The End of Government Money
Author’s note: This story mentions things you can do with cryptocurrencies, including some unlawful things, in order to inform the readers of what’s actually possible. This is in no way an endorsement for breaking the law.
I think that the experiment we are doing with Bitcoin and alternative cryptocurrencies is the beginning of the end of government-issued money. The concept of money and our relationship with it in a decade from now will be very different from what it is today. People who are slow to embrace this technological shift will miss out on what I believe is going to be the greatest wealth redistribution event in human history.
The reason why I think cryptocurrencies are the future of money is simple: they are already here. There is no way to shut them down. They operate in a competitive market to win over users. You can do things with cryptocurrencies that you can’t with government-issued money; the reverse is not true.
Collaboration vs Exploitation
Throughout human history, our forefathers have relied on two alternative strategies for social scalability as we moved beyond tribal societies to build cities, countries, and empires:
Collaboration rewards individuals who are generous and empathetic. Exploitation rewards individuals with sociopathic tendencies. From a game theory perspective, in an environment with abundant resources, collaboration is the optimal winning strategy for both individuals and the group. But the rules of the game change as we face scarcity. When resources dwindle and labor is in short supply, exploitation can be the short term winning strategy on an individual level, at the expense of the ones who fall victim.
Fiat money was born out of the scarcity era of the Great Depression and the First & Second World War. Wars are expensive, and much of the gold reserves backing the paper money in circulation were spent in financing wars and rebuilding afterward. So the governments around the world gradually abandoned the gold standard, ending the convertibility of paper money to Gold.
No longer requiring a gold reserve backing the paper money, the governments had the ability to create money out of thin air, change inflation rates at will, and impose more regulatory control and surveillance on the citizens, who were legally forced to use fiat money. The primary mechanism to generate revenue for most government enterprises switched from value-adding ventures to exploiting the citizens, in the form of inflation, taxation, interest rate manipulation, and various types of capital, wage and price restrictions.
The problem with trusting a centralized entity with a legally enforced monopoly in money creation is that our trust inevitably gets abused. The governments use freshly minted money in unproductive ventures, from building gold toilets in the presidential palace to bombing other countries. Our money loses value. Prices of things go up.
In cryptocurrency design, the problem of trust is handled by decentralizing the money creation. The transparency of the blockchain and the cryptographic tools further empower the users with the ability to verify that everything is working as intended without requiring to trust any network participant. Incentives for all participants are designed so that collaboration is rewarded and exploit attempts are punished.
Monopoly vs Free Market Competition
Bitcoin was born in a harsh environment where the governments around the world introduced legal tender laws in order to prevent free market competition in money. The issuance of new currency by private enterprises was criminalized. Satoshi Nakamoto, the inventor(s) of Bitcoin, overcame this hurdle by using a pseudonym, carefully hiding their identity, and designing Bitcoin as a purely peer-to-peer network with no trusted intermediary or single point of failure.
“Governments are good at cutting off the heads of a centrally controlled networks like Napster, but pure P2P networks like Gnutella and Tor seem to be holding their own.” — Satoshi Nakamoto
Following Bitcoin, thousands of alternative cryptocurrencies have come out in the last decade, and it’s now impossible to shut them all down.
Today, we live in a world where all fiat and cryptocurrencies must compete and win over users by improving the features that make money useful to the end-users: medium of exchange, store of value, fungibility, scalability, user experience. This competitive nature in the creation of money is no different from any other industry, from garments to automobiles.
Bitcoin brought us the technology we needed to end the injustice of fiat. The logical next step is the complete separation of money and state unless the state-issued currencies can compete with cryptocurrencies based on meritocracy alone.
Friends Don’t Let Friends Use Fiat
This may have sounded like science fiction only five years ago but, today, most of my friends already use cryptocurrencies. We pay our credit card bills with cryptocurrencies. We store our savings in cryptocurrencies. We bill our clients and compensate our team members in cryptocurrencies. We settle debts among ourselves in cryptocurrencies. My ex-landlord told me the other day, “I wish I accepted Bitcoin when you offered to pay rent in Bitcoin 4 years ago.” Today, he happily accepts Bitcoin.
“The future is already here — it’s just not evenly distributed.“ ― William Gibson
Cryptocurrencies are here. There is no way to shut them down. Cryptocurrencies are programmable. Their monetary policies are incorruptible. Cryptocurrencies can’t be confiscated, can’t be traced if precautions are taken, and can’t be subjected to the regulatory burdens that plague the fiat users.
For better or worse, there are things you can do with cryptocurrencies that you can’t with fiat:
- You can write trustless smart contracts for conditional payments. This will only become more relevant with the rise of AI and robotics.
- You can buy drugs online. It’s as safe and convenient as shopping on Amazon.
- You can maintain complete financial privacy without reliance on anyone but yourself.
- You can skirt capital control laws.
- You can avoid paying taxes.
All these strong advantages mean that cryptocurrencies should inevitably replace the much weaker government-issued money as they exist currently. This would have a profound social and political impact. Without the ability to create money in the form of inflation or tax citizens effectively, the governments will have to reduce spending and cut funding on unproductive and wasteful ventures. Wars might become unaffordable due to the heavy risks and financial burdens they carry.
On the flip side, social security and welfare programs may also become unaffordable. We may have to look for alternative means of taking care of each other, instead of relying on government-run safety-nets. My hope is that the collaborative nature of cryptocurrency networks will help bring out the best in us. Empathy tends to get naturally rewarded in a consensus-driven network. Selfishness and greed tend to get punished.
The Greatest Transfer of Wealth
Most cryptocurrencies are deflationary, or otherwise, have much lower inflation than fiat currencies. As more people onboard, the value of existing units of currencies go up in purchasing power. The transition from fiat to cryptocurrency will therefore inevitably come with a mass wealth transfer event. It is a once in a lifetime opportunity for our generation to take advantage of this movement, and hopefully, change the world for the better.
My hope is that the cryptocurrency movement would transfer wealth from the oil and fiat rich who enriched themselves by means of exploitation to those who value collaboration. The new wealth would flow from those who are trapped by status games, dogma and tribalism to those who value freedom, sovereignty, scientific progress and meritocracy.
Bitcoin is a powerful tool that will enrich the early adopters. If we use this tool wisely, we will be able to influence the future of humanity and create a better world.
This blog post is a call to embrace the wealth transfer mechanism that Satoshi Nakamoto has bestowed upon us.
Images with Creative Commons licenses.