«This article was originally published in Theory, Culture & Society, Vol 33, Issue 1, Pages 53-72. First published online December 1, 2015. DOI: ...»
How is Bitcoin Money?
Journal article (Post print version)
This article was originally published in Theory, Culture & Society, Vol 33, Issue 1,
Pages 53-72. First published online December 1, 2015.
Uploaded to Research@CBS: Januar 2016
How is Bitcoin Money?
Abstract: Bitcoin is a peer-to-peer electronic payment system that operates as
an independent currency. This paper is a philosophical investigation of the
ontological constitution of Bitcoin. Using Slavoj Žižek's ontological triad of the real, the symbolic and the imaginary, the paper distinguishes between three ideal typical theories of money: commodity theory, fiat theory, and credit theory. The constitution of Bitcoin is analysed by comparing the currency to each of these ideal types. It is argued that Bitcoin is commodity money without gold, fiat money without a state, and credit money without debt. In conclusion it is suggested that Bitcoin poses an ideological challenge to conventional forms of money in so far as it not only provokes sedimented beliefs about money but also exposes the forms of exploitation, risk and even violence inherent in the existing system of state authorised credit money.
Keywords: Bitcoin, money, Žižek, gold, fiat, credit Word count: 7,954 Forbes Magazine declared 2013 to be 'The Year of the Bitcoin' (Christensen 2013). It was the year that Bitcoin evolved from a subcultural phenomenon into a common reference point in mainstream public debate. A tangible expression of the rising popularity of Bitcoin, which was at the same time also a propeller of this popularity, was the price of the currency when traded against more conventional money. An investor who bought 10 BTC at the current price of $13 per bitcoin on the 1st of January 2013 would have been able to make $7,000, if the investment was realized by the end of the year. So far the peak of the price in Bitcoins was reached in December 2013, when the currency was traded at $1,242 for one bitcoin. At the time of writing in 2015 the price has slumped back to about $250. The usability of the currency has also increased rapidly and today it is possible to pay in Bicoin for a wide variety of commodities and services from electronics and computer hardware to restaurant meals, legal services, and even college education. The future of Bitcoin is still very uncertain. Proponents believe it is going to be the payment system of the future, while critics argue that it is nothing but a Ponzi scheme soon to collapse (Rosenblum 2014; Trugman 2014).
While this article has no qualified opinion about whether there is still money to be gained by investing in Bitcoin, the fundamental proposition is that there is surely a lot of philosophical value to be redeemed through an engagement with the currency. We seem to living in times of not only financial but even monetary turmoil. Martin Heidegger once remarked that it is only when things are broken that they become conspicuous and we actually start reflecting on their being (1927, para. 16). Today our monetary system is if not outright broken then at least functioning in ways that are out of the ordinary. While this situation does indeed produce a series of very unfortunate economic effects and insecurities, it also opens a philosophical window of opportunity for thinking and writing about the very nature and being of money. In the following, we are going to use Bitcoin as a way to leverage our reflection on the nature of money. The article is framed by the question stated in the title: How is Bitcoin money? Working with this
question, the article has two aims:
1) to provide a philosophical account of the ontological constitution of Bitcoin, and
2) to question the constitution of conventional money by comparing it to Bitcoin.
(How) Is Bitcoin Money?
A straightforward way of approaching Bitcoin might have been to start with a definition of money and then analyse how Bitcoin fits the bill. This is precisely
how the Bank of England has structured it's recent report on digital currencies:
From the perspective of economic theory, whether a digital currency may be considered to be money depends on the extent to which it acts as a store of value, a medium of exchange and a unit of account. (Ali
While such analysis of Bitcoin may shed some light on the first aim of our article, it fails to accommodate the second aim as it takes the conventional definition of money as well as the conventional forms of money for granted. In contrast to such a 'perspective of economic theory', we shall be pursuing a philosophical approach that takes as its premise that the very ontological foundation of money is inherently undecidable. We are thus aligned with the position pointedly formulated by Graeber: 'money has no essence. It's not “really” anything; therefore, its nature has always been and presumably always will be a matter of political contention' (Graeber 2011, 372). As demonstrated by Ingham 'the mainstream, or orthodox, tradition of modern economics does not attach much theoretical importance to money' (Ingham 2004, 7). Perhaps not surprisingly, the BoE approach to Bitcoin perfectly represents such orthodox thinking, where the very nature of money is rarely if ever questioned. Asking the question: how is Bitoin money?, we thus deliberately sidestep the much more obvious question: is Bitcoin money? This in turn allows us to explore Bitcoin without first committing to any definite theory of money.
Our analysis of Bitcoinapplies Slavoj Žižek's distinction between the three different ontological orders, real, symbolic, and imaginary, as an analytical prism through which different dimensions of a money system is examined.i To the extent that the nature of money is even discussed within the field of economics, we can distil three general theories of the origin and constitution of money: the commodity theory, the chartal theory, and the credit theory of money. The contention here is that neither of these theories are capable of providing a coherent and conclusive account of the nature of money, while at the same time each of them captures a dimension of the functioning of money. Hence, we shall in the following be using the commodity theory, the fiat theory and the credit theory of money respectively as a series of ideal types to uncover the ontological constitution of Bitcoin as money.
But before we enter into this three stage analysis, we shall be looking into the very mechanics of the Bitcoin system.
How does Bitcoin work?
Bitcoin is a virtual network that allows users to transfer digital coins to each other. Each bitcoin consists of a unique chain of digital signatures that is stored in a digital wallet installed on the user's computer. The wallet generates keys used for sending and receiving coins. A transfer of bitcoins is made as the current owner of the coin uses a private digital key to approve of the addition of the recipient's key to a string of previous transactions. The coin is then transferred and now appears in the recipient's wallet with a recorded history of transactions including the one just recently completed.
Since physical objects can only be in one place at the same time, a physical coin cannot be spent simultaneously on two or more separate transactions. Once the coin is in the hands of the payee, the payer cannot spend the same coin once again. A fundamental property of digital entities is, however, that they are easily copied and multiplied. In other words, digital entities can be in several places at the same time. Therefore, digital currencies are faced with the problem of doublespending.
Bitcoin's original solution to the problem of double-spending is what makes it fundamentally different from conventional electronic payment systems and vastly more successful than comparable predecessors (Barber et al. 2012). Rather than instituting a central authority of verification, Bitcoin is organized as a decentralized peer-to-peer network. In brief, the solution to the problem of double-spending is to keep a complete and public record of all transactions in the network. Here is how the enigmatic founder of Bitcoin, Satoshi Nakamoto,
reflects on the problem and its solution:
We need a way for the payee to know that the previous owners did not sign any earlier transactions. For our purposes, the earliest transaction is the one that counts, so we don't care about later attempts to doublespend. The only way to confirm the absence of a transaction is to be aware of all transactions. In the mint based model, the mint was aware of all transactions and decided which arrived first. To accomplish this without a trusted party, transactions must be publicly announced..., and we need a system for participants to agree on a single history of the order in which they were received. (Nakamoto 2008, 2) A transfer of bitcoin is recorded with a time stamp by the network and bundled together with other transactions to form a so-called block. The block is processed by users making their CPU power available to the network. For reasons to be explained later, different users compete against each other to see who is able to process the block faster. When a block of transactions has been processed and verified, it is sealed through an operation that connects it to the previous block and it is now added to the so-called block chain. The block chain constitutes the entire history of payments in the system against which new transactions are checked for double-spending. The block chain is a public ledger of transactions and balances in the system.
A crucial feature of any money system is the way that it allows for new money to enter into the economy. Bitcoin combines the function of money creation with the provision of incentives for users to participate in the maintenance of the
By convention, the first transaction in a block is a special transaction that starts a new coin owned by the creator of the block. This adds an incentive for nodes to support the network, and provides a way to initially distribute coins into circulation, since there is no central authority to issue them. The steady addition of a constant of amount of new coins is analogous to gold miners expending resources to add gold to circulation. In our case, it is CPU time and electricity that is expended. (Nakamoto 2008, 4) We see here how new bitcoins are introduced into circulation as rewards to users that process and verify the transactions of a block. This process is also known as mining. It is, however, not enough to just do the rather simple task of processing and verifying transactions in order to claim the reward. In order to regulate the rate at which new bitcoins are created, Bitcoin also requires miners to solve a certain cryptographic puzzle before a block may be sealed. The puzzle can only be solved through trial and error and its level of difficulty is steadily increasing over time in order to match the progress in the development of CPU power. This means that miners' computers have to do a certain amount of 'work' in order to solve a block. On average, a new block is solved every ten minutes.
The amount of bitcoins per block offered in reward is also adjusted so that the creation of new bitcoins follows a predetermined asymptotic trajectory approaching a total of 21 million in year 2140, when the creation of new coins is terminated. At the time of writing in 2015, the total amount of bitcoins in circulation is approximately 14 million.
We shall now move on to the philosophical analysis of the cryptocurrency.
Gold Standard without Gold The famous quip by Keynes that '[p]ractical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist,' nicely captures a certain commonsensical understanding of money that prevails even far into the ranks of established academics (Keynes 1936, 383). This is the understanding that once upon a time money emerged as gold or other precious metals and even if contemporary forms of money have been officially decoupled from such a material base of value, we may still understand money as if it were just another commodity in the economy. The 'defunct economist' that is ultimately responsible for this commodity theory of money is usually identified as Adam Smith as he tells the mythical story of the butcher, the brewer and the baker, who figures out a way of advancing from simple barter to a money economy by appropriating precious metals as means of exchange (Smith 1776, 24–25). But also Karl Marx and Carl Menger would count as key sources of this classical theory of money, the influence of which may be traced well into contemporary neo-classical economics (Menger 1892; Ingham 2004, 15–37 for overview).
Historians and anthropologists have pointed out how the commodity theory is an incorrect account of the historical origins of money (Humphrey 1985, 48;
Ingham 2000; Hudson 2004; Graeber 2011, 23). The commodity theory fails to recognize the role of the state or another sovereign power in establishing currency as an
standard of account and it also fails to understand the relations between debt and money (Ingham 2004, 89–133; Ingham 2006). The importance of this critique is, however, not merely historical. As the commodity theory of money is explicitly or implicitly carried over into contemporary neo-classical economics, these failures to recognize especially the role of banks in the creation of money have significant implications for the conclusions that may or may not be drawn from its analyses (Werner 2005; Keen 2011; Hudson 2012; Jackson and Dyson 2013).
At the same time, the commodity theory should perhaps not be dismissed to hastily. One of the lessons to be learned from the financial crisis of 2007-8 concerns the intricate relation between money and real estate (Bryan and Rafferty 2009). At the peak of the asset bubble leading up to the crisis, mortgage backed securities in the form of CDO's would circulate as highly liquid assets in the financial markets. It has been suggested that such financial derivatives are in fact a form of money replicating some of the features of a gold standard (Bryan and Rafferty 2006; Bryan and Rafferty 2012). This point may be pushed even further to say that CDOs constitute a new form of commodity money that is coupled not to a gold standard but rather to some kind of real estate standard.