Yves here. Bitcoin boosters are so insistent and doctrinaire as to discourage non-believers from bringing up the topic, since too many adherents engage in flagrant bad-faith argumentation to score points. Nevertheless, we’re taking a chance with this piece, since Varoufakis tersely and efficiently rebuts some of the misguided claims about how Bitcoin and blockchain might operate in the public sphere.
By Yanis Varoufakis. Originally published at his website
On 15th July, Ben Arc published in Bitcoin Magazine an open letter addressed to me in a bid to convince me that I should re-assess my rejection of Bitcoin as a force for good; as a bulwark for democratising capitalism and paving the ground for socialism. Here is my reply:
Dear Ben Arc,
Thank you for your open letter and your efforts to bring a socialist perspective to bear upon my assessment of Bitcoin.
In my reply below, I shall address you as a fellow socialist, rather than put together a reply meant to address all sorts of different perspectives (e.g. Keynesian, Hayekian, neoclassical)
As you know, I am one of those who, back in 2011, were genuinely intrigued, fascinated even, by the remarkable blockchain algorithm. The prospect of a decentralised ledger controlled by its community of users was mesmerising.
As you also know, I was unimpressed by Bitcoin as an alternative to fiat money that is either likely, or indeed desirable, under our current capitalist predicament.
Having read your open letter, I remain as enthusiastic on blockchain’s capacities and as unimpressed by Bitcoin’s ability to help us either civilise or (as any socialist dreams of) transcend capitalism.
Two propositions support this view. In the hypothetical case where Bitcoin were, under presently-existing capitalism, to replace fiat money: (1) It would lack the mechanism necessary to stop capitalist crises from yielding depressions that benefit only the ultra-right; and, (2) Its community-based, democratic protocols would do little to democratise economic life.< I shall explain my two propositions briefly below. But, before you despair (at my continued negative take on Bitcoin), let me foreshadow the concluding sentence in the Epilogue below: Once (and, of course, if) socialism dawns, money will have to be founded on a distributed-ledger, monetary commons enabling tehnology. In other words, I shall argue that Bitcoin is not fit for purpose under capitalism, or as a vehicle toward transcending capitalism, but something like Bitcoin will characterise monetary systems in a future world free of private banks and share markets.] OK, let me now support my two propositions: Proposition 1: Bitcoin lacks the shock absorbers necessary to prevent capitalist crises from doing untold damage to the working class
Consider the Crash of 2008 or the more recent 2020 Covid-19-induced crisis. Suppose that Central Banks did not have the capacity instantly to create trillions of dollars, euros, pounds and yen – and instead had to rely on a spontaneous majority of Bitcoin’s users to agree to a massive increase in the supply of money. The result would be a 1929-like collapse of banks and corporations.
While socialists would shed no tears for the tragedy of the oligarchy, socialists should beware that a 1929-like systemic collapse is bound to strengthen the forces of the ultra-right – not of the socialist left (that has been, since at least 1991, languishing in the doldrums of political paralysis).
Technically, there is of course nothing that would prevent the Bitcoin community from agreeing instantly to even a doubling of the money base. However, the Tragedy of the Commons guarantees that Bitcoin owners will be subject to the usual prisoner’s dilemma dynamic that prevents the boost in the money supply necessary to avert the liquidation of potentially viable businesses and jobs. Moreover, this free-rider problem is made far, far worse by the fact that Bitcoin ownership is very unequally distributed, thus giving the Bitcoin-rich powerful incentives to restrain the growth of the money supply (since such restrictions would boost their private rents at the expense of the public interest).
In short, the free-rider problem that guarantees the maximal reinforcement of any capitalist crisis (in any economy relying on Bitcoin as its main currency) will be turbocharged by the unequal ownership of Bitcoin – which is unavoidable in any monetary system overlaid upon contemporary capitalism.
Proposition 2: Under capitalism, Bitcoin’s dominance will not democratise economic life – or give socialism a chance
Suppose, again, that some magic wand is waved and Bitcoin replaces fiat money under contemporary capitalist conditions. In other words, as Bitcoin replaced dollars, pounds, euros and yen, property rights over land, resources and machines remain as they are while private equity firms and pension funds continue to own the bulk of shares trading in Wall Street, the City etc. All that will have changed is that Central Banks will vanish and the community of Bitcoin users will determine the global money supply (subject to the free-rider problems mentioned above).
At the firm level, nothing will have changed. Jeff Bezos will still control a massive monopsony-cum-monopoly, Facebook will still own the whole marketplace within its platform, Exxon-Mobil will continue to lean on weaker developing country governments to drill for oil and gas that should be left in the Earth’s guts etc.
And what of private banks? They would, make no mistake here, find ways of creating complex derivatives based on Bitcoin – derivatives that will soon (just like Lehman Brothers’ CDOs prior to 2008) function as stores of value and means of exchange; i.e. as private money. Massive bubbles denominated in Bitcoin will build up and they will burst just as they did in the 19th century under the Gold Standard. And then?< In the absence of Central Banks and with the Bitcoin community in the clasps of the aforementioned free-rider problem, depression will follow – as it did before the Fed was instituted in the US. Thus, the tragedy mentioned in Proposition 1 above kicks in.< In short, not only will the democratisation of money via Bitcoin fail to democratise capitalism but it will also give an almighty boost to the forces of regression. Epilogue
Bitcoin’s great appeal is that it breaks the cronyist chain linking central banks and private bankers. However, it does not undermine the cronyism of the network of bosses, politicians and private bankers.
Lest we forget, 19th Century bimetallic America also lacked a central bank. Under the gold and silver standards, the public money supply was fixed – and could not be easily manipulated by the state (either the government or the, then non-existent, Fed). But that did not stop private bankers from leveraging public money out of thin air to create huge quantities of private money with which to fund the Robber Barons, i.e. the Jeff Bezoses, of the era.
In this sense, replacing fiat money with Bitcoin would take us back to a postmodern version of 19th Century America – not exactly a prospect socialists should go to the barricades for.
In summary, the monetary system is like the dog’s tail. It cannot wag the capitalist dog, in the sense that democratising money by means of a monetary commons will not democratise economic life but, rather, make capitalism uglier, nastier and more dangerous for humanity.
Having said all this, a monetary commons (that may very well rely on something like the blockchain underpinning Bitcoin) will, I have no doubt, be an essential aspect of a democratised economy; of socialism.
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Thanks for sharing this, Yves. The big a-ha for me is his point that bitcoin (and the like) is a bet on a return to Robber Barons and an e-Gilded Age. And the entities that are holding large positions in bitcoin are sort of like the same Robber Barons who gobbled up land, sat on it, and extracted ever-increases fees and wealth just because they could. Yesterday’s Vanderbilt is today’s Winkelvoss.
Bitcoin is favorite modern hobbyhorse for parlor anarchists; because weakening the state’s hold over the money supply weakens the state itself. But the state, imperfect as it is, is the only means by which the powerless masses gain some protection against capitalist gang leaders. Don’t forget that the violent and oppressive feudal period was the apotheosis of both anarchism and lassez-faire.
True, and Old Graybeard respected Capitalism’s role in ending Feudalism…
…because it was a step on the way to socialism.
Wrong! Capitalism and feudalism go hand in hand, capitalism just sounds better !
“Capital” in feudalistic economies is land and fungible assets – the most basic form of ‘wealth’; and this “capital” is NOT distributed but ‘owned’ by a very small group of families. Unfortunately, in feudalistic societies all useful land and profit producing assets are privately owned, and wealth is extracted via “rents” and ownership of the products of the land.
Un collectable debt is collected through the modern forms of indentured slavery, or dismissed when the debtor is devoid of both capital and assets and declared bankrupt. In a “capitalist” run society “capital” owns all of the profit and profit producing assets, there is virtually no limit to poverty at the bottom end nor asset and wealth accumulation at the top end; which is virtually assured as the financial elites purchase all economic assets thereby eliminating opportunity for workers to advance and eliminating competition between wealthy elites. The competition becomes between the asset owning classes and labour classes; and devolves into labour being a disposable service as financial assets obtain greater mobility and labour is comparatively immobile. Labour has to compete for employment and is almost immobile, while capital (money) flows day and night around the world searching for higher financial returns – usually where generally immobile labour is cheapest. The small group of “capitalists” are singularly and only interested in obtaining higher profits and driving down or eliminating their costs, specially labour!
bitcoin is the point of the diagram where Goldbugs, Glibertarians and TechGeeks intersect.
not the only point, mind.
Thanks for this YV take down of Bitcoin. It is not the technology (BC ledger), it is the motive. Stability and wealth preservation are close cousins in the Bitcoin world. In the fiat world there is a healthy recognition that what goes around comes around and we’re all in this together. I’ll take fiat. It’s much closer to the spirit of socialism than Bitcoin is. And if fiat can morph into a “monetary commons” fine. It is pointless to switch to BC, it’s like going back to gold coins. It’s worse because BC has no ancient value mystique like gold – BC is simply manufactured scarcity. To try to make BC into a form of fiat is a huge contradiction. Naga happen. And to just imagine Bitcoin derivatives is so chaotic it gives me a headache. And besides all this we are having a veritable silent sea change in human economics and I suspect it is the demise of the profit motive.
I agree with Yanis’s propositions that bitcoin is not compatible with socialism and probably doesn’t solve any problems we currently have in any meaningful way (or maybe creates more problems that it solves). His last line leaves open the possibility that a “monetary commons” could “rely on something like the blockchain underpinning Bitcoin”. Herein lies a fundamental misunderstanding of bitcoin: You cannot decouple bitcoin or something functioning like bitcoin from “the blockchain”. The blockchain without bitcoin does not solve the mega problem first solved by bitcoin: the double-spending problem. Bitcoin functions as the security, by incentivizing people to validate transactions with their combined computing power (now something like 120 Exahash per second) in return for “bitcoins”, so that the decentralized ledger cannot be theoretically changed unless the attacker controls 51% of the computing power. So, no, imo a monetary commons in the sense that Yanis imagines it, cannot rely on “blockchain technology”.
Worth noting in the current climate that the country manufacturing the most Bitcoin and Ethereum right now is: China. They currently manufacture 62% of BTC, i.e. > 51%.
And I think the BTC aficionados have mistaken a *governance* problem for a *computer sciences* problem.
Yes, certainly a cabal of miners could get together and make a 51% attack possible, but even so it would cost more than they would gain and why would a miner go along with killing their cash cow? OTOH a state actor could theoretically coerce miners but at this juncture I still don’t see the payoff for the trouble. (why destroy what you can control, if, as you suggest the majority of the btc is in China).
The BIS released a report in June that telegraphs where this is going (PDF linked below). On page 88 they are very clear: central bank digital currencies (CBDCs).
How much longer they will tolerate Bitcoin as anything other than an “asset” to speculate on is unclear. The efforts to make it operate faster (called Lightning Network), where Bob sends money to Alice through Dave’s account without Dave’s knowledge, are straight-up money laundering.
And the basis of so-called “de-fi” (decentralized finance, crypto lending) is fiat currency surrogates (Tether’s USDT etc). I’d think the chances that sovereigns will continue to allow private issuers of sovereign currencies they cannot control are vanishingly small.
BIS Annual Economic Report June 2020 (PDF): https://www.bis.org/publ/arpdf/ar2020e.pdf
I think your take is the most sober and rings likely for many obvious reasons – mostly having to do with (very obvious to anyone who isn’t daydreaming) the concentration of money and power, rather than the “democratization” of it. But that concentration trend has nothing to do with some made-up game of mining electronic coins that many have mimicked.
Also, let’s remember that Roubini said that blockchain is a glorified spreadsheet.
I agree with the critique Varoufakis offered, but it still irks me somehow. “Monetary commons” — wtf is that?? Like a commenter below said, YV is too credulous about BTC. I feel like he is sometimes too credulous about a lot of things. Also, the Tragedy of the Commons was disproved – and stringing along that phrase along with ‘prisoner’s dilemma’ and whatever else in the mishmash – I don’t know, it feels ostentatiously rigorous but hollow.
If BTC is like gold, what prevents anyone – a government – to create BTC-backed currentcy, like BoE first did? Basically, without considering the whole legal framework which support currencies and finance, to think that BTC can change anything, let alone change capitalism into socialism – is beyond ridiculous.
I saw a billboard advertising Bitcoin along an expressway in 2010 in Silicon Valley and no one knew what it was. It’s been picking up believers. But my money is on CBDCs. And no, that’s not likely to lead to socialism – at least not the kind YV may be daydreaming about.
Yanis Varoufakis has some serious geek and street cred, as he has worked at Valve. Don’t know how much he worked on the digital economy of hats, though.
Hardly a damning takedown of blockchain as a useful instrument. He seems to offer a counterpoint to every criticism. I personally don’t see why Bitcoin et al. have to be some perfect savior of the people’s economy to play a role in future economics (and finance).
It’s more of a criticism of the “bitcoin will save us!!!” thing, with different flavours among the faithful what, precisely, it will save “us” from. Usually the ones saved are the holders of Bitcoin, a bit like a Rapture of Currency holders if you will.
He did point out that one of his criticisms was including the assumption of Bitcoin being the one true currency. Its quite a common rhetorical device to promise Pie in the Sky, or Utopia, once everyone is doing X (compare and contrast the promises of Communism, if you like).
The points he makes is that Bitcoin can’t be a vehicle for socialism without it becoming something quite different from what it currently is, and hence it’s not really useful to talk about Bitcoin in that context while leaving the door open for using the technologies that are associated with Bitcoin for good.
I’m personally a bit sceptical, as the problems with distributed ledgers (too easy for big entities/organisations to take over, current implementation of Bitcoin using way too much power, deflationary currency by design, massively advantageous for early adopters) seem now to be assumed to be a part of the technologies themselves, making them more restricted and less useful.
Usjng the technologies as a way to bottoms-up “solve” the central control problem is likely to end in tears; and somewhat feels like the tech-bro solution to political change not being fast enough (or beneficial enough for them).
As an indication to the central systems that there’s something wrong with what they’re doing it works.
The true point of bitcoin in my mine is the possibility of removing government control of money. It is for this reason that I hold some.
For grin: we need some real economic creativity which does not depend on an ever increasing pie Nor trickle down
Yes, it was explicitly designed to trade like gold, so comparing a Bitcoin based economy to the old gold standard is probably fairly accurate. It’s also not scalable and imposes massive transaction costs in the form of energy consumption on top of everything. Any attempt to scale it up to the level described here would be a climate catastrophe.
Blockchain more generally only solves one specific problem, namely establishing collective trust in the absence of a central authority. It does so generally at a very high cost compared to the alternative. This pretty much limits utility to cases where a central authority is inaccessible, impractical or otherwise unavailable, or when the central authority is distrusted to such a degree that the premium for cutting it out of the loop is worth it (this last point is why Bitcoin is popular with criminals, crypto-anarchists etc.) Bitcoin in particular has the problem that it’s inherently deflationary and prone to speculative bubbles, which isn’t generally what you want in a reserve currency.
This rings true, as the promise of some bitcoin revolution seems like a return of the robber barons on the face of it. But much of the argument references the Tragedy of the Commons >> Prisoner’s Dilemma >> Free Rider problem described in paragraph nine. I’m familiar with the terms, but I’m having trouble putting them together in a way that would discourage bitcoin owners from inflating the money supply as a response to some crisis (fwiw, I don’t see that happening in any case — I’m not sure it’s even possible, and if it were possible, the venality of the wealthy would make it a non-starter). But I want to grok what Yannis is saying here, and would much appreciate it if someone who gets the logic might take the time to explain.
From what I understand, YV is way too credulous about blockchain: It works well for a small volume of transactions, but in the wild its costs scale combinatorially. This means the system is likely to fall under the control of a few big banks. I think I’ve seen that movie before.
Go look up Tim Berners-Lee on the re-decentralization of the Internet. That’s the real point of the blockchain, not the stupid bitcoin cryptocurrency nonsense.
Bitcoin enthusiasts mostly are clueless about the uses of blockchain and decentralized ledgers, as they think it’s all about the cryptocurrency and accompanying ‘asset’ speculation. It’s not. So it’s not really a criticism of Yanis that he makes the same mistake.
In machine-to-machine payments there’s a valid role — in fact, a real need — for a blockchain cryptocurrency. That may be about it.
It’s a crappy, ludicrously slow database. It doesn’t have any practical use. It’s been free and open-source for eleven years now. If it had any real use, someone would have found it by now.
And how do you incentivize people to become a node for your decentralized internet? What you’re missing here is the “blockchain” doesn’t exist without bitcoin. You might as well just use a SQL database. Certainly distributed ledgers existed before bitcoin but bitcoin confers immutability and solves the double spending problem.
The fungibility of paper bills will always be with us.
I agree with YV’s critique, but his credulity, as someone above pointed out – about BTC – feels like unserousness.
What is a “monetary commons”, anyway? Why don’t we talk about that, instead of BTC. YV likes to throw a lot of aspirational phrases like that – without substantiating them much (happy if someone points to evidence of substantiation).
Also, the “tragedy of the commons” was unequivocally debunked, why is that still a thing, let alone an element of analysis.
My money is on CBDCs.
(had another comment in moderation, excuse any redundant posting)
Bitcoin is right wing populism for millenials.
They perceive bitcoin and its clones as a rebellion against an economic system they are excluded from. They know the only thing the current system has to offer them is a lifetime of debt, low wages and temporary jobs. So bitcoin is seen as the technological solution that will deliver what the system couldn’t : actual financial security. They see it as both a way to get rich – the only way to be truly secure and escape the rat race of a rigged economy – and as a genuine threat to the system. ‘Banks fear bitcoin because they can’t control it!’. The analysis is that something that both threatens banks and that is technologically out of reach of the people currently running the economy can only be a Very Good Thing.
The cryptocurrency mirage is one more symptom of a generation that is utterly politically defeated. A generation that has completely given up on collective action. Technology, not politics, is seen as the only way to change the system. Maybe you’ve heard something along the line of ‘Bitcoin is great because you don’t have to trust anyone!’.
Yet, all technology has done for millennial is to sharply increase the gross inequality they rightly resent.
The internet, just like bitcoin, is built around radical decentralisation, like bitcoin, it came with promises of delivering a techo utopia. Both were portrayed as extremely egalitarian and ripe with opportunity. Censorship free decentralized digital communication was supposed to free us. 25 years later how does that freedom look like? Well, the thing that was delivered is surveillance capitalism, minimum wage Amazon warehouse jobs for the many and billions of dollars for the very, very few. We went from techo utopia to digital neofeodalism. Bitcoin is another manifestation of that process.
*Comment scooped from another bitcoin story from two years ago, still seems relevant.
This letter fails to address the fact that — according to what I have read — the custodians of digital money records are largely shady operators located in the Republic of Georgia that are not subject to any public oversight.