The Organisation for Economic Co-operation and Development (OECD) recently published a working paper on bitcoin and the implications of financial trust without intermediaries, authored by economist and Special Advisor to the Secretary-General on Financial Markets at the OECD, Adrian Blundell-Wignall.
Entitled ‘The Bitcoin Question: Currency Versus Trust-less Transfer Technology’, the paper represents one of the first official analyses on bitcoin in the context of contract law, legal tender, and plenary powers.
Besides grossly misunderstanding the economic nature of bitcoin, the general prescription for public policy would be disastrous, accelerating a ‘parallel’ monetary system faster than normal and simultaneously depriving millions of people of seamless participation.
The author fundamentally views bitcoin as something that must replace legal tender in order to be successful, so he is dismissive of bitcoin the monetary unit. Moreover, the author fears bitcoin more as a competitive alternative within a freedom-of-choice scenario and thus outlines policy behavior that attempts to extinguish any interface with established institutions.
However, monetary freedom has already arrived, demonstrating that the state’s compulsory monopoly over money is unearned and unjustified. Government powers now need to be directed at removing hindrances for participation in alternative monetary units, because excluding large swathes of society from engagement with bitcoin exacerbates the problem of inevitable integration.
This article gives a critique of the general public policy prescriptions contained in the OECD working paper:
1. A general ban on cryptocurrencies in the interbank clearing system
Bans and prohibition are totally ineffective. A ban on bitcoin would increase global awareness for bitcoin, inspiring alternative and parallel clearing systems. This result would end up harming the existing clearing system even more and it would probably take the form of denying bitcoin a currency code such as XBT. Gold currently has code XAU within the ISO 4217 standards body.
2. Recognition that bitcoin the network is separable from bitcoin the unit
A bitcoin network separable from the bitcoin unit would be neither decentralised nor secure. The technology underpinning the bitcoin network is distributed and massively decentralised for a reason – it had to be immune to plenary power shutdown and strong enough to sustain an attack from outside computational power. The bitcoin unit provides the incentive for maintaining the security and integrity of the block chain, which makes it inseparable.
3. Best practice registration to verify the owner’s identity
I am assuming that this recommendation is made only for the exchange endpoints that interface with national currencies (not merchants), thereby treating bitcoin exchanges like financial institutions. Physical cash transfers do not typically demand owner identity verification, but of course when an exchange business is involved, the operating jurisdiction defines the required conditions around getting in and out of national fiat currency. In some jurisdictions, this best practices registration may be conducted on an opt-in basis.
4. Balance sheet and income statement reporting for all networks
Again, I am assuming exchange networks because the bitcoin block chain is already a publicly accessible transparent ledger of transactions. Market competition will demand exchange solvency and reporting of financial status.
5. Mandatory capital should be held by exchanges (in the form of legal tender)
Jim Harper, Global Policy Counsel at the Bitcoin Foundation, suggests that consumer protection may differ in the future bitcoin era as the assumption of government regulation providing sophisticated commercial oversight becomes challenged.
Cryptographic proof of reserves can deliver responsible public audits of exchange assets as bitcoin’s cryptography-based public ledger allows an organization to prove control of bitcoin assets without revealing private information about customers or account holders.
Harper continues, “multisignature transactions are a second innovation that may remake consumer protection. ‘Multisig’ allows any combination of consumer and business entities to exercise control over a bitcoin-based asset.”
“These innovations, and others to come, will tend to make consumer oversight of bitcoin businesses easier – and government oversight a less important part of the mix. Consumers will be better positioned to do their own monitoring and, in the best case, to enjoy cryptographic proof that they are being properly served.”
6. Implement some form of backing for cryptocurrencies, such as gold
Requesting gold backing for bitcoin is one of the rookie mistakes made by new analysts, because the transportation costs, audit issues, and potential confiscation are all issues that bitcoin seeks to bypass. A gold-backed bitcoin would lead to centralisation in the way of specie reserves and would irreparably damage the incentive structure for securing the distributed block chain, which includes the process of new bitcoin issuance.
Despite the fact that our working paper author appears to support gold, he is mostly an apologist for ‘The State Theory of Money’ myth that the sovereign’s power to collect taxes and declare legal tender imbues a currency with ultimate value. Bitcoin is the primary value unit and requires backing from neither state sanction nor gold. I recently attempted to explain that logic to legal-tender poster boy Paul Krugman, in ‘The Fiat Emperor has no Clothes‘.
7. Use of government plenary powers to restrict contracts in bitcoin
Given today’s cryptographic protocols and smart contracts with time-release amounts and multisignature transactions, it is simply infeasible to restrict private party contracts that would not require the judicial system. Potentially, contracts could be banned by statute within aggressive jurisdictions, but that would probably only drive them underground.
Blundell-Wignall references the 1935 gold clause cases where the Supreme Court decided in a 5:4 majority in all of these cases that “the power to regulate money is a plenary power”. The author concludes that “the abrogation of all gold clauses was considered to be within the powers of Congress when such clauses presented a threat to Congress’ control of the monetary system.” He then posits that “if bitcoins begin to undermine the financial and tax systems they will be shut down and all contracts between traders would be unenforceable.”
According to law professor Henry Mark Holzer, the abrogation of gold contracts and gold clauses during the Roosevelt administration in the US marks one of the saddest periods in worldwide monetary history, because it restricted freedom to transact.
Market-based legitimacy
Ironically, the items that the author highlights with respect to legal tender and monetary contracts are precisely what the bitcoin protocol alters with its ‘trustless transfer technology.’ Governments will no longer maintain a monopoly position over money because an alternative exists and that alternative does not rely on legal tender status for its legitimacy – it relies on global acceptance of the mathematics behind the protocol for its market-based legitimacy.
The implications of bitcoin are quite simply “Money Without Government.” We don’t need kings to coin our money. Trust has become decentralised.
The die has been cast. All that remains is the jurisdictional competition to determine if any nation-state has the political will to harness and benefit from nonpolitical money.
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