Wednesday, November 27, 2013

A spoiler for the future - Bitcoin

Bitcoin is a marvel of our time, a weapon which exploits social engineering to astonishing effect.  The delivery mechanism is greed, the payload is a laissez faire economic system for the unwary. I thought rather than go through the details of how it operates or where it impacts (much of which I've mapped and is related to commoditisation of the means of transfer) that I'd just get right to the conclusion of what I think is going to happen.

So be warned, as per the 3D printing, this is a spoiler for the future which I unfortunately expect to play out over the next thirty years (barring some strong intervention e.g. Government) ...

1. Bitcoin will continue to grow and whilst there will be some wobbles, as it pasts a $1,000 per bitcoin a slew of articles will be published on whether this is "the future of currency" and what is its potential for disruption of existing financial markets including currency arbitrage. Early financial instruments around bitcoin will be developing. China will invest in developing exchanges.

2. As bitcoin races towards $10,000 per coin (expect lots of wobbles along the way) many more Governments will start to introduce legislation formally recognising the currency. A number of articles will be written in equal measure on how bitcoin could threaten taxation systems and how bitcoin represents the rise of laissez-faire capitalism. Numerous books will be written on the "democratisation of currency", "the new laissez-faire", "a new form of capitalism" etc. There will be a very faint weakening in treasury bonds and the ability of Governments to raise funding. New practices will start to emerge from wealth hiding, wealth pooling, new fund raising and equalisation of global investment opportunities. Many organisations in the financial and related industry will still dismiss the impact of bitcoin as fairly irrelevant. China will invest in the development of the industry, encourage external use of bitcoins and have introduced legislation regarding internal use of bitcoins (i.e. outside its borders is ok but severe limitation of internal use as a currency). This will include a register of Chinese users with state identifiable UUIDs (bitcoin addresses) and control of the exchange rate of bitcoin to the Renmimbi (a non free floating currency) with severe sanctions for non state approved exchanges.

3. The volume of worldwide transactions will continue to rise exponentially with bitcoin hitting $50,000 per coin. Governments will become slightly concerned about black / grey markets and a perceived potential reduction of income tax receipts as we head towards a cash based system where the cash is untraceable. Whilst bitcoin transactions are public, the use of single addresses per transaction, mixing services, volume and other techniques will mean the effort required to identify connections between addresses and hence trace identity becomes exponentially hard. Concerns over tax receipts, Government debt, a slight weakening of gilts and increased difficulty in raising funds will add pressure for more austerity.  There will be a number of high profile investigations on bitcoin exchanges and articles will appear with provocative headlines such as "benefit scrounger is a millionaire bitcoin hoarder". Some attempts will be made to control circulation of bitcoins which will be countered through well funded lobbyist groups including large banks that have adapted to this new model. A journalist will also write an expose of "How many bitcoins does your MP have?'. The currency itself will start to appear in wider circulation with articles on "How to buy your car with bitcoins?".  New roles and services will start to emerge e.g. a wealth detective, used to hunt down sources of wealth. The battle to hide and find wealth will heat up and new start-up investment funds with new banking platforms will emerge. China will grow as a centre for development of bitcoin and related instruments. A significant fraction of Chinese external investment will be encouraged and conducted in bitcoins and there will be several high profile cases of severe sanctions for unofficial use of exchanges. In China, through a combination of the great firewall, official UUIDs, sanctions and official exchanges it will become difficult to use bitcoins internally to trade through non official routes.

4. As bitcoin reaches $250,000 per coin, other 'old world' currencies (with the exception of the Renmimbi) will show the first signs of weakening. Many articles will be written on "How I lost a bitcoin fortune" to "The bitcoin billionaires". Financial instruments (currency swaps, derivatives etc) will be well established with bitcoins and along with a growing OTC market there will be a growing market of publicly traded instruments. Most pension funds will be investing in bitcoins and the currency will now be so invasive into our systems, driven by greed, that it becomes too big too fail and impossible to stop. Most governments will have realised they face a future threat of reduced taxation as the public black market slowly starts to becomes unmanageable and the laissez faire economy looms. Articles will be written on "You can't arrest everyone?" exploring how widespread untaxed transactions have become. The effort required to now trace identity through public transactions will have become extraordinary due to highly automated privacy features taking advantage of mixing services. To add to this, along with mounting debt there will be significant weakening in the gilts market as market starts to price in the future effects of bitcoins. New solutions for taxation will appear with books published on topics from "No representation without taxation - managing a voluntary taxation system" to "Reducing the State" to "A Return to Land Tax?". Numerous currency based industries (e.g. exchanges, investment funds) that have not adapted to this world will be facing the early signs of oncoming disruption. Whilst institutions will describe 'shock' at the impact of bitcoin and some will exhibit signs of denial, there will be a rapid movement of organisations into the space. Some journalist will write an article "Is the end of the Dollar / Euro in sight?" whilst another will write "Is this the end for Government as we know it?"

5. As bitcoin surpasses $1M per coin (NB not in 'todays' money but allowing for decline in $ value), most currencies will show weakening. Many governments will start to introduce alternative taxation mechanisms as the ability to determine income and / or wealth rapidly diminishes. Despite various moral authorities preaching on the subject, the use of bitcoins in an effective black market for everyday goods will become a social norm.  Traders who operate with old style cash, declaring earnings and paying taxation will find themselves at a commercial disadvantage. Economists will promote pragmatism and acceptance of the laissez faire economy.  China will continue to heavily promote and invest in bitcoins, with most external trade conducted in such. Internal to the economy, the Renmimbi will dominate and have gained considerable value over other currencies. However, in other Governments conflict will result particularly with the welfare state since it will become almost impossible to determine individuals actual wealth. Concepts such as progressive taxation and means tested welfare will be unenforceable in practice. Alternative mechanisms will be proposed such as "everyone gets a basic salary" from Government, however with tax receipts in decline, reducing ability to raise funds, inability to measure an individuals wealth then this salary will be low.  Endless articles in the unforgiving press will talk of "welfare state funding for bitcoin millionaires". In desperation, taxation will turn towards mechanisms such as Land Tax forcing the poorer to sell property. However, the shortfall will be such that new measures of austerity and reduction of the state are needed and further taxation systems such as "Citizenship tax" become considered. With the dismantling of the state system and mechanisms of redistribution then extreme centralisation of wealth will occur as the ROCE (return on capital expended) increases with C.

6. As bitcoins close on $5M per coin, most currencies will be in severe decline. Government's will be in significant free fall regarding finances. Austerity measures will have taken the route of unprecedented and radical decimation of the state - everything from state provided healthcare to coastguards to income support to education will be practically gone replaced with numerous forms of bitcoin based insurance. If you can't afford it then you won't be able to gain access to it. There will be no state help as the state can neither fund universal care nor determine whether you deserve support. Severe forms of ghettoisation will appear. The argument will be provided that as we live and compete in a global economy then we have little choice. Articles will be written on "How Laissez faire will grow new industry", "The great economic experiment" and "The growth of user choice" but in reality the American dream (sic nightmare) will have become a nightmare for most. Social mobility will be at a historic all time low, the cross generational poverty trap will become an accepted norm and a harder and less forgiving society will emerge with little or no welfare state.  Taxation will be reduced to "property" and "citizenship" i.e. no representation without taxation (NB, as soon as you introduce this including the extreme $1 tax for 1 vote then a few court cases later and companies will have more voting rights than most ordinary people).  Social cohesion will be weak with often draconian imposition by the "funded" state on individuals seen as non citizens. The social contract will have been re-written, the rubicon crossed and many Wat Tyler's will have emerged.  A new global super class of the exceptionally wealthy will emerge.  Governments will be powerless to act as bitcoins will be embedded in every aspect of trade.  With severe reduction of the state, technological innovation in those economies will implode over the next economic cycle (k-wave) exacerbating an already vicious cycle. The key exception to this will be China with its tight control of the Renmimbi and limitation of bitcoins for external trade. China by this point will be the capital and innovation superpower with extensive and virtually untraceable investments in all countries, a mixed economy model and high levels of social mobility, social cohesion and stability.

7. Some monetarist economist somewhere will go back and read Adam's Smiths work on the importance of taxation, redistribution and government. Some member of the Chicago "nut house" of economic blah blah will still claim it's a success and the solution is more "laissez faire".

Of course, the future is uncertain. Let's hope that none of this comes to pass.

As you can guess, I'm not a fan of bitcoin. If left unchecked then I find it has the potential to undermine the importance of Government which is actually not good for competition and not good for the market. I hope none of the above happens and would rather see bitcoin disappear in a puff of history. However, don't confuse my disdain for bitcoin with opposition to the technology behind it. I view the blockchain as having huge and positive potential in many industries. I'm a fan of the blockchain, I just can't stand bitcoin.