The Great Hard Fork: An Unraveling of State Legitimacy
The liberation of money from state control made possible by Bitcoin has reopened societal dialogue on old philosophical questions about the fundamental nature of money. Until very recently most people didn’t think about money as a technology or as something that can exist outside of the control of nation states. In fact, introductory university textbooks even begin with the assumption that the supply of money is set by the central bank without ever exploring a setting in which money could emerge spontaneously like other goods and services. The ambient air of assumptions that protects the monopoly of money creation has given an unchallenged hegemonic authority to central banks which bitcoin finally pierced.
The rise of cryptocurrency doesn’t merely threaten the monopoly of central banking, however; in fact the entire nation state apparatus rests precariously on the structure of banking carefully crafted over 400 years. What cryptocurrency threatens is the very existence of the nation state which will have to pivot quite radically in order to survive the coming onslaught from the blockchain. The resulting institutional framework might look entirely alien once the dust has settled. To understand why the survival of the nation state is threatened by cryptocurrency, we have to delve into history to uncover the 2 most common sources of state legitimacy.
War is Peace
In AD 312 the Emperor Constantine began the Christianization of the Roman Empire, shifting from a persecutor of Christians to adopting it as official state religion. Shortly after, the Council of Nicaea was convened to formalize the New Testament, mirroring the gathering of some wealthy American land owners’ attempt to formalize a government of and by the people some 1400 years later. Between those 2 periods, states across Europe took an increasing interest in regulating and controlling the rise of Christianity and Christian thought. In spreading Christianity, the state was able to gain legitimacy in the minds of its subjects by piggy backing on the virtues of a peaceful religion. In this way a parasitic relationship was formed between ruler and church. On the surface it might appear that the Church was a benefactor from this unification of mission but the gradual corruption of purpose that the Church was forced to endure under the unified Church-State corroded its credibility over time so that the seeds of the reformation found fertile soil. Whatever benefit the Church enjoyed from state protection was vastly overshadowed by the damage done to Christianity itself.
What sets apart this period of history is that this relationship between church and state in medieval Europe was unlike any other before it. In past civilizations, religions often existed to proclaim the king the holy representative on earth. The temple existed to legitimize the king. Instead, following the fall of the Roman Empire the state falsely inserted itself as a high priest of Christianity, boldly and ironically advancing an imperial agenda in the name of a pacifist Christ. The state pretended to deputize itself in the name of the Church in order to hide behind the moral legitimacy of the Church. As we shall see, this moral bait and switch became the dominant approach of western government right into the 21st century.
A Theory of Legitimacy: The Active and Ambient State
To understand why the early European Church-State behaved in this way, a theory of legitimacy has to be developed. In addition to tax revenue, every state needs to draw on a source of continued legitimacy. The existence of propaganda in every state to date is proof that no government can exist without the consent of its governed. In fact the more tyrannical the state, the more it needs to employ brainwashing and diversionary techniques in order to repress an uprising. This is why freedom of expression is constantly under pressure and attack throughout the world. An isolated citizen is much safer to the ruler than an organized populace. Whether the organization of a state is democratic or totalitarian then, it follows that every state must obtain legitimacy in order to persist.
So far there have been only 2 strategies for obtaining legitimacy and these 2 dominant strategies will be referred to in this article respectively as the active state and the ambient state.
Active State: A setting in which the population is made explicitly aware of the established ruling hierarchy through a strong reliance on the combination of intimidation and propaganda.
The active state is historically the most common form of government. It is easy to understand for both ruled and ruler. The best modern example of the active state is North Korea which pounds its citizens with the hammer of fear of disobedience and the deification of its leader. Throughout history, god-kings have ruled over their citizens by utilizing the simple mechanisms of active rule.
Ambient State: The state operates subtle levers whose effects are difficult to detect by citizens on a daily basis, making the state difficult to distinguish from background societal white noise. The illusion of individual liberty manifests in the minds of the general population who are unable to accurately pinpoint or identify the ruling class.
The ambient state will always outsource its legitimacy to mask its true existence. By confining its visible rule to a few pretty marble buildings, the ambient state appears benign and inert. While both the active and ambient states rely heavily on propaganda, the active state focuses on deification of the leader while the ambient state relies on obfuscation and false humility.
In the case of dark ages Europe, the visible states hid their presence behind the sanctity of churches by declaring themselves missionaries in the spread of Christendom.
By removing itself from societal observation behind preexisting institutions, the ambient state frees itself from being held responsible for its deleterious effects on society. Instead, the very institutions that serve to prop up the ambient state bear the brunt of public outcry by a populace who are unable to detect subtle rule by a background force. This is why I claimed that the Church was being parasitically leached upon by the state, having its legitimacy gradually sucked dry. The ambient states of Europe gradually honed their soft touch elusiveness over the centuries following, further reinforcing the idea that they played a limited role in society.
The beauty of the ambient state is that it evades detection by even the most astute intellectuals. Karl Marx was the first famous intellectual to fall for this sham when he targeted capitalists for the ills of society instead of correctly identifying the true background puppet masters, who themselves were merely masquerading as capitalists, draining legitimacy from the institution of commercial man.
To use a bee keeping analogy, an active state is akin to a beekeeper bursting in and seizing honey with smoke and protective clothing, agitating the bees who see their ruler. An ambient state is similar to someone installing a tap at the base of the hive and slowly draining away honey without disturbing the bees. The bees are certainly disturbed by the installation of the tap but after that, encounters with netted ape invaders recede into distant hive memory while honey stocks mysteriously decline.
Both the active state and the ambient state sow the seeds for their own destruction in the way they draw on their respective sources of legitimacy. The active state tends to subsist on an impoverished mass of subjects and is therefore vulnerable to coups from within the ruling class as demonstrated recently by the change of leadership in Zimbabwe. Every time a churn in leadership happens, the active state faces a slim but very real opportunity to radically change its style of governance. This CPGGrey video explains the incentives facing active states very well.
The ambient state insulates itself from this effect by formalizing the churn in leadership in return for maintaining the exact same style of government post-churn. In the modern world this is seen in democratic elections which hold far more legitimacy-capital than revolutions. In this way, the omnipresent specter of revolution that threatens active states is completely neutralized in ambient states. Instead, the ambient state is threatened by exhausting its sources of outsourced legitimacy. In the case of Western Europe, the state had nearly exhausted its reserves of church-tapped legitimacy. In order to save itself, the parasite had to disengage from the host and seek a new host, lest both die. And so we experienced the great separation of Church and State.
The great failing of modern electorates to grasp the nature of the world we live in is to assume that the ambient state is subject to the rules that govern the active state. Democratic election cycles rest on maintaining the myth that “this time change is coming”.
To sum up, leadership turnover threatens the health of active states but is subsumed as a legitimacy renewal mechanism by the ambient state who wishes its populace to mistake it for an active state. In return for immunity from revolution, ambient states have to parasitically tap their legitimacy from 3rd party institutions which themselves are subject to sudden collapse.
From Confession to Commerce
Fortunately for the ambient state, by the time it had to disengage from the Church, the intellectual foundation had been laid for a new champion of legitimacy: the free market. The rise of capitalism gave so many fruitful avenues for a state that wanted to appear invisible while slowly consuming the economy. In fact the very virtue of limited government that liberals espoused served as the perfect cover for the roving parasite of ambient legitimacy. The innovation of the state in this new era where men were informed by calculation rather than sermon was to latch onto an institution that formed the very basis of calculation: money.
Central Bank: The Church of Progress
As Western Civilization began to fall in love with scientific rationalism, liberal economists of the 19th century were espousing the brilliance of unfettered commerce. The ambitions of Industrial Man were rising to god status and, like all false gods, he felt increasingly vulnerable as he grew in stature. Confident in his ability to accumulate money, Industrial Man was unable to gain control over money itself which, like language, had always been an emergent phenomenon of society. Just as the greatest authors have very little control over the evolution of English, so too the wealthiest tycoons have no say over the purchasing power of the measure of their wealth. Capitalizing on the growing sense of insecurity that accompanied the growth of national output, the state stepped in to soothe fears by nationalizing and regulating the supply of money. By applying the now popular principles of scientific inquiry, the central bank represented man’s taming of the wild anarchic waters of finance with committees of informed bureaucrats. Man had finally declared himself master over money. And so memory of a period before money was backed by nothing and issued by technocrats began to recede with every passing generation until we arrived at the present point in time where economic textbooks declare money a centralized institution like a telescreen declaring that we’d always been at war with Eastasia.
The public takeover of money ushered in a new era of public economic thought that accepted the state as a beneficial caretaker of all matters finance. As a societal bargain for establishing order, the state would assume all powers of taxation, of course. This included taxation on flows of money rather than just stocks of wealth. The passing of the income tax represents society’s acknowledgement that all money is first and foremost the property of the caretaker state.
The Ambient Banking State
“There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.” — John Maynard Keynes
Once the norms of ubiquitous state control of money had been established, the state’s role in money became ambient to most citizens who knew no other way. The illusion of liberty was fostered in the mind of the citizen who would easily grow enraged by inefficient postal services without realizing that half their income and all of their pension were being siphoned off silently like honey through a hive-tap. Failing to recognize the nuances of the ambient state, western civilization boasted its superior way of life relative to the Soviet Union who was still using the now outdated active state approach, a model that was too easily recognizable by westerners as overt rule to garner any sense of legitimacy.
Bitcoin’s two-pronged threat to the current Ambient State
The current ambient state dines at the table of central banking legitimacy but bitcoin has come to kick the legs out. The first and most obvious victory bitcoin won over the central banking cartel was to expose and eliminate inflation. Succumbing to inflation, an omnipresent mechanism of theft, has now been relegated to a lifestyle choice where just a decade ago it was considered an inevitable fact of existence. The weapon of mass HODL has been deployed and Central banks will never get back their ability to inflate away our wealth.
Make no mistake: cryptocurrency and income tax cannot coexist.
The next ambient institution to fall will be the state’s asserted ownership of all matters finance. This one gives it legitimate authority to tax our income. In recent times, states have begun agitating that profits made in bitcoin would be subject to tax. This attempt to tax cryptoflows radically reduces the scope of use cases open to the nascent industry. In response, obfuscating technologies have begun emerging that will conceal flows between wallets. Make no mistake: cryptocurrency and income tax cannot coexist. The ambient state can choose to either pivot to property taxes or see their revenues eventually vanish. Cryptocurrency tax evasion is an anti-fragile beast which means that the more the state clamps down, the better the evasive technology will get.
The state can avoid total annihilation if it once again adapts to circumstance as it did at the time of the Reformation but to do that it has to recognize that its source of 20th century legitimacy is collapsing before its eyes.
By asserting legal tender and money laundering laws, the state risks having its ability to enforce both innovated away. Bitcoin alone has already made a mockery of legal tender laws. Monero, Dash, Ethereum and others are on the crest of a wave that will drive a stake into the heart of taxation on monetary flows. None of these technologies would be as useful if not for the modern state outsourcing its legitimacy to the banking cartel. How popular would Bitcoin really be if we still had a gold commodity currency, for instance? Cryptocurrency is a noose placed over the neck of the banking cartel that grows ever tighter the more it squirms. The infinitely deep well of banking garnered legitimacy cemented during the New Deal era is drying up and ambient states will have to disengage from banks in order to save both.
A New State
The Ambient State is facing a major existential crisis for the first time since the separation of Church and state. There are 3 possible survival strategies open to the state:
- Separation of Money and State: The ambient state relinquishes all control over monetary formation and repeals legal tender laws. Taxation is reverted to a fee scheme that mimics a private institution or on stocks of immovable wealth such as land. VAT and Income Tax are consigned to history books.
- Switch to Active Rule: internet usage is completely repressed. The only way to kill cryptocurrency in this instance is to completely destroy capitalism since not even the internet is needed to maintain a blockchain. Nothing short of widespread enslavement would achieve this. Nations like China which believe they can maintain ambient rule while censoring the internet will face the music sooner than smaller, more open nations such as New Zealand or Mauritius.
- Radical Decentralization: To shield themselves from individuals digitally seceding, governments will shed their inefficient vestiges and may even relinquish national control by devolving into city states in order to tap into the few remaining reserves of legitimacy which pool at the local level. With no banking cartel to fall back on, microstates will have to source legitimacy from ethic tribalism or by actually offering useful services.
One thing common to all 3 scenarios above is that banking and finance will radically shrink in importance and economic scope once blockchains have had their way. Another Great Reformation has begun but this time pamphlets have been replaced with white papers and the 20 000 + denominations of Christianity that followed the first will be mirrored by the 20 000+ states that will emerge to replace the current small group of banking nations that dominate the planet.