Cryptocurrency: America’s go-to funding solution for 200 years

William Freedman
Jan 29, 2018 · 6 min read

Cryptocurrencies have been around for at least two centuries.

Bitcoin, ethereum, ripple … these are nothing new. Sure, blockchain technology and the distributed ledgers it enables are recent innovations. But the underlying purpose served by alternative currencies, and its risks as well as its rewards, could be almost as old as money itself.

That’s because “crypto” is just what Millennials call their bearer bonds.

Bearer bonds are simply debt instruments, not unlike T-bills or the senior, secured paper sitting in your 401(k). The main difference is, almost all debt certificates sold these days are registered, meaning the taxperson knows when — and for how much — you buy it or sell it. Bearer bonds are just what the name implies: payable to the bearer. You don’t need to show ID.

If you’re looking for another name for a debt certificate payable to the bearer, just open up your wallet. Here in the United States, it says right at the top of all the bills: “Federal Reserve Note”. Note, as in short-term debt instrument. It’s what the Fed owes whoever holds that paper.

The Fed is a central bank. We can argue all day about how independent from the U.S. government it might or might not be, but it still serves as its monetary authority. The Fed’s notes are backed by the Treasury Department’s full faith and credit.

Bitcoin et.al. aren’t. They are the truest expression of the dawning “reputation economy.” They’re worth precisely what the supply and demand curves say they’re worth, predicated on nothing but perception of value.

So you can’t really say that crypto is exactly the same as cash. But you don’t have to look too far back in history to find other securities that also provided the liquidity and anonymity of Federal Reserve notes.

America in late 1865 was, by today’s common parlance, a shithole country. A ghastly civil war had left half the nation in ruins and both halves impoverished as a result. The banking system was in complete shambles. One of the casualties of the Civil War was the Free Banking Era, a quarter century of no central banking and no national bank charters. With no nationally backed cash, state-chartered banks just printed up their own. Interest rates, money supplies and prices whipsawed up and down. This posed the opposite problem of Too Big to Fail: Too Small and Too Many to Possibly Succeed. The typical American bank went out of business in five years.

Of course, that’s no way to fight a war, so Congress passed the National Banking Act of 1863 and gave President Lincoln authority to name a Comptroller of the Currency and print paper money again.

You can print all the money you like, of course, but you can’t buy trust with it. If you’re printing it at the same time you’re announcing that you’re taking your currency off the gold standard, then you can’t even make a down payment on that trust.

But there were train tracks to lay, docks to repair, factories to build. And even America’s return to the gold standard wasn’t very helpful — considering it was driven by Germany forcing it off the silver standard. (Long story.)

So a new medium of exchange had to be invented on the fly: something more trustworthy than central bank notes, and scalable into the millions of dollars. Of course, it had to be more portable than bars of gold or silver. And that’s when bearer bonds came into vogue. Who started it? Who knows? Who quickly got into the act? Everybody. Banks. Railroads. Utilities. State governments Foreign governments. Anybody who needed letters of credit, commercial paper, municipal notes or foreign exchange.

And it was all backed up by nothing but the reputation of the underwriter. No promise of gold or silver. No guarantee by a sovereign government.

Just like crypto.

And, just like crypto, they were subject to the same caveats we hear today. “Their value can go to zero overnight.” “Someone could steal them from you and you’d have no recourse.” “Their anonymity enables tax evasion.” “Their anonymity enables criminal or terrorist activities.”

It’s all true, of course — just as it’s true that, from the libertarian perspective, it lets you buy what or sell what you want, when you want, with nobody looking over your shoulder.

It’s also true that all this can be said about a backpack full of Benjamins. Unless and until all world governments make privacy and discretion illegal, there will always be this tug-o-war between the rights of the individual to transact private business and the rights of society to be protected against violence and theft.

By the way, bearer bonds have not gone away entirely, even though they’ve been suppressed in the United States since the 1980s. Eurobonds are technically bearer bonds, but in practice it’s pretty much impossible to exchange them anonymously for cash. In 2012, Superstorm Sandy flooded the underground vaults of the Depository Trust and Clearing Corp., along with the rest of downtown Manhattan. According to one press account, those vaults included as much as $70 billion in bearer bonds. Whether or not they were actually worth anything remotely close to their par values is another question.

And it was inevitable that someone would invent a bitcoin-denominated bearer bond. I’m not sure what value OpenDime brings, but it’s selling flash drives loaded with crypto. If you’re ever someplace without wifi and you need to spend your bitcoin, I guess this would be a good idea.

But I said at the top that bearer bonds were two centuries old. The astute among you noticed that my history lesson fell almost fourscore and seven years short.

Bearer bonds weren’t actually invented during Reconstruction. They were rediscovered. Further back U.S. history, the Treasury Department issued notes to refund debt it accrued during the War of 1812. Not able to raise enough money with multi-thousand dollar bonds, in 1815 it issued zero-coupon bearer notes of between 3 and 100 dollars.

That didn’t work out too well. The small notes’ 7% discount effectively inverted the yield curve — something you don’t worry about if your country is fighting for its survival.

But then he war ended — sooner than expected and with America on top. Suddenly the long-term bonds were worth more, and the small notes were cashed in just as quick as investors were convinced the United States would still be in business 30 years later.

And that’s pretty much where we are with crypto right now — right where sovereign currency was during the Napoleonic era. Once we have some sense which digital currencies will be the new dollar, pound and toler/mark/euro, their stability becomes a self-fulfilling prophecy, and the notes denominated in them will be more precisely valued.

William Freedman

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Hard-working, fact-based journalist on the FinTech beat