercise. Yet they will be competing in future with public blockchains that will accrue structural advantages.
According to Nathan Waters, “the network effects of an open, public blockchain-based protocol will inevitably outpace any private systems.”
19 Waters and many others see this as the key paradigmatic shift many observers are missing. Models of scarcity and monopoly are ill-suited to the digital networked age. This applies as much to commercial actors as it does to the state, which as we have seen, has not been able to quarantine its agency from these forces, even while in their infancy.
Disintermediation with disaggregation
History suggests the state has been more than capable of commandeering the disruptive effects of technology to its own ends. Few would be willing to draw a line in the sand this time around. But a more interesting question might be: What exactly is the state now?
With the advent of electronic money and the influx of complexity to its once quarantined preserve, the relationship between centres of financial and political power in society has expanded in locus, perhaps beyond recognition. Finance has been securitised and security has been financialised. The data crunch is here. The state is left herding a sovereign swarm of locusts.
Blockchain technology offers a foothold, a way to structure the digital domain that offers verification, standardisation, and security. Internationally, central banks from China, Russia, Canada, Denmark, England, Japan and Singapore are exploring ways to use blockchain to issue controllable digital versions of legal tender. But in whose interests? Are they unwittingly instigating their own demise if public blockchain-based economies will defeat them with scale?
The IMF’S Christine Lagarde has also weighed in recently on cryptocurrencies, warning central bankers not to dismiss them. The future of the IMF’S Special Drawing Right, the quasi-reserve currency backed by a basket of the world’s major currencies, could one day be ideally suited to a blockchain solution that restores trust to the imperilled global financial system.
There’s something else, too. Blockchain offers clean data – gold dust to Artificial Intelligence developers. And bigger is better. A public, permission-less, global-scale blockchain serving up endless streams of verifiable data is every AI developer's dream. Access to good data is so important to compounding AI learning that a small initial edge can become a significant advantage over time, applicable to almost anything strategically of interest to the state.
Japan is the quiet achiever in the development and implementation of blockchain, and the Pentagon announced recently it would deploy its first AI system on the battlefield by December 2017, to hunt ISIS as it dissolves back into local populations. AIS fed by blockchain-generated data will be the strategic game-changers of the near future.
Standards Australia has led efforts to begin the process of regulation and standardisation in the blockchain space, and 129 AI patents were filed in Australia at the beginning of 2016.
So vehicle or vice of the state? Blockchain is just one component of the expanding techno-hybrid locus of power in which human beings find themselves now precariously situated.
Models of scarcity and monopoly are ill-suited to the digital networked age. This applies as much to commercial actors as it does to the state
IMAGE: © Jeremy Keith-flickr