Politics not fintech will determine a Greek parallel currency’s success

Earlier this week we gave fintech people a brief guide to the Greek crisis in a bid to explain why payments technology is unlikely to be part of any solution there.

On bitcoin specifically: why on earth would Greece want to replace the euro, a currency it already thinks too restrictive, with another which would be even more constraining and give Greeks even less control over monetary affairs!?

Alas, this insight seems lost on influential bitcoiners such as Nick Szabo, popularly assumed to be one of the crew behind the Satoshi Nakamoto pseudonym. Thankfully, Felix Salmon at Fusion has already done much of the heavy lifting on why Szabo’s currency plan for Greece is basically nuts and misses the politicised nature of developments — not to mention that the Greek people quite enjoy their democratic right to meddle with the currency.

We guess Szabo never read Yanis Varoufakis’s blog post from 2013 on the dangerous fantasy of ‘apolitical’ money. The core point: there is no such thing as neutral money and pretending you can control money’s supply with artificial scarcity is plainly stupid. (For ironic developments in Bitcoin just look at the explosion of bitcoin derivatives, bitcoin margin trading a.k.a. fractional reserve systems, middle-men running off with funds that were pooled in their name and, our particular favourite, the phenomenon of off-blockchain accounting.)

Here’s a nice extract from Varoufakis, in any case:

Since the second industrial revolution made possible the emergence of large, networked oligopolistic companies (the Edisons and Fords of the 1900s, and the Googles or Apples of today), capitalism became dependent on large credit spurts for the purposes of financing these capital corporations’ needs. Such credit spurts required large boosts in the money supply, both in order to finance the creation of new capital goods and also to support the new consumption patterns that were necessary to maintain the economy’s new productive capacity. Even when capitalist economies operated under the Gold Standard, banks found ways of creating money by lending increasing quantities against the existing, stable, stock of gold.

The 1920s thus demonstrates the impossibility of an apolitical money supply. Even though the monetary authorities were insisting on a stable correspondence between the quantity of paper money and gold, the financial sector was boosting the money supply inexorably. Should the authorities stop them from so doing? If they had, the Edisons and the Fords would have never flourished, and capitalism would have failed to produce all the goodies that it did; indeed, it would have stagnated and spawned social tensions that would put its institutions under a cloud well before 1929. So, the authorities stood by, allowing the bubbles of the 1920s to inflate, leading to 1929 and to the disaster of the Great Depression.

To the extent that bitcoin attempts to emulate the Gold Standard, if a large portion of economic activity is denominated in bitcoin, the dilemmas of the 1920s will return to plague the bitcoin economy. Finance will either have to find ways of introducing bitcoin denominated securities, 1920s-style, that will cause asset bubbles to form or the bitcoin political economy will nosedive into a deflationary spiral that either causes untold hardship amongst its users or leads them, as is more likely, to abandon bitcoin altogether.

But the key point really is:

The reason that money is and can only be political is that the only way of steering a course between the Scylla and Charybdis of dangerous ponzi growth and stagnation is to exercise a degree of rational, collective control over the supply of money.

Politics, he suggests, is part of the solution. It’s certainly not the problem. Varoufakis understands this. George R.R. Martin understands this. And so does Greece.

Which brings us to some disappointment in Salmon’s secondary point, which goes:

Still, bitcoin’s default stance of anarcho-libertarianism is not the only possible use to which blockchain technology can be put. For a much more constructive idea, you need look no further than a proposal put forward last year by none other than Yanis Varoufakis, the man who would become Syriza’s first finance minister.

Salmon goes on to recount the mechanics of Varoufakis’ proposed FTcoin idea from back in February 2014, concluding that a blockchain-based solution might in fact be good for Greece.

And so we have to assign Salmon to the ever expanding camp of people who love to hate bitcoin but happily endorse blockchain for its brilliant “technology” — as if the two can be separated without undermining the “apoliticised” illusion of either system.

As Varoufakis spelled out, there is no such thing as a neutral non-politicised money. The idea blockchain can make a difference on an apolitical basis if applied to a new scrip issued by Greece entirely misses the point of his piece, we think.

When Varoufakis deployed the FTCoin concept — which stands for “future tax” — we’d like to think he was exercising didacticism for the benefit of the fintech misguided who think money stands independent of politics, society or state.

We saw it as parable for the point that FTCoin is fiat money.

All that Varoufakis’ FTCoin solution would do, after all, is make something implicitly understood by economists, sociologists and anthropologists explicit and obvious: a currency’s value is intimately connected to the state’s ability to tax and spend responsibly.

Also, and more important, value is connected to the state issuer’s ability to reliably extract taxes and/or tribute from its citizenry and to spend that capital sensibly on services private agents just can’t be bothered to fund but which are necessary for society to get richer and more civilised (“what did the Romans ever do for us?” stuff like infrastructure, schools, waste, pensions, transport, police…).

Greece may indeed be forced to deploy a parallel currency. But, if and when this happens, the parallel scrip will remain a highly politicised form of money whose true value will be linked to the government’s democratically-approved authority to extract taxes and spend funds on the public’s behalf. Whether that coupon comes as FTCoin or drachma makes little to no difference.

The issue isn’t whether the scrip will be “blockchain-based”, but if authority handed to the government by its people will be sufficient to raise the necessary revenues needed to provide the sort of public services Greeks expect from their government.

The blockchain, to the contrary, has been purposefully devised to undermine central authority. Worse, what little authority it has is derived from continuous algorithmic plebiscites disassociated from the opinions of real conscious agents (people). Nor, for that matter, does it allow for any sampling of sentiment regarding tax and spend policy as a whole.

Indeed, as we’ve commented many times before, the “bitcoin is bad, but blockchain is good” view overlooks two fundamental flaws in the blockchain system . First, blockchain only captures transactions on an “opt in” basis, thus can’t control for obligations or value transactions made “off blockchain” at all.

Second, blockchain has no authority to enforce the actual transfer of true real economic value against its coupons — whatever they may be — on the ledger. At best blockchain has the capacity to register that someone is owed something, but does little else. What it certainly can’t do is prove a delivery took place or that it happened according to the correct conditions, because that would take qualitative judgment by a conscious agent.

Going back to authority, there are only two types of institutions that can enforce tax collection on a scale necessary to underpin a high order currency. The first is the state — whose authority is legitimised (in a democratic state) by the will of the people and enforced by the power of its police and military services. The second is the underworld — whose authority is illegitimate and enforced only by the power of lawless thugs, extortionists and organised criminals by violence and intimidation.

One could even say the former emerged by way of a social conspiracy of doves specifically to protect the weak and defenceless from the latter.

The third type of institution, whose liabilities are intrinsically linked in value to efficiently extracting rent from the population and redeploying it for constructive purposes, of course, are banks.

But unlike the state and the criminal network, in this day and age banks lack authority or power to shoot or jail those who don’t pay up. Consequently, a bank’s capacity to extract rents is restricted to methods deemed reasonable by the highest authority, the state, a.k.a public consensus. If and when legal methods fail to extract rents due, further enforcement can only be legitimatised by legal process.

If a bank’s claim fails by way of legal process, its last remaining mode of enforcement comes through the threat of naming, shaming or “black listing” the defaulter. (And yes, sometimes that threat precedes the legal process).

But there are limits, laws which wipe clean credit records after so many years, for instance. Banks, essentially, must bow to higher authority and are closely regulated and supervised precisely to ensure public trust is not abused and the public interest is defended.

Back to FTCoin

None of which is to say Varoufakis’ FTCoin isn’t a good idea. It is a good idea. It’s based on the logical theory of a currency’s value being linked to tax (rent-extraction) and spending.

But, let’s not confuse matters by saying things like a blockchain-based system can help Greece’s deployment of a parallel scrip when really the success or failure of any new currency will be determined by the authority that stands behind it.

Even Ross Ulbricht, criminal mastermind of the anarcho-libertarian marketplace SilkRoad, eventually realised markets don’t work without a central authority to decide whether rules of the marketplace have been broken or not. What’s more, if the state doesn’t recognise your authority to rule on such judgments, you must carve out a vigilante-style reputation as enforcer directly — most likely through criminal example.

So what can blockchain be used for in Greece?

At best, we’d say, the Greek authority could use the blockchain to publicly broadcast information about missing tax receipts. The question is, would this be helpful or even need a hugely expensive blockchain system to be deployed? We don’t think so.

For one, information about missing tax receipts is pretty useless unless an authority stands ready to chase those missing sums. Second, it’s not like the government doesn’t already know who the biggest tax evaders are. Third, Blockchain’s pseudonymous nature actually hinders rather than facilitates that process, which gets to the fourth problem: in situations where the government regularly fails to collect taxes, the only method that has historically been known to get wealthy tax dodgers to pay up is, of course, public shaming by way of the media.

And again here, the blockchain — if deployed in accordance to the great “satoshi protocol” — obfuscates that process by hiding identities but also takes away the power of monetary intervention from the government.

Now, if what we’re really talking about a “blockchain-based” system that wouldn’t hide identities, be engineered to help government collect information about tax receipts and economic activity and retain monetary control in government hands, well, we’re not really talking about a blockchain system are we? We’re talking about a cashless society, which is an entirely different thing which requires no blockchain-system at all. Furthermore, we’re pretty sure the dark economy would adapt quickly by forging their own parallel bearer scrip in no time.

The only advantage of rolling out a politicised cashless society (i.e. controlled by a central authority) by way of a “blockchain-system” is that it arguably passes the cost of defending government e-money from cyber attack to the bank network by having them host the data within their systems. Nice but hardly revolutionary.

The core point: “Blockchain-based” is irrelevant in the entire economic debate surrounding a parallel unit. If anything it’s just code for: “let’s role out an information intensified cashless society, which also happens to be highly secure”. Though, as we have already stressed, the world’s most tax efficient millionaires don’t tend to operate on a cash-only basis. They’re able to dodge tax because of regulatory loopholes, corruption and/or high-level bespoke agreements with government. Going cashless doesn’t really solve that.

Related links:
A summary of the Greek crisis for the benefit of fintech people – FT Alphaville
Lord, won’t you buy me a core €-denominated Mercedes Benz – FT Alphaville
Goldman’s Trojan currency swap – FT Alphaville

Copyright The Financial Times Limited 2019. All rights reserved. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web.

Read next:

Read next:

Lookout, there’s a dollar crunch!

FT Alpha Tweets