This is a combined repost of two previous blog posts titled “Are Cryptocurrencies Backed by Nothing?”.

 

  • If a technology holds the potential to disrupt the structure and authority of an entire monetary system, and if it is capable of reorganizing the fundamental concepts and materials that define our understanding of “money,” then is it conceivable that such a disruptive phenomenon can be backed by “nothing”?
  • Is the term “nothing” in the context of the phrase “cryptocurrencies are backed by nothing” merely a figurative placeholder; one standing in for a vague or nondescript value? Or might it actually imply that an entire regime of technologies–its production, capacity, potential–is powered by an absence of something essential?
  • Perhaps the term “nothing” is meant to designate a negative operation: a “blotting out” of something (perceived as) irrelevant, false, or unsustainable.
  • Or perhaps it signifies an unwillingness to acknowledge something that appears incongruous; something that doesn’t belong there; something dangerously foreign to the system; a monstrosity.
  • Whatever the case may be, the term “nothing” does little to explain the trail of creative destruction that the crypto-movement (as a currency and technology) has left behind, nor does it provide much to affirm or negate its potential to continue its disruptive course.
  • More importantly, turning the criticism back onto itself forces us to question more thoroughly the values and assumptions underlying the essential “something” that some may find lacking in the in the crypto-space.
  • Perhaps by following a more traditional line of thought, but with a dose of skepticism, it may lead us to discover the wizardry behind the curtain of “intrinsic value”: a functional necessity transformed into a transcendental notion whose “moral” authority floats miraculously above and beyond those who had created it in the first place.
  • If someone says “I have trust in the US Dollar,” what exactly does that mean?
  • For most people, it probably means that they have trust in the functionality of the dollar as both a means of exchange and a store of value.
  • But can we say that the dollar’s functionality is predicated on trust (by consensus) in its value prior to its use?
  • If so, what gives the dollar its value?
  • After all, isn’t this “value”–whatever it might be–one of the main reasons we have trust in the dollar as a legitimate and reliable currency?
  • Do we still view the dollar as a “promissory note”? If so, what does it promise?
  • There was a time when the US dollar was backed by gold. The dollar’s value rested on its “promise” of gold convertibility.
  • Gold, once considered the ultimate object of monetary value, was seen to possess the primary characteristics of money: durability, portability, divisibility, uniformity, scarcity, and acceptability.
  • When convertibility was completely abolished in 1972, so too was the dollar’s “promissory” attributes. Yet trust in the dollar remained.
  • But if trust in the dollar was initially based on its promise of gold backing and convertibility, as dollars represented gold, then what values replaced the original promise?
  • Did this abolishment transform the dollar from a representation of value into the actual embodiment of monetary value itself?
  • As a “legal tender” object, minus gold backing, does the dollar then represent governmental authority?
  • Doesn’t this create a weird feedback loop: a “promissory” note whose value rests on government’s “promise” of value?
  • Or is value to be found in government’s monopoly over the creation, oversight, and distribution of all monetary assets and activities? (this of course means printing, taxation, surveillance, etc.)
  • Let’s back up and consider the implication of money creation (as most recently demonstrated by the Fed’s QE program).
  • Doesn’t the “artificial” creation of money violate one of money’s key characteristics: scarcity?
  • If you have trust in the dollar, wouldn’t that also require you to have trust in the system of third-party institutions, networks, and processes supporting and facilitating the circulation of dollars (banks, payments systems, technologies, regulatory restrictions, fees, etc.)?
  • And the regulations enforcing the entire system?
  • At this point, is this “trust” (in the dollar) a matter of choice or coercion?
  • If it’s a matter of choice, what is your alternative? (although gold and silver are still “sound” assets, neither make for a convenient means of exchange).
  • If it’s a matter of coercion, can we say that the emergence of cryptocurrencies constitutes a movement in which “the market takes care of itself”?
  • If so, wouldn’t that mean that at the heart of the cryptocurrency phenomenon is an overwhelming demand for (the creation of) a more reliable, efficient, and effective form of money?