So where does that leave us? In the early months of 2018, the bitcoin price bobbed around in the range around $10,000, cheering up developers who felt the cryptocurrency needed more time to develop out of the investment spotlight. Searches for bitcoin on Google dropped, as did the transaction volume, even though the fees had dropped significantly. It seems clear that bitcoin has to go through a few more evolutions before being widely adopted as a currency for payments.
What does remain, though, is the fact that the global financial crisis of 2007 is still playing out, with no radical and transformative solution to the existing problems. It’s worth recounting those here. In September 2007, panic began to spread through the global banking system. An abrupt drop in demand for securitised mortgages, as people stopped paying for their homes, caused the short term money markets to seize up. The UK bank Northern Rock, unable to source short-term funding to pay its obligations, asked the Bank of England to provide it with liquidity, and the next morning nervous Northern Rock customers showed up en masse outside branches to withdraw their money. It was the first bank run in England since 1866, and the sight unnerved financial markets further.
As banks lobbied for action, central banks began issuing credit into the markets, dropping interest rates to nearly zero and buying government and corporate bonds. In the years of analysis that followed, the public learned, too late, all about world of triple A rated bonds, securitised mortgages bonds, collateralised debt obligations, the shadow banking system and moral hazard. Demand for lending dropped off, as people and businesses paid off debt built up during the boom years. Yet few seemed the wiser about how to fix the problem. The Bank of England and other central banks continued to create billions of dollars, yen, pounds and euros without moving the needle on inflation.
In 2014, the Bank of England was moved to publish a paper about money creation in the modern economy. The conventional wisdom about fractional reserve banking - the idea that banks take deposits, and then legally lend out multiples of those deposits, was incorrect, the paper stated:
“In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way is through commercial
banks making loans. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.” Nor, the paper continued, is central bank money ‘multiplied up’ into more deposits and loans. Most of the money in circulation, 97 percent, is made up of money created by private banks. The rest is central bank money, which is notes and coins. The bank acts to balance the amount of money in circulation by setting interest rates, but when those rates (when at zero for instance) are not effective, then the bank can directly undertake asset purchases: quantitative easing. The paper was pointing out two important things: that most money in circulation is interest-bearing debt, legally created by private banks; and that quantitative easing resulted indirectly in the Bank buying government bonds.
The paper was widely circulated in the bitcoin world, along with links to an article in the Guardian titled ‘The truth is out: money is just an IOU, and the banks are rolling in it’. It written by anthropologist David Graeber, author of Debt: The first 5,000 years. “Why did the Bank of England suddenly admit all this?,” he wrote. “Well, one reason is because it's obviously true. The Bank's job is to actually run the system, and of late, the system has not been running especially well. It's possible that it decided that maintaining the fantasy-land version of economics that has proved so convenient to the rich is simply a luxury it can no longer afford.”
One of the main arguments of bitcoin critics was that one could not simply create money out of ‘thin air’. The Bank of England was now calmly - if patronisingly - was explaining that this is precisely how the creation of money happens in a modern economy. However, the bank was no longer the only one in control of the creation of money in a modern economy.
In those intervening years, the big developments in payment have come from places such as China, which largely bypassed the existing cards network widely used for payments in the West, to be replaced by the QR-code and smartphone combination used by Alipay and WeChatPay. Facing into the future a little, it does not seem that big a leap for someone to come up with a widely usable mobile wallet that allows payments with bitcoin using the QR code system that does away with copying and pasting long hashes and makes the payment easy and widely accepted. That’s the objective, it appears, of groups such as Pantera Capital, which has back smartphone crypto wallet and payment business Abra and also Bitpesa, both designed first for emerging economies.
But when we look at the wider context of internet businesses, data, and privacy, it seems clear now for the last several years that individuals and societies will reject the centralised surveillance model of Facebook and Google, with even Tim Cook of Apple stepping in to criticise Facebook - and Microsoft openly stating that its business is based on selling things, not surveilling its customers. China still appears to be headed towards a full-surveillance state, just as Western countries are resiling from the same approach.
So what next for bitcoin? With wide interest in the blockchain, a new model is emerging for self-sovereignty, where citizens can hold their own data securely through a smartphone-based app that lets users control their own data, sharing just as much as is necessary for different circumstances, and sharing that data in a way that it remains encrypted.
It’s 50 years since people started dreaming of personal computers, and the attendant problems that might accompany that, such as the need for privacy on the internet. Personal computers for all is a dream now widely realised with the smartphone, but along with that came alarm over surveillance, and data capture by the state and corporate world. And along with that came the practice of widely sharing our personal information such as name, date of birth, bank account or credit card information - opening up a vista where all of this data is regularly stolen and hacked, bringing us a world of hassle to protect our email and social media accounts. Is there a better way?
Certainly. Instead of a centralised world we’re seeing the first possibilities of a decentralised world run by citizens, relying on technology such as smartphones and the blockchain, in a way that will surely open up new ways of trading, sharing and communicating with one another. The direction of money on the internet points that way. In the final analysis, as we’ve seen through this book, money is a codified form of value, moved around by a series of messages. Casting a cold eye on modern media, Marshall McLuhan famously stated that the medium is the message. Now we can say that money is the message.