Chapter 1.3. The three avenues of blockchain innovation
-79. In the first chapter we have identified that collaboration among large numbers of people is what brings forward the human society, and that such collaboration can be done in a “state” based context at much larger scale than in “state-less” communities (sometimes conflated with “anarchic” communities). In addition, we have noted that, according to surveyed literature, “states” are not neutral, but rather adversarial toward alternative “state-less” or anarchic communities, which they tend to crowd-out and suppress.
-80. In the second chapter we have explained that the analysis of the success of Bitcoin has been done in the existing “state-based” institutional context and was thus channelled to focusing on technological benefits while often ignoring their costs and being mostly silent about the economic and socio-political alternatives it offered.
-81. In this chapter we argue that the main contribution of Bitcoin and more generally “blockchain technologies” to the well-being of people is by supporting large scale collaboration in “state-less”, quasi-anarchic settings. The first section discusses cooperation absent the state. The second section illustrates how the crypto-assets can support and foster such cooperation and the third section investigates possible challenges which this innovation can pose to existing institutions.
"Nothing can stop me from sending bitcoin to anyone I please. [...] As long as I have an internet connection and pay the network’s transaction fee, denominated in its crypto asset, I am free to do what I want." source
1.3.1 States discourage stateless cooperation
-82. In the previous chapter, I explained that we wouldn’t be discussing the “Markets in Crypto-Assets” (MiCA) regulation and its potential impact on the prosperity and well-being of people in Europe if not for the success of Bitcoin, which managed to combine existing technologies to create “peer-to-peer” (P2P) electronic money. I have also underscored that the Bitcoin paper tackles and offers viable solutions not only to technological problems, but also to economic and legal problems.
-83. On the legal level, Satoshi Nakamoto made plainly clear in his online interventions that he was aware of previous attempts at creating “private”, non-state-backed currency such as “Liberty Dollar” and “e-Gold”, and how they fell afoul of money-transmission laws and regulations and were dismantled by law enforcement .
-84. The first reference in Satoshi’s “Bitcoin paper” is Wei Dai’s 1998 “b-money” article. This short text starts with the phrase: “I am fascinated by Tim May's crypto-anarchy. Unlike the communities traditionally associated with the word "anarchy", in a crypto-anarchy the government is not temporarily destroyed but permanently forbidden and permanently unnecessary. It's a community where the threat of violence is impotent because violence is impossible, and violence is impossible because its participants cannot be linked to their true names or physical locations.”
-85. Let’s recall from the first chapter that communities are essential to stateless cooperation, and shared common beliefs and norms, direct and complex relationships and reciprocity are in turn important ingredients of community creation. However, to advance beyond a certain stage of development, Wei Dai notes that communities need money (see below). To quote Y.N. Harari, “money is the most universal and most efficient system of mutual trust ever devised. […] Thanks to money, even people who don’t know each other and don’t trust each other can nevertheless cooperate effectively.”
-86. If one wants to destroy or limit the growth of a community, one prevents it from having its own money and supplies it instead with money the community does not control. As M. Taylor observed, states tend to destroy small communities, and an example of how this happens is illustrated by Lawrence White in his paper “The Troubling Suppression of Competition from Alternative Monies: The Cases of the Liberty Dollar and E-Gold.”
-87. Starting by quoting Friedrich Hayek’s “Choice in Currency: a way to stop inflation” , Lawrence White makes the case for competition in money and against the state’s monopoly on “the kinds of money in which contracts may be concluded within their territory” . He proceeds to write: “Ordinary citizens are harmed by the restriction of monetary competition, much as they would be harmed if the federal government banned UPS and FedEx from competing with the US Postal Service in package delivery. […] If we care about the welfare of ordinary citizens in their role as money users, then the law should allow the market for monies should be openly competitive. It should not make money production a privileged monopoly.” Further he analyses the actual situation in the United States (similar in this respect to the situation in Europe) and concludes: “The policy lesson of the e-gold story is that anti-money-laundering laws and money transmitting licensure requirements in the United States – and the discretion given to their federal enforcers – are serious entry barriers to any domestic gold-based online payment system, apparently to the point of being completely prohibitive.”
-88. Timothy May had published ten years earlier, in 1988, his short “Crypto Anarchist Manifesto” that Wei Dai is referring to. In it he writes: “Computer technology is on the verge of providing the ability for individuals and groups to communicate and interact with each other in a totally anonymous manner. Two persons may exchange messages, conduct business, and negotiate electronic contracts without ever knowing the True Name, or legal identity, of the other. […] Reputations will be of central importance, far more important in dealings than even the credit ratings of today. […] The technology for this revolution--and it surely will be both a social and economic revolution--has existed in theory for the past decade. […] the next ten years will bring enough additional speed to make the ideas economically feasible and essentially unstoppable.”
-89. A conundrum is implicit in Tim May’s text: if participants are totally anonymous, how can they avail themselves of a “reputation”? What would that reputation be associated with? Wei Dai’s “b-money” paper offers a possible solution: “A community is defined by the cooperation of its participants, and efficient cooperation requires a medium of exchange (money) and a way to enforce contracts. Traditionally these services have been provided by the government or government sponsored institutions and only to legal entities. In this article I describe a protocol by which these services can be provided to and by untraceable entities.”
-90. It is highly noteworthy in the context of this analysis that the intellectual ancestry of Bitcoin distinguishes between “legal entities” and “untraceable entities” – which cannot therefore be held responsible before the law, and against which the law cannot easily be enforced.
-91. The quotes above tend to indicate that Satoshi intended Bitcoin as an electronic money system for a “crypto-anarchist community” in which, unlike M. Taylor’s small communities, there can be no “direct and complex relationships” because the participants are “untraceable entities”, in order to make the system resistant to “money transmitting licensure requirements” and to the “discretion given to their federal enforcers.” Bitcoin appears thus as an answer to the destruction of community-based cooperation by the state, a property which Bitcoin analysts have called “censorship resistance”.
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[63] Treaty on the European Union, Art. 3(1)
[64] L. H. White, “The Troubling Suppression of Competition from Alternative Monies: The Cases of the Liberty Dollar and E-Gold” GMU Working Paper in Economics No. 14-06, Available at SSRN: https://ssrn.com/abstract=2406983 or http://dx.doi.org/10.2139/ssrn.2406983, 2014
[65] W. Dai, op. cit.
[66] Y.N. Harari, op. cit., p. 201-207
[67] F. Hayek, “Choice in Currency – A Way to Stop Inflation”, published by The Institute of Economic Affairs, 1976
[68] L.H. White, op. cit.
[69] ibid.
[70] T. May, op. cit.