Can Modern Monetary Theory and Bitcoin be Reconciled?
BTC isn’t money — and that’s good news for both investors and MMT economists
I’ve been a passive investor in Bitcoin (BTC) since 2017, experiencing its euphoric highs and depressing lows. Recently, I’ve tried to educate myself on Modern Monetary Theory (MMT). MMT is an economic framework showing that currency-issuing governments can’t run out of money and should fund full employment and social programs, viewing deficits as beneficial.
I will analyze the Bitcoin Satoshi White Paper with my understanding of MMT to determine if there can be harmony between these two seemingly different economic paradigms. Anecdotally, I have encountered Bitcoin investors who hate MMT and MMT economists who dismiss Bitcoin as money. I don’t believe Bitcoin should be considered money, and this may be my way to bridge MMT and BTC.
The Title: Bitcoin: A Peer-to-Peer Electronic Cash System
From an MMT perspective, the title is problematic. If it had been called “a peer-to-peer digital value system,” MMT economists might not be as suspicious. In MMT, only the government can issue currency, and only currency can be called cash. This initial misnomer likely contributes to the hostility MMT proponents have towards BTC. To reconcile the two, I will substitute the word “cash” with “value” throughout the white paper. Admittedly, this isn’t an ideal start.
Abstract
A purely peer-to-peer version of electronic cash (value) would allow online [payments] to be sent directly from one party to another without going through a financial institution.
We must be careful with the word “payments” because it typically implies cash. However, since payment can mean a transfer of value, the word still works despite common associations. The rest of the abstract describes a peer-to-peer network using proof-of-work to timestamp transactions, preventing double-spending, and ensuring the longest chain of transactions is secure and trustworthy. Beyond the initial linguistic confusion, BTC’s peer-to-peer value transfer system represents an innovative technological leap.
Introduction
The introduction discusses reliance on financial institutions for online payments, leading to high costs and fraud risks. It proposes a peer-to-peer electronic payment system using cryptographic proof for secure transactions without intermediaries. There is nothing objectionable from an MMT perspective here. It might be worth considering if such a system could be implemented for government-issued cash, making it more relevant to MMT.
Transactions
An electronic coin is defined as a chain of digital signatures where each owner signs the previous transaction and the next owner’s public key. To prevent double-spending without a central authority, transactions must be publicly announced, and a system is needed to ensure participants agree on the transaction order. There’s nothing MMT objectionable here if we substitute the word “coin” with “asset” in this section.
Timestamp Server
Satoshi’s solution starts with a timestamp server that widely publishes a hash of a block, proving the data existed at a specific time. Each timestamp includes the previous one in its hash, creating a chain where each new timestamp reinforces the previous. This innovative tech solution for digital assets should be neutral from an MMT perspective.
Proof-of-Work
Proof-of-Work (PoW) is a system where participants solve complex puzzles to add new blocks to the blockchain, making alterations very difficult and ensuring security. The longest chain represents the most effort and is considered valid. PoW may pose problems for MMT if Bitcoin is viewed as money. However, MMT understands that currency must be tied to work, goods, and services. BTC abstracts and gamifies work, making it compelling and viable for digital assets but not viable as a stable currency.
Incentive
The first transaction in each block creates new coins for the block’s creator, incentivizing nodes to support the network. This process, akin to gold mining, uses CPU time and electricity. Transaction fees can also fund incentives, replacing new coin creation to avoid inflation. While the metaphors may be confusing, BTC is fine as a digital asset and not as a coin competing with government-issued currency.
Reclaiming Disk Space
After transactions are embedded in the blockchain, earlier transactions can be discarded to save space. Transactions are stored in a Merkle Tree, allowing only the root hash to be included in the block, compacting old blocks and minimizing storage needs. This tech innovation poses no conflict with MMT.
Simplified Payment Verification
SPV lets users check payments without a full node by keeping a small part of the blockchain. It depends on honest participants and can be tricked if attackers take over. Users can receive alerts for bad transactions and check further if needed. Businesses might still use full nodes for better security. Renaming this to “simplified asset transfer verification” aligns better with MMT.
Combining and Splitting Value
Transactions can handle multiple inputs and outputs to allow splitting and combining value, avoiding the need for separate transactions for small amounts. Provided we view BTC as an asset rather than money, there is no MMT objection.
Privacy
Bitcoin maintains privacy by keeping public keys anonymous, showing transactions but not identities. Users should use a new key pair for each transaction to enhance privacy. MMT in my opinion has no issues with BTC’s privacy solutions.
Calculations
An attacker must outpace the honest chain to create a fraudulent blockchain, which becomes increasingly unlikely as the chain grows. Nodes will not accept invalid transactions, ensuring security. The longer a recipient waits after a transaction, the less likely it can be reversed, protecting the blockchain’s integrity. This tech aspect poses no conflict with MMT.
White Paper Conclusion
The proposed system for electronic transactions uses a peer-to-peer network and proof-of-work to prevent duplicate transactions, creating a secure public transaction history. The network operates simply and robustly, with nodes independently validating and extending the blockchain. Nodes can join and leave freely, maintaining security and consensus. Taken as such without a claim as being money this system does not run afoul of MMT.
Squaring the BTC MMT Circle
After examining the BTC white paper and replacing money metaphors with asset terminology, BTC still holds up as a digital asset with real utility if its currency claims are abandoned. We suggest rebranding BTC to “BitCom,” indicating a digital commodity. This aligns with how the market perceives BTC, much like how PayPal evolved from transferring money between Palm Pilots to a comprehensive online payment platform. Although shifting BTC’s perception from money to an asset may be challenging, it could harmonize with MMT and its principles. BTC has already been widely adopted as purely a digital asset in its brief history, and redefining it as such allows it to coexist peacefully with MMT.
Jason Paul Guzman is a partner at the branding, design and web agency Trasaterra in New York City. Trasaterra’s creative philosophy and methodology is rooted in audience attraction through brand authenticity.
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