Last week, investor Chris Dixon posed a provocative dichotomy when introducing his employer’s USD $25M investment in Bitcoin service Coinbase:
“The press tends to portray Bitcoin as either a speculative bubble or a scheme for supporting criminal activity. In Silicon Valley, by contrast, Bitcoin is generally viewed as a profound technological breakthrough.”
Now working at vogue venture capital firm Andreessen Horowitz, Dixon is in a fine position to speak for Silicon Valley. But to the extent that the Valley is a placeholder for the technology industry at large, I beg to differ. Bitcoin is “generally viewed” quite differently.
Most charitably, Bitcoin is regarded as a flawed but nonetheless worthwhile experiment, one that has unfortunately attracted outsized attention and investment before correcting any number of glaring security issues.
To those less kind, Bitcoin has become synonymous with everything wrong with Silicon Valley: a marriage of dubious technology and questionable economics wrapped up in a crypto-libertarian political agenda that smacks of nerds-do-it-better paternalism. With its influx of finance mercenaries, the Bitcoin community is a grim illustration of greed running roughshod over meaningful progress.
Far from a “breakthrough”, Bitcoin is viewed by many technologists as an intellectual sinkhole. A person’s sincere interest in Bitcoin is evidence that they are disconnected from the financial problems most people face while lacking a fundamental understanding of the role and function of central banking. The only thing “profound” about Bitcoin is its community’s near-total obliviousness to reality.
Regulation and Other Minor Details
Bitcoin owes its present flexibility to a lack of regulation (or, more accurately, a lack of understanding around existing regulations and/or unwillingness to comply with them). If the broader Bitcoin experiment doesn’t implode, the currency will be regulated just as any other. In this best-case scenario for Bitcoin, what of the benefits Dixon claims?
We’re told that Bitcoin “fixes serious problems with existing payment systems that depend on centralized services to verify the validity of transactions.” If by “fixes” you mean “ignores”, then yes: a Bitcoin transaction, like cash, comes with the certainty that a definite quantity of a store of value has changed hands, and little else. How this verifies any “validity” or cuts down on fraud I’m not sure; stolen Bitcoins are spent as easily as stolen cash, which is why theft of Bitcoins has been rampant.
With those risks in mind, are the fees that existing card networks and payment processors charge – Dixon’s “roughly a 2.5% tax on all transactions” – outrageous, or are we perhaps collectively subsidizing the cost of fraud prevention and regulatory compliance? In what plausible universe will legitimate Bitcoin transactions be allowed to take place without such protections, and thereby without the associated costs? (Incidentally, you can expect to pay a similar “tax” just to reclaim some semblance of the anonymity that Bitcoin fails to provide in the form of mixers, a zingy term for money laundering.) To be sure, the credit card companies have fattened their margins beyond the raw cost of moving money around, but we have a miraculous salve for this called regulation.
If Bitcoin’s strength comes from decentralization, why pour millions into a single company? Ah, because Coinbase provides an “accessible interface to the Bitcoin protocol”, we’re told. We must centralize to decentralize, you see; such is the perverse logic of capital co-opting power. In order for Bitcoin to grow a thriving ecosystem, it apparently needs a US-based, VC-backed company that has “worked closely with banks and regulators to ensure that the service is safe and compliant”.
And Coinbase certainly feels, uh, compliant. It took me over a week to use the service to turn US dollars into a fraction of a Bitcoin, an experience that coupled the bureaucratic tedium of legacy consumer financial services with the cold mechanization of notoriously customer-hostile PayPal, but with the exciting twist that I have no idea from moment to moment how much my shiny new Internet money is actually worth.
While most of the claims around Bitcoin are merely wince-inducing, there is one that deserves particular attention: that Bitcoin is “a way to offer low-cost financial services to people who, because of financial or political constraints, don’t have them today.”
Economic inequality is perhaps the defining issue of our age, as trumpeted by everyone from the TED crowd to the Pope. Our culture is fixated on inequality, and rightly so. From science fiction futures to Woody Allen character sketches, we’re simultaneously alarmed and paralyzingly transfixed by the disappearance of our middle class. A story about young people dying in competition with one another just to continue lives of quiet desperation isn’t radical left-wing journalism, it’s the pop fiction on every teenager’s nightstand and in every cinema right now.
With this backdrop of looming poverty, nobody can reasonably deny that the euphemistically “underbanked” are in desperate need of financial services that empower them to participate fully in the global economy without fear of exploitation. What’s unclear is the role that Bitcoin or a similar cryptocurrency could play in rectifying this dire situation.
The push toward Bitcoin comes largely from the libertarian portion of the technology community who believe that regulation stands in the way of both progress and profit. Unfortunately, this alarmingly magical thinking has little basis in economic reality. The gradual dismantling of much of the US and international financial regulatory safety net is now regarded as a major catalyst for the Great Recession. The “financial or political constraints” many of the underbanked find themselves in are the result of unchecked predatory capitalism, not a symptom of a terminal lack of software.
Silicon Valley has a seemingly endless capacity to mistake social and political problems for technological ones, and Bitcoin is just the latest example of this selective blindness. The underbanked will not be lifted out of poverty by conducting their meager daily business in a cryptocurrency rather than a fiat currency, even if Bitcoin or its ilk manages to reduce marginal transaction costs (at scale and in full regulatory compliance, that is). But then, we should note that Dixon wasn’t talking about lifting anyone out of poverty, just “offer[ing them] low-cost financial services”. Also notable is that both Andreessen and Horowitz supported Mitt Romney’s failed presidential bid, giving us some insight into the likely level of concern for economic inequality around Dixon’s office.
In Bitcoin, the Valley sees another PayPal and the associated fat exit, but ideally without the annoying costs of policing fraud and handling chargebacks this time around. Bankers in New York and London see opportunities for cryptocurrency market-making. International investors see the potential for arbitrage and are taking advantage of cheap electricity, bringing the environmental destruction of real-world mining to the brave new world of digital money.
In other words: Bitcoin represents more of the same short-sighted hypercapitalism that got us into this mess, minus the accountability. No wonder that many of the same culprits are diving eagerly into the mining pool.
Moving Past The Failed Techno-Libertarian Agenda
For the past few months I’ve been giving a talk, informed largely by feedback on my post about the tradeoffs of joining startups earlier this year. The talk delves into the history of Silicon Valley and venture capital, tying past to present. Though I cover a lot of ground in a short sprint, I hope my message is clear: that the dominant socio-political ideology of Silicon Valley has failed to deliver sustainable profits to the broader investor class while technological innovation has slowed and jobs have dried up. It’s time for new thinking.
Bitcoin is not without its left-wing supporters, but I think it’s safe to say the currency has mostly proven to be a rallying point for those who see the state and central banks as little more than obstacles to a libertarian techno-utopia, a worldview perhaps best captured in The Californian Ideology. In this sense, Bitcoin is ready-made for a cultural moment when Silicon Valley ideologues are discussing plans for a new opt-in techno-centric society and sliding so far right that a return to monarchy is on their table.
Working in technology has an element of pioneering, and with new frontiers come those who would prefer to leave civilization behind. But in a time of growing inequality, we need technology that preserves and renews the civilization we already have. The first step in this direction is for technologists to engage with the experiences and struggles of those outside their industry and community. There’s a big, wide, increasingly poor world out there, and it doesn’t need 99% of what Silicon Valley is selling.
I’ve enjoyed the thought experiment of Bitcoin as much as the next nerd, but it’s time to dispense with the opportunism and adolescent fantasies of a crypto-powered stateless future and return to the work of building technology and social services that meaningfully and accountably improve our collective quality of life.
First off, thanks to everyone who read an early draft of this post.
I wrote the vast majority of this post before today’s sizable Bitcoin crash, for what it’s worth (and, honestly, from moment to moment, who knows?).
At time of writing, I own a fraction of one Bitcoin. A portion of that was mined on a laptop several years ago as part of the Deepbit pool. More recently, I purchased some BTC with US dollars on Coinbase. I own this small amount of BTC because I’m largely in the “Bitcoin is a worthwhile but flawed experiment” camp, and I wanted to try using the currency for my personal edification. Several readers asked me to be harsher and more conclusive on the economic fundamentals of Bitcoin. I chose not to out of deference to the experimental potential I saw in the project, warts and all. Bitcoin’s, er, creative take on economics and monetary theory is well dealt-with elsewhere.
I was previously CTO at online banking service Simple. While that experience has informed my thinking on the role of technology in consumer finance, I am not aware of Simple’s strategy with regard to Bitcoin and this post should not be construed as representing the opinions or direction of that company.