On January 9th 2019, the world’s first fully digital decentralised cash system, Bitcoin, celebrated its tenth birthday. On the same day the European Banking Authority (EBA) released its annual report on the new breed of financial instrument which Bitcoin has given rise to; the so-called crypto-asset.
For ten long years, the established centralised authorities of legacy finance and neo-liberal governance have come under fire from all sides and opposition has come in numerous disparate forms; European populism, the Occupy movement, Brexit and, of course, Bitcoin itself.
Strange times indeed are these in which we live and that’s without mentioning Donald Trump!
In January 2009, a global financial crisis was in full swing. Banks had bet big on subprime mortgages and lost. Tranches of toxic debt had been packaged in the form of CDOs (collateralised debt obligations), given triple-A ratings and sold with wild-eyed zeal. Between 2004 and 2007 alone, 1.4 trillion dollars worth of steaming CDO was dumped onto the open market.
Credit default swaps (CDSs) were issued to insulate the banks from their own lunacy and when their main insurer, AIG, ran out of money, it was the taxpayer’s turn to foot the bill. The bailout ran into the trillions (it’s thought to be at least 16 and counting).
All the while, in some hidden corner of cyberspace, a bloodless revolution was taking place. It started with a one megabyte bundle of information called a block, forming the first link in what would become a global blockchain. On this genesis block its elusive creator, Satoshi Nakamoto, had paraphrased a newspaper headline to commemorate the occasion. It read;
The Times 03/Jan/09 Chancellor on brink of second bailout for banks.
With these words, the world’s first cryptocurrency was born.
Published in October 2008, Bitcoin’s whitepaper lays bare with technical clarity Nakamoto’s vision;
“A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.”
Bitcoin establishes a trustless exchange of value at the expense of third-party systems; there are no banks, no accounts and no borders. No personal information is sought nor required. There’s nothing for Facebook to harvest, GCHQ to scrutinise, Equifax to lose and nothing for Goldman Sachs to chop up re-package and sell on. Or so we thought…
At its inception Bitcoin, stood as a rejection of centralised authority, the middleman had had his turn and he’d screwed the pooch. However, ten years on and the leaderless network and its imitators are finding themselves being welcomed into the fold whether they like it or not. Formal regulation of crypto assets in Europe has been limited and local but probably won’t stay that way for long. The EBA’s report confirms as much;
“some crypto-assets/activities do not appear to fall within the scope of current EU financial services law and are highly risky, as identified in this report, risks arise with regard to consumer protection, operational resilience, and market integrity.
Moreover, the proliferation of legislative and supervisory actions at the national level, driven by consumer protection considerations, gives rise to risks for the level playing field.
For these reasons, in this report the EBA advises the European Commission to carry out a cost/benefit analysis to assess, on a holistic basis, whether EU-level action is appropriate and feasible at this stage to address the issues identified.”
The middleman hasn’t faded into irrelevance either, in fact, he’s diversified!
Cryptocurrency trading is a 120 billion dollar market with the middleman taking a commission on every sale. You can now buy Bitcoin futures, stablecoins and asset-backed cryptocurrencies. Bitcoin exchange traded funds (ETFs) are on their way too.
Crypto-assets, specifically the class referred to as investment tokens by the EBA and known as security tokens elsewhere, are set to feature heavily in the tokenisation of 2019. Distributed ledger technology – upon which Bitcoin is built – allows for the digitisation and fractionalisation of all manner of assets which, in turn, opens the door for secondary markets which claim to, “unlock liquidity and provide broader market access.”
If you think this is all starting to sound a little familiar, you’re in good company. Warren Buffett once called CDO-squared derivatives, “weapons of mass destruction” and has since poured similar scorn on Bitcoin by calling it, “rat poison squared.” The bitter irony of such a close comparison goes some way to illustrate how far the use of Bitcoin has diverged from its original remit. The cryptocurrency is now perhaps better known as a speculative store of value than as a revolutionary payment system.
With the hopeless fudging of Brexit, the predictably woeful reign of Donald Trump and the bastardisation of Bitcoin into a regulated financial instrument, the last ten years may be better remembered for the reassertion of the centre rather than any attempts to undermine it.