Unbundling and Remixing the Cryptocurrency Narrative

From the origin story in the canonical Nakamoto Document (2009) [3], cryptocurrencies have enacted a story about the virtue and logical inevitability of non- (indeed, anti-) statism. Bitcoin is better than that cruddy old “state run” money, and will inevitably displace the dinosaurs, goes this narrative.

The byproducts of this approach, which are either a feature or a bug depending on your views, are criminality and fiscal freebooting, including crazy market swings, ponzi schemes, and plenty of shady commerce. If states and conventional financial controls are doomed to disappear, are we destined to a financial wild west, with every person for himself?

This summer has seen push backs against this particular narrative about cryptocurrency. In particular, it is becoming clear that many of the benefits of using cryptocurrency can, in principle, be enjoyed without necessarily accepting the anything goes, anonymous, peer-to-peer architecture.

In June, the UK Home Office offered a cautious evaluation of risks and possible actions relating to cryptocurrency [1]. With responsibility for law enforcement and home defense, it is not surprising that this report suggests that it would be advantageous to have a cryptocurrency “created and owned by central Government”. This system would be designed to limit criminality, and to offer similar benefits now accrued from using the Pound Sterling.

Generally speaking, “limiting the use for crime or terrorism” would mean “enhanced traceability”. In other words, much of the Bitcoin idea would work fine without the cloak on everyone’s identity—unless you are trying to hide from the government.

In addition, a cryptocurrency issued by the government would be coordinated with, if not integrated with, the fiat currency. This would be extremely advantageous for most legitimate commerce, who benefit from stable, regulated currency, and insured banks.

This month, Deloitte issued a very similar proposal, with some more detailed arguments. [4]. They call for a cryptocurrency issued by the central bank, e.g., the US Federal Reserve. The ad hoc, volunteer Bitcoin network would be replaced by a network of licensed banks, which would gain a flow of revenue from participation. (With unconscious humor, Stan Higgins describes this as “uncompensated mining”. Banks are never, ever, uncompensated for anything.)

They note that this setup eliminates some of the hard to quantify risks surrounding the Bitcoin protocol, such as the effects of mining pools, technological changes, and possible 51% attacks. It also would bring fees and other policies under control of a central agency, rather than a hard to predict “consensus”.

The Deloitte paper also calls for the cryptocurrency to be integrated with fiat currency, such as the US Dollar, rather than floating independently a la Bitcoin. This would mean that individuals and businesses could accrue the advantages of cryptocurrencies (low transaction costs, easy transmission, etc.) without the exchange rate and legal risks endemic to Bitcoin.

Based in regulated financial institutions, this cryptocurrency would be much more resistant to abuse, and in fact would play by exactly the same rules as conventional currency. This is a path that would allow paper currency to be replaced by secure and convenient cryptocurrency, with concomitant benefits to the financial system and economy.

Finally, a cryptocurrency integrated with central bank fiat currency would be amenable to sound macroeconomics, including manipulation of the money supply required for a healthy economy. Nakamoto’s atavistic “hard money” doctrine is one of the major barriers to Bitcoin’s use in large scale economies.

Underlying both these proposals is the realization that many of the key benefits (better transaction processing, secure electronic transactions, and so on) are technically separable from the peer-to-peer mining paradigm, and the hard money macroeconomic policy advocated by Nakamoto and his disciples.  They are unbundling the Bitcoin package.

These proposals are also asserting an alternative to the notion that the “trustless” design of Bitcoin makes it “trustworthy”. These proposals base trust on publicly accountable institutions rather than “the Internet”. While this is pure heresy for orthodox Nakamotans, it is precisely the model that we have rather carefully constructed over the past century, which may not be so easy to overthrow as enthusiastic believers hope.

I have often commented that “anyone can have their own cryptocurrency” [2]. So: who better to create a cryptocurrency than those who already operate currencies on a far larger scale than Bitcoin? Central banks already issue digital currency and manage the frighteningly heavy weight banking system. They will have little choice but to upgrade to these crypto based systems, pretty soon now.

When this occurs, it will be a formidable competitor to Bitcoin, quite possibly putting it out of business. After all, how well do gold coins compete against conventional money in all its forms? Not so well, for good reasons. Bitcoin could become a quaint historical artifact, with the romantic appeal of the Krugerrand, and just about as useful.


  1. Home Office, Digital Currencies: Call for Information, H. Office, Editor. 2015. http://www.scribd.com/doc/269477425/Home-Office-Digital-Currency-Response-CoinDesk
  2. McGrath, Robert, You Shall Not Crucify The Internet On This Cross of Bitcoin, in Very Much Wow. 2014: Albuquerque. p. 34-37. http://issuu.com/verymuchwow/docs/vmw3/35?e=11558635/8421855
  3. Nakamoto, Satoshi, Bitcoin: A Peer-to-Peer Electronic Cash System. 2009. http://bitcoin.org/bitcoin.pdf
  4. Piscini, Eric, State-sponsored cryptocurrency: Adapting the best of bitcoin’s innovation to the payments ecosystem. Deloit Development LLC Anaysis, 2015. http://www2.deloitte.com/content/dam/Deloitte/us/Documents/strategy/us-cons-state-sponsored-cryptocurrency.pdf


Cryptocurrency Thursday

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