Bitcoins and Blockchain
In the past weeks, there were a number of media reports about our government’s initiatives in bitcoin and blockchain. These are two different sectors but as they are linked to digital technology, they are being discussed simultaneously. For those who do n
Dr Simon Mercieca is senior lecturer, Department of History n simple terms, money was first made up of gold, silver and copper. Then, in the nineteenth century, there was the major transformation, where paper money was introduced. In truth, the use of paper money is older than the nineteenth century and bills of exchange are found in use in the previous centuries. Slowly paper money replaced gold and silver coins. Metal coins were created when humanity moved from hunter and gatherers to an agrarian civilisation. Once the world became industrialised, gold became a reserve to back up paper money. This transition was not without controversy. Now, we are moving to the next generation where money is no longer in paper, but in digital format. In truth, this process has already started, and plastic money is nothing more than a form of digital transaction. The person using plastic money does not touch real money. Money is just a number in the bank account that goes up and down. Digital money or bitcoins is the continuation of this monetary process. They are nothing more than virtual accounts.
As for the blockchain, it preserves all your personal documentation; moveable and immovable assets on a digital platform. The term blockchain is used because data is held so tight, in a layer format, that it is very difficult or practically impossible for those who do not have the code to access the information. Till here there should not be an issue of controversy. This is just a very rudimentary explanation of what bitcoins and blockchain are all about.
Blockchain and bitcoins work on the basic principle of using encryption. The holder holds a virtual account. What one possesses, whether money or assets, is stored and documented in the net and no one can tamper with the stored data. The difference lies in the fact that with money, whether, metal, paper or plastic, the State still has control over the account. In bitcoins, the State has no control over your money. The same holds for the blockchain. The State loses control over all the assets of an individual. Both in bitcoins and blockchain transactions take place without the state knowing or can even take control over these transactions.
On a person level, I know Maltese who have invested in these areas and made money. Normally, these individuals are not the ones that one sees in press reviews talking about bitcoins and blockchain. They work in the shadows. One in particular, is today giving advice on these structures to big auditing firms. 2017 was the best year for these investors.
What appears strange with the present government initiatives is the fact that our government is giving the impression that both bitcoins and blockchain can be controlled through State legislation. At least, in reading the press conferences, one gets the idea that the present government is working on legislating in this particular financial sector. I find this weird to say the least. It is an odd piece of news because bitcoins and blockchain were created simply to free money and assets from the control of the Sovereign State.
This led to a covert political concern amongst governments. This explains why countries like China do not even permit their citizens to invest in them. This explains why the Guardian newspaper reported that ‘the new head of the Bank for International Settlements, Agustin Carstens, said bitcoin had become a combination of “a bubble, a Ponzi scheme and an environmental disaster” that threatened to undermine public trust in central banks.’ I cannot see how they can be an environmental disaster but they are a threat to the dominance of banks and governments.
When the Nation State was created, around 500 years ago, it created the concept of citizenship which did not exist in the Middle Ages. With the concept of citizenship, came the concept of taxation. Taxation is not just a means for any government to get revenue: it is also a means for the government to control its citizens. Now, the political fear is that with bitcoins and blockchain, governments lose control over the money of their citizens. If this has to happen, then the concept of citizenship will come to an end. The concept of citizenship cannot hold water in a digital world. It cannot exist without taxation. If the Nation-State loses control over its citizens’ money, it would mean that it has lost its raison d’etre for existing.
Stories of malware and ransomware are showing that the nation-state or any superstate structure does not have control in stopping individuals from carrying out these attacks. They don’t even have the power to bring the perpetrators to justice. In short the current nation-state cannot control or stop these criminal activities. The banks are not in a position to stop the transfer of money demanded by hackers. These situations are already exposing the weaknesses of the nationstate. The super-state is ineffective to control the ‘internet’.
Thus, the covenant that both Thomas Hobbes and Jacques Rousseau speak about; that of keeping citizens loyal to their state, will start to be questioned. And in fact, already many citizens in the developed world are questioning the current democratic system. In truth, they are not questioning democracy but the existence of the current formation of their respective nation-state.
This is why the model of a nation state is being discussed by academics and this is why there are some who do not see it as a sustainable model with any future. What the digital age will create is a situation where people will end up living in cities without taxes and freedom of movement. With the creation of the blockchain, the structures created by the industrial revolution, such as central banks, will start losing their power. The nation state will have no control on the citizens’ assets. The assets will be spread over a number of citystates, governed and kept together by the internet. Therefore, migration or movement will be the hallmark of the new city-state. If our government is working in this direction, then, it is thinking in terms of the future. But I honestly doubt it.
Thus, my question is very straightforward. Why is there all this interest in Malta from abroad to have our present government as a world leader in this sector. Is Malta being seen as some sort of political guinea pig where market powers can test their theories on how to introduce control over this new flexibility that bitcoins and blockchain will bring to the world of the future? My impression is that Malta and its government are being used to test the waters in this very fluid world. Let’s hope that Malta will not end up in another international imbroglio, as was the case with Vitalis and other international initiatives - such as the selling of passports - that are rocking our country.
This does not mean that there are not grey areas and speculation. In the past weeks, two particular companies in the bitcoin business registered a drop in their shares values. Last week, there were reports of cryptocurrency being used for money laundering purposes. But even in the past, the transition from hard coins to paper money fueled speculation.
I will mention one case that concerns Malta. In the past, Malta had a law, by which an owner who had common parts with an adjacent property had the right to recover this property, in case it was bought by a third party. Someone bought a property in this period of transition. The adjacent owner made a court case to recover the property. The court granted to this person the right to recover the property but had to pay the exact amount that, according to contract, the previous owner paid to buy the property. The problem here was that the person who bought the property paid in gold coins. But the one who recovered the property paid back the amount in paper money!
But the biggest challenge is somewhere else. All your assets and money will depend only on your knowledge of your secret password. If one loses it, there is no way one can recover his or her money and titles of his or her assets.
Another grey area is the issue of inheritance. How can one inherit the assets of someone who invested his money in bitcoins or blockchain? The control is linked to the possession of a secret code. If the heirs do not recover the code, they cannot recover the money and if one of the heirs, or anyone else get holds of the password, there goes the inheritance. In part this is already happening. When hackers get into someone’s account or password, they process illegal transfers. When this happens, it becomes difficult for the one who loses the money to recover it. But at least, in the present system, there is the physical bank which one can contact and access personally. In the world of bitcoins and blockchain, this is not possible.
I am sure that this sector is destined to grow. I don’t personally share the idea of those who see all this as an economic bubble. There were some who compared bitcoins and blockchain to the tulip bubble in the Netherlands of the seventeenth century. There are individuals who have also lost money. But there are others who made big gains. My advice is not to invest in this sector if you do not understand how the mechanism work. If you understand bitcoins and blockchain, then it is worthwhile to take the risk. If one makes the right investment, using the correct agents, one can make big profits in the next six years. As I said this is a sector that will definitely expand, and with or without the national state, these digital platforms are here to stay. They are going to be the money of the future.