Tom Woods | Oct 24, 2020 | 0
Cryptocurrency and Libertarianism
“The desire of gold is not for gold. It is for the means of freedom and benefit.” — Ralph Waldo Emerson
The impact of cryptocurrency on libertarianism has been profound, especially among the younger generation. To many, the appeal is a mystery because they view crypto as a scam or a delusion of the madding crowd. Austrian economists invoke the Misesian Regression Theorem that claims any valid medium of exchange has to have a previous use-value as something else; gold is the standard example. To them, crypto was manufactured out of thin air, which means it has no prior use-value and cannot be valid money.
As a crypto zealot, I disagree. Quite apart from who is correct, however, an important issue should be discussed. Why does crypto elicit a passionate commitment from so many bright libertarians who see it as a fresh path to freedom? The idea of a free-market currency is nothing new, certainly. So what does crypto offer that makes its champions believe it is so different? The answer lies in the underlying ideas from which the original Bitcoin emerged. It is important to discuss them for two reasons. Without understanding the dynamic, more traditional libertarians could easily fall out of touch with a fast-evolving movement. And the misunderstanding causes an unnecessary divide instead of being simply a difference of approach.
A word of background on crypto is a useful starting point. The first bitcoin that flashed across the blockchain in January 2009 was a proof of principle, and the principle was not how to make a fortune. It consisted of a set of ideas — the actualization of which would allow individuals to be financially independent of states and central banks. Bitcoin’s genesis block — the first block in the chain — held an encrypted message from its creator(s) Satoshi Nakamoto: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” The London Times headline remains forever embedded in the blockchain as a reminder of why crypto was created — in rebellion against the corrupt partnership of states and central banks which glut themselves on the property of average people.
The key to escaping financial slavery was solving what Satoshi called the Trusted Third Party Problem (TTPP). The state requires trusted third parties in order to usurp control of the wealth and lives of individuals. Without them, the state would be largely impotent. Up until crypto, however, this concept was not even recognized as an inherent problem.
What is it?
Economically speaking, a trusted third party is a middleman or intermediary between two parties who want to make an exchange. With barter or a direct purchase, no third party is required because the exchange is peer-to-peer; it is between two individuals who are equal in legal status. The same is true of small-scale black market exchanges, such as buying gold under the table from another person. Peer-to-peer exchanges are notoriously difficult for the state to monitor, prohibit, tax, or otherwise control.
In order to function in modern society, however, average people require the services of trusted third parties. Checks or direct deposits go through financial institutions before they are available to individuals. Online commerce depends upon credit cards, Paypal, or other trusted third parties. Stocks and bonds are rarely purchased directly from the issuers. International or long-distance commerce is especially dependent upon intermediaries for the transfer of money and goods across borders and over oceans. At this point, it is difficult to imagine a sophisticated economy without trusted third parties.
In a free market, the middleman’s job is to facilitate exchange — that is, to provide a benefit to the exchanging parties in return for a fee. A lawyer might draw up an employment contract that memorializes terms and conditions, for example. But all trusted third parties introduce an element of risk into an exchange; how do the parties know the middleman is trustworthy? The third party could be dishonest, incompetent, accident prone, or otherwise damaging to an exchange. Libertarianism has traditionally answered: the free market establishes a middleman’s trustworthiness through mechanisms such as reputation, recommendations, credentials, or other criteria accepted by the parties who pay. Risk is not eliminated but it is drastically reduced.
Enter the State. It monopolizes the basic dynamic of a complex economy: the medium of exchange. The State issues money and mandates its use through legal tender laws as well as ones that restrict competition. But issuing money is only half of what is necessary to control the wealth of a nation; it is also necessary to monopolize the channels through which the money flows.
This is where trusted third parties move center stage. State-sanctioned financial institutions become required intermediaries for anyone who wishes to write checks, use credit, invest, obtain loans, save, transfer funds, and engage in the many other economic activities of modern society. Consider long-distance or international exchanges in which the two parties cannot travel to conduct business in person. An intermediary is essential. And, so, global wealth flows through a network of central banks and sanctioned means of transfer — SWIFT, for example — all of which are state controlled.
In this system, the middleman’s job is to facilitate the state’s control over the wealth and information of society. Arguably, financial institutions are the state’s main source of personal data on individuals, including addresses, ID numbers, the source and amount of wealth, the goods and services purchased… Banks turn over records to the authorities; they flag suspicious customers; and they cooperate fully when the state confiscates accounts. The information and cooperation provided enables the state not only to control wealth but also people. “Objectionable” business practices, however legal — the sale of guns, for example — can be punished by closing, confiscating, or refusing to open bank accounts. Trusted third parties enforce social control.
Under a statist system, trusted third parties become a grotesque mirror image of their free-market selves. Instead of being a freely chosen service, they are state-mandated “choices.” Individuals, who benefit from free-market middlemen, cease to be customers and become victims. And, yet, to function in the modern economy, the average person surrenders his privacy and endures the plundering of his wealth through dynamics such as inflation.
Traditionally, the libertarian solution for state-agent third parties has been to abolish the ones that serve no free-market function and to privatize the rest. Satoshi took a different tack. He eliminated the Trusted Third Party Problem by eliminating the need for trusted third parties. Bitcoin consists of both crypto and the blockchain; it is both the money and the transmission of it over distance. Crypto offers the benefits of barter — especially privacy and personal control — as well as the benefits of a modern economy — especially the direct transfer of funds across borders and geography. Each individual becomes his own bank and banker.
Satoshi’s White Paper, which launched the crypto phenomenon in late 2008, opens, “A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. Digital signatures provide part of the solution, but the main benefits are lost if a trusted third party is still required.”
States have awakened to the loss of control inherent in peer-to-peer global transfers. At first, states did not take crypto seriously because they did not understand it. Now they understand the threat. Their solution: establish a need within crypto for trusted third parties that are under state control. Some states mandate the use of licensed crypto exchanges that comply with laws like Know Your Customer. Others are designing their own digital currencies to be issued by central banks. Strategies differ. Nevertheless, the common bottom line is to force individuals to use state-sanctioned third parties. The bottom line of freedom is peer-to-peer exchanges or ones that use only free-market third parties.
Satoshi’s main contribution to freedom was to combine a free-market currency with peer-to-peer transmission as a way to solve the Trusted Third Party Problem. It was something new under the sun, and it deserves to be recognized.
Almost all debate on crypto is over its validity as a currency or investment. Accepting crypto as valid, however, is entirely separate from taking its underlying ideas seriously. Until and unless people do so, they will not understand the generation of libertarians who are galvanized by Satoshi’s vision.
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