The following thoughts are based on personal conversations, readings (some of which are available on my March newsletter), and synthesising this with my own realist approach to history and current affairs. I highly recommend you read the links in the March newsletter to get a better understanding of the "knowledge trail" that has led up to this short piece.


A Historical Perspective on Money

My thoughts on crypto have continued to evolve over the past few months. One possibility is that crypto could become a 'basket of currencies' with a strong community focus. The merging of currency and social network accelerates as each community develops and uses their own currency, both as a form of tribal demarcation and an attempt to achieve a measure of local resilience and sovereignty versus the recurrent, systemic risk of national currencies. This would still require an acceptance of the sovereignty of the national currency because of the realities of power, although to what extent this sovereignty could be enforced beyond nominal allegiance is questionable for most states. Their central banks, like most organs of state, are largely phantoms.

This is not a novel situation, and historical examples may give us the concepts and tools with which to negotiate a space for this development without threatening central power and inviting destruction. Prior to the rise of the nation-state and its subsequent homogenisation of the broad spectrum of human life, currencies were much like law in that it was a pluralistic system. Today, we cannot even imagine the idea of legal pluralism as legislation is deeply tied to state sovereignty and is monopolised as a consequence. Orthodox Jews or Muslims who privately arbitrate through Halakha or Shari’a are often treated with hostility by the secular priesthood of the modern legal system because of this.

Likewise, the idea of multiple currencies circulating in tandem can appear both needlessly complex and outside our contemporary understanding of monetary policy. However, this was the historical norm. The Roman, Ottoman, and British empires (among others) all had multiple currencies circulating both in the lands they directly ruled, and, in the colonies and satrapies. The reason for this was pragmatic; delivering hard metal coinage to distant provinces took very long in the age preceding instant wire transfers and the computer. Money-changers were an important profession in imperial metropoles, responsible for the fair exchange of dozens of currencies from across the empire and the known world.

The Ottoman ‘Sarraf’ (money-changers)

Phantom States and Paper Money

The idea of a singular, national currency or a global hegemonic currency is a temporary phenomenon brought about by the consolidation of the European nation-state in the early 20th century and then by America in the post-war period. This was enabled by the industrial revolution and the subsequent developments in transport and communications technology; it became faster than ever to enforce direct state rule over distant lands and territories, and as paper money came into existence, central bank control over currency was enabled to a greater degree than ever before.

An underrated fact about most of the states in existence today is that they are not real. On paper, they adopt all the necessary trappings of a modern state by referring to constitutions, departments, laws, etc. In reality, if you were to visit many provinces in 'developing states' like India, Nigeria, and Brazil, you would find that these organs of state are nearly non-existent and the imperatives of local interests and power rule the territory. This state of affairs exists because it is in the interest of the American-led western order to maintain the façade of Westphalia; that the Earth can be neatly divided into states that are paper imitations of the nation-state and therefore at some point converge to that ideal model.

But this can never happen, because these paper states have never fully developed to achieve the level of centralisation of a nation-state. Even as some try to catch up, they will still find themselves left behind. Prior to the nation-state and its technologies of control, polities did not have the technology that enabled both the complete distribution of its own sovereign currency and the power to force others out of circulation. Today, the industrial revolution infrastructure for national and global currencies is antiquated by even greater technological capabilities that now exist. The 20th century nation-state as an aberration of history is starting to sputter to an unceremonious conclusion.

While the European colonial powers had hitherto enforced this state of affairs, it became the responsibility of America after WWII. However, should America’s position on the global stage begin to seriously decline, there is no western state ready to take on the mantle; on the contrary, China is actively making moves to enforce its own idea of regional hegemony in Asia. It has little interest in maintaining the façade of Westphalia, but nor does it have the soft and hard power that America uniquely possesses(d) to enforce its own unipolar hegemony.

If this is correct, the consequence of this would be that the paper states, with their fake departments and laws and "territorial sovereignty", may also see their power to print currencies and enforce monetary unipolarity diminish and then disappear. At this point, cryptocurrencies and their respective social networks are a fait accompli.

It is unlikely that stronger western states like America will suffer from cryptocurrencies. Those who stand most to benefit from it are individuals who fear their states' capital controls, and states with stronger property rights and lax capital controls. In both cases, the paper states that are prone to currency crises and have weaker property rights lose out to crypto's advance, and states with strong property rights (like America) become the net aggregators of capital outflows facilitated by crypto.

As a result, America may even come to embrace Bitcoin as a global standard, maybe for electricity, perhaps even the replacement of the petrodollar. The possibilities are endless because no one actually knows what will happen yet.

Crypto: a hedge against systemic risk... after eliminating its own volatility

What cryptocurrencies may provide is a form of 'antifragility' (a concept coined by Nassim Taleb with panache in Antifragile) through the decentralisation of risk, which each currency essentially acting like a corporation does; the risk becoming much more ring-fenced and preventing Black Swan events cascading through a centrally connected system like the one we have today. But to do that, crypto will need to significantly mature and stabilise.

For all the furore over the Bitcoin and Ethereum rallies since Spring 2020, I still believe that the technology and community around it are still extremely immature. This is a bullish indicator for the coming decade. The pace of iteration and improvement is extraordinary and the energy is absolutely infectious. The fullest applications of crypto are yet to come; people in emerging markets are still being underserved as the crypto community focuses on fellow crypto enthusiasts in the western hemisphere, and the dollar is still our hegemonic currency.

For now, blockchain and cryptocurrencies remain closely related to the stock market and are extremely volatile. They are prone to scams, hacking, forking over disagreements, and wild fluctuation as seen over the past year. But this is the nature of any new frontier; the zebras get eaten and the lion prevails. Like any good foundation story, crypto's will be covered in blood.