The Sacred and the profane
Two spheres cohabit within every society or group within societies: the Sacred, and the profane. The sacred sphere, being esoteric, wields control over mysterious powers, only accessed and enjoyed by the initiated. It is imperative these happy few restrict access and keep the mystery alive as it is the key to their power. The profane, by contrast, is enjoyed and available to all. As long as the profane sphere does not threaten the sacred sphere, it is left alone to prosper as it wants, under the watchful eye and rules of the sacred.
In the Middle Ages, the Catholic church held a monopoly on the sacred; divinity was the sacred sphere. Mass was celebrated in Latin, the Bible was written and copied by monks in Latin. Knowledge and power accrued to the Catholic Church based on esoteric frameworks and strict rules for the dissemination of that knowledge. Indeed, it was illegal, even dangerous to challenge the Catholic Church with fanciful ideas such as the translation of the Bible into the vernacular. Be that as it may, a few fearless souls undertook this endeavor in the 13th and 14th centuries, and translated the sacred text into English, French or Czech, as a political act of defiance and a direct challenge to the Church’s authority. These transgressive souls might be banned, excommunicated, or burned at the stake for their trouble.
Even then, the heretics’ reach was limited as, even if the Bible were translated into the vernacular, it could not reach the masses as handwritten reproduction was slow and expensive. That is, of course, until a little-known German inventor birthed the printing press in the mid 15th century, upon which one of the first books printed was the Bible. This technological revolution was one of the reasons that led to the democratization of knowledge and the Catholic Church’s loss of its monopoly of “sacred power”. Many schisms later, we now have a very varied Christian landscape, and more importantly, a political and legal subordination of Church to State in all industrialized countries. [NOTE: Church and state are not “separated” as such in most of Europe, many countries of which (Italy, Greece, UK) have established religions. The religious apparatus is however subordinate to the secular political apparatus]
Modern society too has its own interlocking sacred spheres. One deals with the creation of money by central banks and large commercial banks. This sphere is indeed sacred and rules over the health of our economy, over the money we use in our daily lives, over the sacrosanct macroeconomic black magic governing of economic growth, inflation and employment. Central bankers are the new Catholic Church and the color of the smoke emanating from their periodic conclaves is scrutinized by many, understood by few, and praised by the initiated.
In my line of work, a most profane one, I deal with fintech, that is financial technology. Fintech busies itself with efficiency. Fintech has pedestrian goals: cheaper, faster, better service, more transparent, more insightful. Fintech is utilitarian. Indeed, some fintech startups only a few years old are increasingly finding themselves challenging large banks or insurers for dominance over users and customers. Others will challenge incumbent service providers in servicing the banks and insurers of tomorrow. Most of these activities are, currently, profane; Central Bankers and large banks alike will lend a distracted eye towards the proceedings, sometimes making solemn pronunciations about “the need for a level playing field” and “adequate regulation and consumer protection.” Be that as it may, no one in control of the sacred sphere has lost sleep over fintech in its aggregate form or at the margin. Not yet.
Fintech is catholic in its own way. I hold a “big church” view of the space, and as such include the entire “blockchain” ecosystem and its unruly twin, the “crypto-assets” ecosystem, within it. For the purposes of this post, I use the term blockchain to include all flavors and stripes of blockchains and distributed ledgers and will narrow “crypto-assets” to only include cryptocurrencies. Simply put, cryptocurrencies can be supported by permissoned and permission less blockchains or distributed ledgers and other types of crypto-assets – crypto-equities, crypto-securities, tokens… are rather profane.
Now that we’re all speaking the same language, it is my belief that cryptocurrencies have the potential to challenge the current sacred sphere of money creation, and that viewed from this vantage point, the borderline hysteria exhibited by most if not all central banks, financial regulators and various governments is a very normal and expected reaction. A reaction borne out of fear on the one hand, and outrage at what is perceived, rightly so, as an existential challenge.
To be clear, to date, the hysteria has hidden itself behind a justifiable criticism of the numerous alleged nefarious activities which bad actors have undertaken in the cryptocurrencies space. More sober criticism has centered around the limitations of the underlying technologies powering these cryptocurrencies as balanced against the marketing used to sell them. Both the promoters and the cynics are in their own way correct, yet do not be fooled for one second that the sacred sphere has not seen the threat and is actively building up its defenses in the hope of definitively crushing it.
Accordingly, we are treated with the threats of bans in some countries, actual bans in others, the threat of litigation and prosecution for bad actors in all, the threat of heavy handed regulation in many. Most within the sacred sphere are quick to point how they do believe in the positive aspects of blockchain technology, but not its current applications. This is further proof that the profane is seldom seen as a threat.
Nation states enjoy a monopoly over violence and over money creation. Money creation is backstopped by taxes on the people and the state monopoly on violence ensures a more or less orderly collection of taxes. Remove the monopoly over money creation and the nation state starts to vacillate on its pedestal. As such cryptocurrencies that challenge fiat currencies are an existential threat that cannot be allowed to propagate. Many pundits will rightly point out that all cryptocurrencies suffer from congenital malformations and do not pass the test of a means of exchange or a store of value as they are either too volatile, too expensive to create, too expensive to exchange or all of the above. They too are correct and these criticisms are a reflection of the current level of maturity of the various technologies underpinning cryptocurrencies. If there is one thing we can count on, it is human ingenuity, and the crypto field will find solutions and solve these defects over time. What we all hear is the sound of inevitability in the form of fitter cryptocurrencies to come.
Other pundits will also point out that even if technologies issues are fixed, cryptocurrencies will always suffer from a lack of backstop properties. That is, they are not, will not be backed by taxes. This is true. A currency cannot be stable if it does not enjoy such backstop. It is also true that money is what individual decide to use amongst themselves. As such, a backstop with a currency that loses the “trust” of the individuals that have access to it is as vulnerable and maybe even weaker than a currency that lacks a backstop. I will even venture to state that once the proper “trust” in the form of a usability/monetary policy paradigm has been programmed into a protocol, a cryptocurrency may prove vastly superior.
The first cryptocurrencies have shown several important points, some new, some we may have forgotten:
- Money can be programmed
- Money is a social construct that comes to life when individuals believe in it, equally so for programmable money
- Programmable money (cryptocurrencies) is cheap to develop
- Programmable money is cheap to fork
- Censorship resistance is worth promoting
Cryptocurrencies have yet to show the following:
- appropriate scalability, adequate latency
- appropriate monetary protocols for wide usability
- appropriate fiscal protocols for wide usability
- appropriate fungibility
- appropriate privacy & bearer qualities
- appropriate energy usage
Cryptocurrencies hold the promise of:
- a more efficient means of exchange
- a more efficient store of value
- infinite customization
- novel ways to conduct monetary policy
- democratization of payment transactions, decentralization and dis-intermediation of the financial services industry
- at the margin, accruing more power to individuals instead of more power to the state
The threat for the current dominant sacred sphere is that of being dis-intermediated its oblivion, or of seeing its power gradually blunted and diminished over time.
It is difficult to envision a complete dis-intermediation whereby central banks and large banks, as central agents of money creation would completely disappear and be replaced by pure p2p interactions. After all, the Catholic Church did survive the democratization of knowledge, the loss of latin as an instrument of esoteric power and the printing press and its offspring. The Catholic Church is indeed alive and many other religions have successfully “forked”. It is just not as powerful as it used to be.
The Catholic Church’s actions starting with the 13th century also show us that full or partial bans do not work. There is no reason to believe that a full or partial ban on cryptocurrencies will work better than one on translating or printing the bible into the vernacular (the US prohibition also ended in failure).
It is easier to predict that central banks will embrace cryptocurrencies by issuing their own “fiatcoins”. We know several central banks are studying such an endeavor. These fiatcoins may be used as a means of exchange and unit of value between financial institutions and central banks, between a central bank and individuals, and between individuals. In any of these examples, fractional reserve banking may be irremediably changed and the losers will be large commercial banks. Indeed, central banks may find it easier to borrow directly from individuals and lessen the money creation role of banks. Individuals may themselves take on the role of lenders and money creators by aggregating supply and demand in a decentralized way – maybe with the help of central agents whose roles would be that of a new age credit bureau for example.
Further, once the current hysteria is over, it is not inconceivable that fiatcoins would co-exist with private cryptocurrencies, whether issued in pure p2p form or issued by private institutions. This would presuppose a new regulatory landscape, both national and transnational, in order to solve for endemic fraud, illegal transactions, scams, ponzi schemes, while promoting genuine economic activity.
I do realize the above may appear like pure science fiction given the current state of affairs. What makes me intrigued and hopeful for a future where cryptocurrencies will play a central part in our lives is the fact that we seem to be nearing the end of the current economic paradigm that has ruled since the end of Bretton Woods. It is clear that hyper-globalization, floating currencies (for the most part), the $ as a reserve currency, and free capital flows have led to a series of financial shocks. More voices are now calling for a new system, coincidentally so as the world of blockchain and cryptocurrencies, after having been unleashed by Satoshi Nakamoto, has ascended (the recent correction in prices withstanding).
Incidentally, we still do not know if Satoshi is one or several persons. I for one believe he may be the sum of modern day John Wycliffe, Jan Hus and Johannes Gutenberg. A trinity of democratization of the language of money (translation in the vernacular), re-thinking of the theology of money (white paper as a political act) and programming of the language of money (printing at scale in the vernacular).
ps: I would like to thank Preston J Byrne for his editorial help with this post.