Cryptocurrencies May Be Too Libertarian for Their Own Good
On February 18, 1522, a second-hand clothing retailer named Geronimo Bambarara invented a new type of clearance in the crowded Rialto neighborhood of Venice.
Instead of selling his goods directly for money, he decided to enter customers into a raffle. In exchange for a 1 Lira ticket, you can win more than 1,000 times this amount in cash or take home carpets, fabrics made of gold, fabric, amber or animals. The promotion was a success. Within a week, the numbers that had their chances resembled the crowds at the religious feast of Ascension, according to a contemporary diary writer: "Currently nothing is being done in this Rialto neighborhood except putting money in the lottery."
It didn't last. Just 10 days after the start of the game, frightened Venetian authorities banned private lotteries. Her next step was predictable as well. After the city eliminated a lucrative private company, it turned it into a public one and started issuing tickets to increase government revenue.
This is a lesson in how cryptocurrencies could perform in the years to come as wider usage increases the potential for negative public consequences.
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Bitcoin falls and rises by double-digit amounts within a few hours and has largely given up the pretext of being able to challenge the greenback as a currency. Even the hyperinflationary Venezuelan bolivar and the Zimbabwean dollar show lower price volatility. However, as evidenced by the $ 1.7 trillion invested in digital currencies, crypto remains immensely popular as a speculative investment, just like Bambarara lottery tickets five centuries earlier.
If Bitcoin and its ilk are to survive an era where their drawbacks are becoming increasingly apparent - from carbon emissions to ransomware attacks - they must find a way to betray their libertarian roots and do their own deals with the state.
Gambling and the financial state are closely linked. It is no coincidence that the first modern lotteries arose in Venice, the city that issued the first government bonds. Much of the Venetian economy revolved around speculation about the fate of shipping companies. A central plot point of Shakespeare's play "The Merchant of Venice" occurs when one of the title dealer 's ships "crashed into the narrow seas" and caused him to default on a loan.
The gambling craze spread across Europe as incomes rose and was often frowned upon by religious authorities but tolerated or co-opted by governments. When the world's first casino opened at the Ridotto in Venice in 1638, it was approved by the ruling Grand Council to regulate and oversee the numerous private card clubs that had sprung up. So many fortunes have been won and lost at the gaming tables that the inventor of the basset, the game of poker played in the Ridotto, is said to have been banished to Corsica as a punishment.
None of this put players off. The Italian artist Caravaggio, the Flemish Theodoor Rombouts and the French Georges de la Tour all painted famous scenes of the card game and often emphasized the amount of cheating. There was clearly a good market for such scenes as both art and gambling were popular pastimes for the wealthy in 17th-century Europe. This situation also has parallels to the current enthusiasm for NFT art.
The same pattern played out in Northern Europe. Before it was financed by issuing government bonds, British government debts were paid off through lotteries and tontines at the end of the 17th century. An early attempt to consolidate these loans and pay them off with proceeds from the slave trade resulted in the formation of the South Sea Company, which led to one of the first major speculative financial bubbles.
The lesson from all of this is that the modern state can be remarkably tolerant of people who make and lose wealth as long as it gets some benefit from it. This can take the form of a cut in revenue; a degree of control over otherwise chaotic risk-taking; or even the capital allocation functions of the financial markets. However, where these benefits are absent, governments grow impatient with the turmoil of unrestrained speculation and go tough.
What is unique about cryptocurrencies is the way their resistance to the combination of traditional political and financial power is written into their code. Bitcoin is "very attractive to the libertarian point of view," wrote its pseudonymous creator Satoshi Nakamoto in a 2008 post. Anonymous and separate from the state-sanctioned banking system, crypto received one of its early boosts as an undetectable way to buy illegal drugs on the internet. To date, its most useful function, aside from a simple gamble on price, is the currency for illegal activities.
This allergy to government control fundamentally sets it apart from the many other speculative activities that have been tolerated over the centuries, pouring wealth on a lucky few and bankrupt others. For digital libertarians, this has long seemed to be a key feature of the technology. However, as the social and economic cost of tolerating crypto increases, it can look more and more like a mistake.
The moment governments decide that the harassment and destabilization of digital currencies is too great, they will forbid financial institutions from converting them into fiat currencies as vigorously as the US sanctions its geopolitical enemies. That possibility, once a long way off, seems increasingly likely in an era when America's $ 5 million in crypto fuel supplies can be held hostage.
By establishing a relatively efficient payment system for illegal activity, digital currencies have drastically reduced the cost of crime. This is not the kind of challenge the modern state can take lying down. If crypto fails to find a way to make its peace with the governments it was set up to bypass, it will eventually be crushed.
This column does not necessarily represent the views of the editors or Bloomberg LP or their owners.
To contact the editor responsible for this story:
Rachel Rosenthal at rrosenthal21@bloomberg.net
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