One of the core narratives of Bitcoin (BTC) since inception is the oft-stated goal of separating money and state. While this has certainly been a powerful creed in the currency’s early adoption by the crypto-anarchist and techno-libertarian communities, what does this actually mean? It’s quite simply a call for a neutral form of money.
When stripped of the more political messaging, Bitcoin is fundamentally the introduction of a credibly neutral, global system of value transfer that is open and permissionless yet cryptographically secure and verifiable. This burgeoning crypto economy is still relatively early in its development, yet in the ten-plus years since its launch, it has fundamentally shifted the discourse around what money could or ought to become in the future. Sponsored Links
Bitcoin’s third halving on May 11, a 50% reduction in the BTC block subsidy that rewards miners for validating transactions and securing the network, represents a clear distinction between fiat monetary systems governed by whim and crypto monetary systems executed through software. A global crisis such as the one we’re facing now is a crucible for any monetary system, often showing what the priorities of the powers that be are.
The unlimited ability to print money in the fiat world operates in stark contrast to Bitcoin periodically reducing the issuance through an immutable monetary policy. The Bitcoin halving in the context of the pandemic provided an interesting starting point in discussing the core difference between the fiat and crypto paradigms and the distribution of power in both. Fiat monetary systems
The predominant monetary systems of the world are fiat systems that are backed by the sovereign entity of the state through arbitrary decree. Such currencies have value because the state enforces their use as a medium of exchange, store of value and unit of account: the three qualities of money. The most obvious evidence of this enforcement is that the state requires taxes to be paid in the national currency.
This relationship between state authorities and money goes back hundreds of years to when governments and empires would stamp the visage of the current ruler of the territory into the hard metal currency. Today, fiat money takes the form of printed pieces of paper issued by a central mint overseen by a state department. This money is backed by the state rather than any commodity.
The United States used to operate on a gold standard, with bank notes backed and redeemable for precious metal reserves, but the mass capital flight to a secure store of value in gold during the Great Depression prompted the government to untether the dollar from the underlying commodity. The systemic challenges of a monetary system based on gold would have inevitably led to the state further abstracting the connection to the underlying resource to the point where the scaffolding would have become the building, in a sense. In short, fiat currency can be seen as a technical response in simplifying the management of money at great scale.
There is a multitude of fiat currencies circulating throughout the global economy, but only one has achieved hegemonic status: the U.S. dollar. Following the end of World War II, an agreement established the dollar as the global reserve currency. Even though the agreement implied that the dollar would be backed by gold and thus ended when the gold standard was abandoned outright during the Nixon administration, organizations like the International Monetary Fund and the World Bank were formed to maintain a neutral, international monetary system — with the dollar at the center.
As the government is able to print pieces of paper backed by nothing but the power afforded to it by itself, people place a lot of trust and responsibility in the government to properly oversee the mint and avoid economic instability. If a government prints too much money, inflation occurs, sharply devaluing the value of the money in the economy. Some governments have severely mismanaged the money supply, leading to hyperinflation where the volatility for the price of a country’s currency against other global currencies starts to decrease rapidly, eventually becoming more valuable as kindling or paper-mache than a reliable medium of exchange.
Does this make the state a boogeyman that chains the populace into arbitrary financial systems that it can’t opt out of? There are certainly many proponents of Bitcoin that would support that claim, but let’s look at the larger pattern. The reason why state-managed currencies gained prominence is because people agreed to the unwritten social contract behind the money, entrusting the state to manage the complexities of such a system. This issue of trust is paramount and is essential to understanding what Bitcoin brings to the table. The Bitcoin paradigm
While fiat monetary systems feature monetary policies highly subject to what the lawmakers believe is necessary, Bitcoin and other cryptocurrencies a...