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Sociological and Political Aspects of Cryptocurrencies

Étienne Perrot, SJ - La Civiltà Cattolica - Wed, Jan 26th 2022

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A new appetite for cryptocurrencies arose last year, and it has not diminished during this course of 2021. Why? These currencies are more secure, being now better supervised by the public authorities, but they still scare political leaders who react by imposing  increasingly intrusive regulations. They are also looking to launch their own cryptocurrencies, the central bank digital currencies.

The main technical aspects of these cryptocurrencies are easy to summarize. Their base is the blockchain, which is a technology for storing and transmitting digital data. It’s probable industrial origins reduce the number of intermediaries who are responsible for verifying and preserving the data of the traders in a lasting and always verifiable form.

The principle of the blockchain is very simple: every transaction is encrypted in such a way that it integrates in blocks in its cryptogram all of the preceding transactions. This, in monetary matters, prevents anyone from involvement without having the necessary money first. Hence, no bouncing checks, no fear of bankruptcy, no blind trust in an intermediary – since there is no intermediary.

 

The corollary of this encryption is the anonymity of both the payer and the receiver. This makes cryptocurrencies a convenient medium for all illegal operations: payment of ransoms in Bitcoins, purchases of illegal weapons, illicit trafficking, concealment of secret capital gains. The paradox is that this double anonymity of the payer and the receiver goes hand in hand with total transparency of transactions. Everyone involved in crypto exchanges is informed of all transactions.

A currency like no other

Unlike legal currencies issued by a bank (central or commercial), cryptocurrencies do not rely on any banking authority. Hence sometimes their designation under the term “jeton,” (“token”) although the French Court of Cassation, for example, grants them the status of currency. Regardless of the word, cryptocurrencies respond – very poorly – to the three economic functions of any currency: as units of account, as an intermediary for exchanges, and a secure item of value . Unit of account, because they can be used to value products or services, and benefit from an exchange system that translates into dollars, euros, yen or other currencies, the value being  expressed in any of the cryptocurrencies. Intermediaries for exchanges: cryptocurrencies also serve as such, at least in the case of traders, service providers or speculators who are willing to accept them. Suppliers can therefore refuse Bitcoin, Ripple, Europa or Ethereum, but they are not free to refuse payment in legal tender. store of value: any encrypted currency is subject  to speculative variations in its exchange rate and the security of the electronic system that keeps track of it.

The danger here is not the same as that of bank deposits subject to hackers or direct debit. Kept not in a central memory but in the entire Internet network, and even assuming the security of the system, cryptocurrencies can be lost if their holders forget their access codes to the system, their computers are hacked, or they lose a USB key containing their codes. In all these cases – the negative side of anonymity – as is the case with  lost or stolen banknotes, the dealers have no way of recovering their credit.

The lack of counterparts differentiates cryptocurrencies from legal tender. The first of these counterparts of legal currencies – historically speaking – is gold. In addition to gold or precious metal, the counterparts of the money supply are mainly the credits established by the central bank with the public treasury and, for the most part, the credits granted to the economy by commercial banks. This means that the value of legal tender varies according to the view  that one has of the future value of these three counterparts.

In the absence of a quid pro quo, speculation in cryptocurrencies is of a different nature. It is based only on the idea that participants in these markets have of their future value. Given that dealers rely solely on rumors of a rise or fall, the price movements of cryptocurrencies tend to be self-sustaining. This explains the erratic and exaggerated aspect observed in these markets.

To counter these movements and benefit from the technology underlying cryptocurrencies without facing the risk of erratic movements in their price, cryptocurrency futures markets have been set up. But, like all hedging systems (which work like insurance), these futures markets come at a cost. This is the reason why the solution – more convenient but which supposes a regulator which adjusts the quantity of money needed  to preserve its value – consists in linking the value of a cryptocurrency either to a legal tender (less fluctuating), to a basket of currencies, or even to the price of a commodity such as gold, diamonds or oil. We then benefit from the technology (immediate transaction bypassing intermediaries) without the risk of too rapid price variations. This is called a “stable coin.” This is how New York State accepts  payments in “stable coins” (at least those among the stabilized cryptocurrencies that it recognizes).

Some self-proclaimed prophets of speculative finance have announced that cryptocurrencies will replace gold as a secure item of value. The person in charge of  bond strategy at one of the largest fund managers on the planet (BlackRock, with eight trillion assets under management) peremptorily asserts that Bitcoin is here to stay, and that it will replace gold. This is to forget that gold is not the most reliable source of  value: 35 dollars an ounce on August 15, 1971, its price multiplied by ten in the following months; it fluctuated between 300 and 850 dollars an ounce for several decades before crossing the threshold of 1,000 dollars in the years following 2000, until touching the 2,000 dollar mark , before falling back to 1,000 and then touching 2,000 dollars again  in August 2020,  then falling by more than 10 percent on the announcement of the discovery of some vaccines against the coronavirus.

Betting on the bright future of the most important cryptocurrencies, like Bitcoin, also means forgetting that they are at the mercy of improved technology.   Some of the Bitcoin challengers have faster transaction speeds and are easier to use. This is still forgetting that the value of cryptocurrencies – at least those that are not indexed – often  is reflected  by reversing and amplifying the value of legal currencies, and therefore influences the idea that we have  of central bank monetary policy. It is certain that the coronavirus pandemic, by justifying the almost unlimited creation of money by central banks, has damaged the credibility of legal currencies and boosted the value of cryptocurrencies after 2020. To this was added the possibility of using Bitcoins on the PayPal platform.

To think that cryptocurrencies will replace gold is to discount the strengthening of public controls and regulations. A few years ago, in September 2017, it was enough to hear the Chinese administration discuss the possibility of banning cryptocurrency exchange platforms in its territory to see the price of these currencies collapse for a time. Again, at the start of summer 2021, another fall was triggered by the Chinese ban on the proliferation of cryptocurrencies in its territory, by means of “mining” the term for the process by which new cryptocurrency enters into circulation, and it consumes a substantial amount of electricity.

A new conception of the human person

The installation in the cultural landscape of cryptocurrencies brings about a sociological shift, an outline of which I would like to specify here. If we free ourselves from the restrictive conception of economists who reduce money to its triple function (unit of account, intermediary in trade, and store of value), we then realize that money plays the role of a pledge. A pledge is a symbolic object that memorizes a debt. The euro I hold in my hand or in my bank account is a sign of a commitment on the part of all those who may one day have to pay me the counterpart in the form of a service, a commodity or another currency. Of course, this is not an acknowledgment of debt to any particular person, company or administration; furthermore, this pledge has no fixed expiry date. However, this pledge is for me the promise received from a community that is committed to meeting my needs as I experience them when the time comes. This is why anthropologists speak of money in terms of the “debt of life.”

In more rigorous terms, money is an open demand claim on a payment community.  It is a demand claim, because it is a sign of debt. It is open, because I can claim the counterpart at any time. It involves a community, because I can turn to any member of the community, a supplier of goods or services, or a speculator. It involves community of payment, because, by transmitting this pledge, I free myself from a personal debt without extinguishing the debt of the community. In effect, monetary payment is simply the transmission of a pledge to the  community. This is because the supplier who receives my payment acquires a pledge, a sign of the community’s debt to him or her. Moreover, people only accept this pledge in payment if they are convinced that, when the time comes, the community will honor the debt. It is a  debt of life, therefore, since the currency mobilizes the assets and capacities of the community, at the service – and according to the personal choices – of each member.

The anthropology underlying money, as recognition of the debt of a community toward each person, is therefore based on an asymmetric relationship, a dependency. But only a misconception of freedom could see an alienation in this dependence on the payment community. Without even going to Spinoza to look for the justification of freedom as being the sum of accepted conditionings, it suffices to recall, in line with  Christian tradition the social and political nature of human beings.

The political dimension of human beings seems to be fading with the use of cryptocurrencies, at least those that are not legal tender. The creators of cryptocurrencies wanted to subvert this fundamental sociological structure of subjectivity by tuning into the radical individualist current of contemporary modernity. The electronic cryptography from which cryptocurrencies were born was first, in the 1980s, the land of cypherpunks (this new word  made up from the English terms: cipher “encryption” and punk: literally, the “anarchists of encryption”)It was the moment when the Internet system hinted at the danger of a sprawling public administration in  control of privacy, much like that exercised by the totalitarian regimes found in the well-known novel of  George Orwell, 1984.

The technology used by cryptocurrencies, such as the blockchain, by removing so-called trusted intermediaries (banks or payment platforms), thus pushed to the extreme the cultural tendency of Do It Yourself. Through the blockchain, we devalue political control by escaping the standards decreed by the central coordinator. The individual thus acquires a margin of freedom. An essential step was taken when, in the late 1990s, a way was discovered to replace the trusted intermediary with multipolar control distributed over the Web. This is because, in electronic transfers, the greatest threat to secrecy is identity theft or, conversely, its disclosure, which is particularly easy when you access the central file responsible for interconnections between participants. This was the case with hidden accounts in tax havens. With the blockchain there is no central file, no intermediary who controls the identity of the partners and the legality of the operation. The successful completion of the transfer is ensured without human intervention.

Through the use of cryptocurrencies, the subjectivity allowed by monetary pledge is reduced to individualism. This individualistic subjectivity is not a game without rules, however. The individual autonomy which the aficionados of modern ideology praise remains conditioned.

On this sociological point, cryptocurrencies differ from legal currencies. Like casino chips or local currencies, the approximately seventy local currencies that circulate in France are worth one euro. In the same way as the units of account in associations which practice barter between their members, these local exchange systems [LES] as they are called, suppose, in addition to the knowledge of the traders and precise accounting, a certain consensus on the value of services exchanged. In contrast, in the cryptocurrency system, the identity of the beneficiaries remains unknown until they want to convert their cryptocurrencies into legal currencies. . This is where the public administration lurks, waiting to pounce.

The politics of cryptocurrency

The anarchist spirit that presided over the emergence of cryptocurrencies remains, at least among some of their users. But does this mean that all regulation is absent from the system? No. We cannot imagine an institution (language, currency, market) without a minimum of binding regulations. Or, to use the formula consecrated by the social sciences, there is no community – even ectoplasmic like that of cryptocurrencies – without society. Even an association of anglers, where each member joins or leaves according to their changing mood, is governed by some rules, procedures or customs that are binding. No individual interaction is possible, for cryptocurrencies as for any community, without guidelines that frame and limit the initiatives of all.

In the mutual debt community of cryptocurrencies, this restrictive regulation is present: it is that of the protocols put in place by the initiators, the first of whom  was Satoshi Nakamoto, a pseudonym that hides a group of computer scientists. These computer scientists created Bitcoin and published the protocol on October 31, 2008.

Each cryptocurrency has a unique model. Some announce a total limit to the number of monetary units that will be created (21 million for Bitcoin, of which more than four-fifths are already in circulation, which partly explains its appeal); others specify the conditions required to modify the protocol. We administer the electronic circuits, we leave the users free. This is also the ideal of radical economic liberalism.

Like the internet they could not exist without, cryptocurrencies are developing at a similar rate to that of liberal capitalism, at the same rate as the contractual individualism that serves as its cultural medium. Everyone involved only feels obliged to do what they have contracted – or have had forced upon them – distrusting any interface that might interfere with their individual freedom. But, just as we cannot pass without mediation from the sum of individual wills to the general will, so we cannot pass directly from the sum of individual interests to the general interest. Hence there are readjustments that necessarily involve the public authorities, as evidenced by the expected – but always late – reactions of the political power to counter the negative fallout from cryptocurrencies, like those from the market.

There are already the nuisance freedoms which are the corollary of encryption (the anonymity of both the payer and the receiver). Anonymity makes cryptocurrencies a convenient vehicle for all illegal transactions. These abuses have led states to regulate the use of cryptocurrencies in an increasingly intrusive manner. In the Vatican City State the current law bans the “the provision of services of issuance, sale, transfer, custody, deposit, management, loan, exchange, negotiation or brokerage of encrypted, electronic, virtual or synthetic currency” (Law No. XVII of October 8, 2013, concerning norms on matters of financial transparency, supervision and intelligence). In France, the possession and use of cryptocurrencies is legal. Since January 1, 2020, you have to declare any account opened, held or closed on a platform or intermediary for the exchange of “digital assets” (this is the category in which cryptocurrencies are today classified by the French administration). It appeared in French tax regulations in 2014 under the title of “virtual units of account stored on an electronic medium,” where cryptocurrency profits earned on the market are taxable at the progressive scale of income tax, in the category of non-commercial profits. On the contrary, in 2018 the administration classified them in the category of “intangible movable property”, taxable on capital gains as the case with securities (a flat tax of 30 percent). Since the 2019 finance law, encrypted currencies have come under the category of “digital assets,” defined as any digital representation of a value that is not issued or guaranteed by a central bank or by a public authority, which is not necessarily attached to a currency that is legal tender and does not have the legal status of a currency, but is accepted by actual or legal persons as a medium of exchange and can be transferred, stored or exchanged electronically.

Far from the anonymity dreamed of, in several developed countries, including France, the holders and users of a cryptocurrency must identify themselves and declare all the transactions they carry out, as well as their gains and losses. Banks are – here as with all financial transactions – zealous collaborators with the monetary authorities and the tax services, in particular by monitoring the conversion into legal currencies carried out on exchange platforms, thus detecting, among other things, money laundering.

International issues

The policy framework for cryptocurrencies is not simply aimed at criminals and those eager to evade taxes. The more the mass of cryptocurrencies in the world increases, the greater its effects on the international financial system, effects which can hamper public monetary policies.

In 2019, the danger of cryptocurrencies was discussed at an international meeting of G7 finance ministers. In the news at the time was Facebook’s project for a cryptocurrency, the libra. In 2019, Facebook and a few other major  internet  players – Visa, Mastercard and Paypal have since withdrawn from the project – announced their intention to launch a cryptocurrency, the libra (in Latin, “balance”), intended for some two billion potential users worldwide. The libra, announced for 2020 but delayed sine die, reminded us of the pound sterling, the dominant English currency in the 19th century. In fact, the libra referred, according to its creators, to the ancient Roman currency

In the minds of its designers, its value was based not on the speculative valuation of the market, like Bitcoin and other cryptocurrencies with erratic values, but on the weighted average of a basket of currencies, like Special Drawing Rights (SDRs) from the International Monetary Fund (IMF). It would therefore be an international currency no longer reserved for nations, like the SDR, but intended for populations and businesses, managed by a private body. Behind tax evasion and terrorist financing, the hidden argument of official U.S. opponents was that the libra, as a private international currency, could substitute for the dollar in countries affected by excessive reliance on the dollar, as has occurred in Israel, Argentina and some African countries (when the population abandons the devalued official currency to use the dollar, which is more resistant to fluctuation).

The release of the libra would rely, like cryptocurrencies but in a more regulated manner, on the global electronic network. In the era of big data where useful information comes massively from statistics and much less from individualized diagnostics, the potential advantage is great for masters of the system, the GAFAM (Google, Apple, Facebook, Amazon, Microsoft), but not for tax auditors, nor for citizens concerned with preserving their privacy. Data confidentiality is in fact polarizing the attention not only of civil society, but now, finally, of public authorities, especially since Facebook was caught out selling business data collected from its users. The monetization of big data is characteristic of “surveillance capitalism” where statistically processed information has a price in the markets, even as each feeds the global information with a gesture, a click that is itself seemingly worthless.

The French finance minister was outright opposed to the libra. The Secretary of the U.S. Treasury, for his part, had expressed “very great concerns.” If one day the libra were to see the light of day, we would then see for cryptocurrencies a scenario similar to that of the internet, which serves as its support. At the same time as promises of radical democracy and universal free collaboration, the internet has favored rather quickly bureaucratic  control, on the one hand, and the domination of GAFAM, on the other hand. The domination in question is all the more accepted by the population as it is tricked out in the values of modernity: rationality, security and performance. This possible scenario is based on the logic of the network economy where the biggest – which is often the first launched – is more likely to win the bulk of the stake, even if the qualities of its product or of its services are not the best.

It is understandable then that, in the global monetary game, central banks seek to positions their pawns before it is too late. Among countries with economies weakened by geopolitics, the Marshall Islands have led the way. Venezuela launched in 2018 a cryptocurrency, the Petro, indexed to the price of a barrel of oil, in order to circumvent U.S. sanctions. For the same reasons, Iran had considered in 2018 creating a national cryptocurrency, based on Bitcoin, to counter the fall of the national currency affected by the policies of President Donald Trump. Turkey is also looking to boost its economy by launching a national cryptocurrency.

Apart from these economically weakened countries, a few large countries, in addition to China, are making similar preparations. In Canada and Singapore, there are plans to develop official cryptocurrency payment systems. The Bank of England also wants to create a cryptocurrency indexed to sterling. Last but not least, the European Central Bank (ECB), in a report dated October 2, 2020, launched a consultation aimed at creating a “digital euro,” backed by the euro, and therefore less volatile than unindexed cryptocurrencies. “No technical obstacle was identified during the preliminary testing phase,” claimed the European Central Bank (ECB) in the summer of 2021. The ECB therefore wants to take the next step, the establishment of a two-year “pilot project” to create a digital euro, the proposed launch date is 2025.

The reasons announced are without originality but not without ulterior motive: to adapt to the growing practice of users who favor the non-physical nature of payments, but also to counter the proliferation and growing influence of cryptocurrencies. All in all, an sociological and political look at the development of crypto-currencies gives substance to the old idea that laws and regulations are always behind the evolution of techniques and markets. But unless you are a prophet, how can you know today what you will not know until tomorrow?


DOI: La Civiltà Cattolica, En. Ed. Vol. 5, no.11 art. 5, 1121: 10.32009/22072446.1121.5

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