“[I]t’s not that [cryptocurrencies] didn’t aspire to be a payment mechanism; it’s that they’ve completely failed to become one except for people who desire anonymity of course, for whatever reason.”
So testified Federal Reserve chair Jerome Powell earlier this month. With some in Congress and the Biden Administration itching to regulate crypto, pointing out supposed operational flaws has become the rage. In one recent hearing senators called it a “phony populist” movement run by “shadowy super coders.” Politicians revel in catchy soundbites, but it’s worth examining if the reserved chair of the Federal Reserve is right. Has Bitcoin/crypto failed as a payment mechanism or more broadly as “money”?
Over a decade has passed since Satoshi Nakamoto unveiled Bitcoin amid the Great Recession’s bonanza of bailouts and insider deals. Since then, crypto has exploded, with enthusiasts around the world developing, writing, contributing to the phenomenon. A previously unimagined decentralized future is taking shape where individuals control their online lives and are compensated for their time, attention, and data on their own terms. If the government doesn’t stifle it, an amazing new web is on the horizon.
But Powell is correct that Nakamoto designed Bitcoin as money. He stated so in his introductory email: “I’ve been working on a new electronic cash system that’s fully peer-to-peer, with no trusted third party.” And despite volatility, Bitcoin has achieved “electronic cash” status.
Throughout history, money has been a social construct. It has three characteristics: unit of account, store of value, and medium of exchange. Bitcoin has met all three criteria often despite fierce government resistance. And while crypto-skeptics like former Bush administration official Robert Manning argue that crypto has no utility outside illicit activity, a closer look reveals the folly of that assertion.
A year after Bitcoin went live, Florida resident Laszlo Hanyecz initiated Bitcoin’s first commercial transaction when he bargained 10,000 Bitcoin for two pizzas. Since then, Nakamoto’s electronic cash has exploded as a store of value and medium of exchange.
The obvious cases are via dissidents fighting authoritarian regimes. Name a dictatorship and you will find oppressed people using Bitcoin as a workaround for closed or failed financial regimes. Notable examples include Cuba, Venezuela, China, Russia, Iran, and Belarus. Peer-to-Peer marketplaces like Paxos and Local Bitcoins have aided this transition by allowing conversion to local currencies and smoothing cross-border payments.
Podcaster Nathaniel Whittemore noted this trend last spring in the context of Bitcoin Google searches rising 400 percent in the face of Turkey’s lira crashing:
One of the remarkable things about this moment isn’t that digital assets are going to save everyone from the follies of local currency regimes. But for the first time ever in the entire span of human history there is a convenient easy permissionless off ramp from those regimes for those people that have the technical know how to do it. The number of people who have that know how is an ever-expanding group. And that means that Bitcoin and digital assets add an X factor to every single currency crisis from here on out.
What about volatility? It turns out that Bitcoin is more stable than many of the world’s currencies, including those of economic powerhouses China and India. According to Crypto Briefing, “The Emerging Market Bond Index (EMBI), issued by financial institutions, tracks the performance for 25-40 countries considered emerging markets. The one-year volatility of EMBI is 31.8%, while it is 12.4% for Bitcoin.”
Other cryptocurrencies tend to lag but correlate with Bitcoin fluctuations. Thus, any number of alt-coins from fiat-or-commodity-tracked stablecoins to Bitcoin competitors like Ether will qualify as money as awareness and adoption increase.
And El Salvador recently declared Bitcoin legal tender, completing the money trifecta. Hopefully this will spark a monetary revolution in Latin America. Africa too is becoming a Bitcoin hotspot, with Nigeria leading the way.
Stateside, some of the biggest corporations accept Bitcoin, including Microsoft, AT&T, KFC, and the Miami Dolphins. Online behemoth Amazon is rumored to be in the process of accepting Bitcoin, although it has officially denied it, while searching for a blockchain guru. Finally, one Bitcoin ATM startup crossed $50 million in revenue last year.
Bitcoin became money with striking speed. Governments can’t keep up with human ingenuity and the desire for people to be free and to prosper. Hungry and oppressed people aren’t interested in millionaire-senator soundbites. They just know what works. And the global desire for Bitcoin and other cryptocurrencies is undeniable.