Cryptocurrency and the nation state

This is a topic I make no pretence at being an expert in. It has only been recently that I have started learning about Bitcoin and other cryptocurrency. However in the short time I have been educating myself about this issue, I have made some fairly obvious but also quite profound observations. The rise in cryptocurrency occurred after the 2008 financial crisis, and in part was a response to a loss in confidence in traditional banking. Secondly as cryptocurrency increasingly enters the main stream, this poses a significant challenge to the nation state.

For those who like me are still new to the concept of cryptocurrency, below is a brief definition:

a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank.
“decentralized cryptocurrencies such as bitcoin now provide an outlet for personal wealth that is beyond restriction and confiscation.
In an era where people can buy and sell all over the world from their smart phones, the internet has increased global transactions at a phenomenal rate. Cryptocurrency is the logical next step. Bitcoin has played a similar role in cryptocurrency to that which Napster played in the music industry in the late 1990s. Being the first out the gate Napster got bashed by the establishment. Ultimately however the music industry was never the same again.
Other cryptocurrencies such as Ethereum may well surpass Bitcoin, as I gather builds in a programming language on top of the blockchain, allowing for far greater functionality, and the creation of executable ‘smart contracts.’ If one is looking for the best big investment, the time for Bitcoin has possibly been and gone. But other cryptocurrencies will likely rise in its place.
For libertarians, cryptocurrency is a wonderful development. An encrypted currency the state cannot regulate or track. While currency and banking regulation is not the only significant thing the state does, its certainly one of its major functions.
There has been attempts in the US and elsewhere to regulate cryptocurrency and in particular Bitcoin. The concern being that if all transactions are encrypted and cannot be traced, this technology can be used for illegal activity. While this is true, the same argument can be made for someone taking money out of an ATM machine. But the fundamental problem is regulating a currency that operates outside of the nation state.
The monetary system that we use today replaced barter just over two thousand years ago. Currency as we know it today was developed much later. For example the British pound was first established in the year 760. Cryptocurrency has the potential to be the biggest change to the way we use money in over 1000 years. The impact this could have on the nation state should not be underestimated. How do governments set monetary policy for cryptocurrency? What does the future hold for existing currencies? Will cryptocurrency replace them? Again, I am no expert at all. But its clear that these are huge questions. Its not clear that governments, or global governance organisations are yet seriously facing up to this challenge.
Predicting how things will turn out is always risky. Too many variables are at play, especially when it comes to technological developments. But as disruptive technologies go, cryptocurrency is likely to be one of the biggest in the next decade. If the nation state tries to resist or control this force with 20th century methods, it may come off second best.
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