The Production of Freedom: Value Production in the US- dominated Financial System, and Possible Alternatives

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In Articles, Blockchain, Emerging technology, Philosophy Posted June 19, 2012

This was finished on June 19, 2012 and represents some portion of my thinking at that point. I get to the part about Bitcoin about a quarter of the way through. I talk about social currencies in the last quarter of the paper, an idea which eventually resulted in the creation of JeremyCoin.

Introduction and outline of this paper:

After the financial crisis of 2008, there must be a reevaluation of the role of the financial and monetary system in our economy. Before the crisis, there was a prestige attached to Wall Street, and a concerted effort by the executive branch of the US government to prevent constriction of their booming expansion through regulation. After 2008, there is no potential for defense. Even former Federal Reserve Chairman Alan Greenspan, the political archangel of the Chicago school of economics, has testified in congress that he had no idea what would ensue from deregulatory policy in the financial market[1]. However, this dramatic revelation and admission of material and theoretical instability has not led to a dramatic restructuring of the financial and monetary system, it has instead led to a desperate scrambling to maintain as much as possible of the current system. Immediately after the fall of Lehman Brothers, the danger of economic collapse was so immanent that the only recourse for the United States government was to prop up existing financial institutions[2]. However, there has been no proceeding movement to develop an alternative to the structure we had before the crisis. This insistence on material and symbolic support for what is now a demonstrably unstable and inequitable system has continued into the present day, with the use of a second round of quantitative easing to inject electronically created money into banks[3].   Given that there is little being done to truly restructure the financial and monetary system, what are our options? What are our futures? What derivative of our future will ensure our security?

The United States government’s reluctance to consider fundamental change has not stopped private individuals from pursuing innovative new techniques for distributing and exchanging value. One such alternative is Bitcoin, an online peer- to- peer financial instrument that has no central issuer, and is not backed by any government, company, or individual. Some present Bitcoin as the answer to our unstable and inequitable financial system, particularly libertarians, anarchists, and the political left[4]. In this paper, we explore Bitcoin conceptually, ultimately finding that although Bitcoin does not provide us with an equitable, stable alternative to our current financial system, its unique peer- to- peer structure provides the conceptual tools to imagine a further alternative- a social- capital based system that distributes freedom more reliably and equally, and takes full advantage of our capacity as freedom- generating entities[5].

As a path of investigation, this paper begins with a close study of value, and what it means that money or other financial instruments have value, theoretically connecting value to freedom and force. Building on this allows us to determine that the tight regulatory controls that would be necessary to properly adjust our current financial sector are unlikely to occur, making a search for an alternative structure imperative to our continued production of and access to freedom.

We then apply these definitions to Bitcoin. Bitcoin presents new theoretical opportunities, however, its concept in unfamiliar. For readers new to Bitcoin, a fairly detailed explanation of its structure is outlined, which provides a foundation for analysis through the same concepts used in our study of the current financial system- force, value and freedom. This reveals the possibilities of Bitcoin in theory; in practice there have been significant issues with its implementation, including security failures, high volatility in value, and a demonstrated tendency for self- institutionalization. An examination of the brief history of Bitcoin and its surrounding economy reveals where its initial concept holds and where it does not. According to this analysis, Bitcoin was the revolutionary form of freedom production and exchange that its supporters claim it to be, if only for a very short time after its inception. This brief moment provides us with a clue for moving forward, in the search for new forms of exchange, new ways for producing and distributing value, force, and freedom. By applying Pierre Bordieu’s concept of social capital[6], Bitcoin’s peer- to- peer concept is teased out of the electronic realm and into the material. This reveals an alternative that really requires nothing more than a shift in emphasis, from institutionally produced and mediated freedom to freedom produced through networks of trust and accountability between individuals, aided by recent developments in communication and transportation technology.

What is value?

With a barter system, value is renegotiated at every instance according to the considerations of the particular individuals exchanging goods and services. It requires a coincidence of wants- in order for an exchange to occur, the individuals must desire the particular good or service of the other simultaneously. Currency[7] allows exchange to occur more easily, as the need for this coincidence is removed. This is done by abstracting value into an object[8], which is representative of value; the object need not necessarily have any use otherwise. We cannot continue on our path to an alternative to our current system of exchange, without understanding what is meant by “value.”   Too often, currency is defined as a unit of value, and no further questioning is brought to the issue. However, if we are to properly examine the function of the financial and monetary systems in the United States economy, we must look at the practical implications of the creation of value, and what it means to say that currency has value. To examine what currency and value is, we look to what currency does. With currency, resources can be acquired that otherwise could not be, and individuals within a system can be convinced to take actions concurrent with the interests of the currency holder through their desire to acquire resources and influence the actions of others. This influence is bounded by the amount of currency proffered relative to the opportunity cost of an individual suppressing their own desire during the completion of the act required to acquire the currency. Because of this relative influence, more currency allows more freedom to the holder within the given system in which the currency is accepted as valuable. Conversely, money is the ability to oppress others that accept it as valuable, or those who are trapped in a system that accepts currency as the only reliable form of value, and have been allocated relatively little[9]. If currency allows for freedom, then we can discover currency’s nature through a definition of freedom. We define freedom as the ability to affect the movement of objects and individuals to fit one’s desire or will. This, granted, does not account for the potential for internal freedom that may exist within the individual beyond their physical surroundings. However, we will limit our discussion to external freedoms as this is the realm of money, currency, and in fact, economics in general.

We can say that to affect objects or people to fit one’s will, independent of their initial desires or momentum, a physical force, a social force or a cultural force is required[10][11]. Physical force is a change in momentum. Social force is the threat of enforcement internalized by an individual so that they become self- policing, rendering actual application of force unnecessary[12]. There is also cultural force, which is knowledge which allows for the correct application of physical and social forces to achieve a desired recombination of objects and individuals. Both social force and cultural force are rooted in, and convertible to physical force. With social force, this manifests in physical force exerted on oneself, or force exerted on a person by non- institutionalized relationships[13]. Cultural force is not often directly convertible to physical force[14], but it is easily convertible to social force, and can be related to physical force through this medium. To identify the source of currency’s value, we observed that currency allows for freedom within the system in which it holds value. As we have defined freedom, as “the ability to affect the movement of objects and individuals to fit one’s desire or will,” and as we have elaborated that the mechanisms by which these occur are convertible to physical force, we define freedom as the ability to exercise force. Thus we transitively define value as the ability to exercise physical force; we define currency as a symbol representing physical force, and a unit of currency as a unit of force.

Understanding the relationship of value to force allows us to better understand the interaction that occurs between the US government and its financial industry, which privately controls the US financial system. The United States government claims a monopoly on the use of physical force within its borders[15]. This is usually what distinguishes a government from all other organizations within a nation, is the control of police and military forces[16]. The monopoly on force is not absolute in practice, but is powerful enough that its primacy is unchallenged. There certainly are political justifications for the state’s monopoly, but at its root, it is tautological- its monopoly on force is based on its ability to enforce that monopoly. The government controls unabstracted physical force, which, in the past allowed it to constrain the production of both physical force and symbolic representations of force by outside entities (by which we mean symbols that carry value such as currencies and securities). The symbolic order abhors the Real, and must always evaporate in the face of it[17]. We see this when a destitute man holds a gun to the head of a wealthy banker. The US government, in practice, has claimed a monopoly on currency within its borders[18]. Despite this, over the past few years preceding and following 2008, we have observed a startling inability, or at least lack of will, in the state’s ability to regulate and constrain the financial sector. This has arisen because, as we will show below, the financial sector is able to create value spontaneously, and has developed extremely efficient tools for doing so. This is done through the creation of extra- monetary (financial) instruments such as stocks, options, and securities, which is why the nation- state’s monopoly on currency[19] has been unable to prevent this. Because financial instruments are convertible to currency, but are not currency necessarily, the financial sector sidesteps government monopoly claims on physical force and currency.  This has led to the current system, in which the nation state no longer defines and produces the delimitations and growth of freedom within the economy. Through the ability to create value spontaneously through financialization, the financial sector has become the primary mechanism through which freedom is produced and distributed within the United States and other areas of the world who participate in the US- led global financial system.

How is value produced through financialization?

The introduction of a security or financialized asset into a system, including currency adds value to that system. The popular belief currently within the economic profession is that money is neutral- that if additional units of currency are added to a system, the value will decrease and the currency will inflate until the total value of the currency is equal to what it was previously in the “long run[20][21]”. This, however, ignores some fundamental implications. The introduction of currency (or any other form of financial asset) into a system creates positive value. To examine this phenomenon, we abstract to a hypothetical economy immediately previous to the introduction of a financialized asset or security, and examine the effect of adding “the first dollar.” Imagine a closed room. There is no trade that occurs beyond this room. In the room we place three people, Person A, Person O and Person G, who each own an apple, orange, and grapefruit, respectively. We then posit a situation in which Person A desires the orange of Person O, but Person O does not desire an apple. This is the classic example of the problems with a pure barter system, is that there must be a coincidence of wants, and if there is none, then no exchange occurs. Realizing the limitations of their current system, Persons A, O, and G decide to ask the United States government, whom all three people have a very deep and lasting trust in, to issue a currency to facilitate their exchange. The US government, in response to their demands, issues a dollar to Person A by fiat, asserting loudly through a loudspeaker in the room that a dollar is equivalent in value to one orange initially, after which the value floats freely against the value of the items in the room. Person A then hands the dollar to Person O, who exchanges it for the orange. Person O later uses the dollar to purchase the grapefruit, which he prefers over apples.

It is this introduction of the “first dollar” that we can use to examine the effect of currency on value in an economy. Prior to the introduction of the dollar, we have a total value in the room of v(total of all goods in room)= v(apple)+v(orange)+v(grapefruit). The v(apple), v(orange), and v(grapefruit) are the amount by which the items would increase the ability of Person A to alter the world according to Person A’s will or desire at the specific moment that the “first dollar” is introduced. Money holds positive value because it is a medium of exchange, however, under monetary neutrality, the total value in the room should remain v(apple)+v(orange)+v(grapefruit) after the introduction of the first dollar. However, this is not the case. We see that the dollar is exchanged for the orange, indicating that v(dollar)= v(orange) in this moment. Thus, the total value in the room after the introduction of currency is in fact v(apple)+2[v(orange)]+v(grapefruit)[22]. Additional dollars introduced into the room after the “first dollar” would add some value less than v(orange), decreasing marginally according to some function of the number of dollars in the room versus the total value of goods[23]. The second dollar would hold some nonzero value for the same reason that the first dollar held a nonzero value, because it increases the ability to exchange objects in the room, however, less so than the first dollar. The value of any dollar is always equal to the value of any other dollar, so the introduction of the second dollar decreases the value of the first dollar by some amount less than the amount at which the sum of the two dollars is less than the value of the first dollar before the introduction of the second dollar.

An alternate viewpoint (one concurrent with the theory of monetary neutrality) would be that before the introduction of the first dollar v(apple)=v(orange)=v(grapefruit)=1/4 but after the introduction of the dollar v(apple)=v(grapefruit)=v(orange)=v(dollar)=1/5 in terms of exchange value. This, however is misleading. Although we can say that v(orange)=v(dollar) in the first exchange, and we can also say that v(grapefruit)≤v(dollar), we cannot say that the exchange values of an apple and orange are equal, evidenced by the necessity for currency in the first place. Because of this, v(apple)=v(grapefruit)=v(orange)=v(dollar)=1/5 does not hold. However, this relation does hold between a unit of currency and other units of currency. Additional dollars introduced into the room after the “first dollar” would add some value less than v(apple) decreasing marginally according to some function of the number of dollars in the room versus the total value of goods[24].

Another requirement of currency or other financial asset in order for it to create value is that the entity issuing the currency agrees to accept it as valuable. If person A agrees to read the thesis of person B, and person B gives person A a voucher worth one thesis review, then it is the agreement by person A to accept this voucher as worth something even to him that creates a surplus obligation, a surplus ability to exercise will. When if there is a person C who agrees to read the thesis of Person A in exchange for the voucher issued by person B, it is the agreement by Persons A and B to continue to accept the voucher in exchange for thesis writing that gives the currency its value. It is when the issuer itself can no longer accept the issued value that the currency collapses. If, in the above example, the voucher happens to be presented to Person B and he rejects its validity, then the currency collapses. The same can be said for a rejection by Person A (in giving the voucher to Person C, Person A also becomes an issuer). In the case of a security, this happens when the issuer of the security to which the value of the security is pegged collapses. It is a government’s agreement to accept its own currency that gives it value. This is true for securities as well as for currency; securities issued by Lehman Brothers became worthless upon its bankruptcy, and credit default swaps issued by AIG would have become worthless had the government not bailed them out.[25][26][27]

How the financial industry produces value through the issuance of securities:

We take these pains to prove that the “first dollar”, and thus subsequent dollars, adds a value to an economy that is nonzero,[28] because of its application to the creation of securities by financial companies. A currency is generally a form of security, under the current legal definition of a security in the United States.[29] We can in fact draw a correlation between the issuance of a currency into the economy above, and the issuance of a security by an investment bank or public corporation seeking to raise funds. The entity in question is creating value from itself. If there is a large IPO occurring, the Federal Reserve does not worry that it will be facing inflation. Why? Because there is actual value in an economy created by the issuance of a security. This is confusing conceptually, however, because there is nothing produced from the issuance of the security, only value, based on faith in the underlying entity or asset. In this way, the issuing entity could be said to be creating freedom, through the manufacture of symbols that can be exchanged for freedom, as defined as access to physical force. What does it mean that freedom is created, and what is the basis of the creation of this freedom? To who is this freedom allocated? A corporate entity seeking to go public is requisitioning the permission for freedom to expand from society. Society grants this permission through demanding their securities,[30] and purchasing them. However, in the same way as the “first dollar”, the securities are not neutral in value to the society. We can examine this in the context of a second price offering. A company has been public for some time, and wants to raise more capital for further expansion.   If we have 100 securities in circulation, worth 100 dollars, and the public company issues 100 more securities, which are purchased from the underwriter at a value of 1 dollar, then even if the price of the securities is cut in half, then we now have 100 dollars (for 200 securities) + 100 dollars (that was traded for the securities by investors), with a creation of value equal to the amount by which the security rises above this price.[31] Through close examination of this example, we see that the production of value symbols (securities) for the purpose of raising capital for a public corporation can add actual value (freedom, force) to a system, to the extent the price of the security rises above the value at which it was issued.

With a derivative such as an option, the creation of value is even more “pure”. We define a creation of pure value as the creation of value without the creation of some good or service that justifies the value. Because it is based on an underlying security that is in turn based on the entity, we again have a “first dollar” situation produced, but essentially from the same entity that issued the security, so that more value is created, ceteris parabus. This can be taken ad infinitum, a derivative of a derivative of a derivative, each successive financialization of the asset adding value through the “first dollar” phenomenon (perhaps to a decreasing degree, perhaps not). Taken to its limit, that is, the limit as the number of successive derivatives on a single underlying entity approaches infinity (the mathematical derivative of a financial derivative), we approach the existence of a derivative based on itself as the underlying asset. Bitcoin is the first example of such an asset. However, the issuance of an unannounced, peer- to- peer financial asset has one distinctive difference from the derivative. Such an asset is a creation of pure value. The value begins at zero, and initially, no dollars need be exchanged for the asset, it is valuable in itself, regardless of its exchange value with dollars. This extreme limit, in which we see a pure creation of value qua value, an object that is valuable because it is valuable, that is created at negligible cost,[32] allows us to more closely examine what is really being produced and subsequently controlled by the financial industry: the creation of value qua value, which here we conflate with force- qua- force, freedom- qua- freedom. Understanding the financial sector’s ability to create value is key to our understanding of how the financial sector has come to supplant the government as the primary producer and distributor of freedom in the United States.

Historically, it has been the role of the government to delimit and control freedom. This occurs through laws, which are enforced with military or police (physical force). Currently, the United States has a democratic government. This allows the people of a nation to, in theory, have input in the constructions and distribution of freedom within the society over which the government presides.[33] However, over the last century we have seen the role of value production shifted from the government to the financial sector. Before the rise of more complex financial assets, the types of financialized asset issued by banks and investors were not sufficient to overwhelm the government- there was too little value created in a bond or simple corporate stock. However, with more complex assets that approach pure value creation, being issued at a rapidly escalating rate, the units of force for which this value is symbolically representative far exceeds the physical force on which the state claims a monopoly[34]. As long as the government accepts the validity of its currency as representative of freedom within its system, therefore force, (and it must, barring complete collapse), it cannot control the financial sector, short of deliberate and widespread nationalization of the sector. Should the government decide to nationalize the financial sector, could not resist because its metaphorical force would evaporate in the face of the real force of the government. However, the likelihood of this occurring is very low.

This privatization of the production of value, and thus freedom, is not immediately disconcerting. In fact, there are considerable benefits to financialization, including the ability to exchange goods without a coincidence of wants[35]. It also allows for more effective forms of borrowing and diversification of risk. And the claim is true- derivatives do in fact diversify risk. During 2006- 2008, a few large institutions were able to diversify their risk across the entire global economy! Also, the current system does very efficiently produce freedom. The issues are equality of distribution and stability. Although there are vast amounts of freedom produced and distributed through financialization, the lion’s share remains within the control of individuals within the financial sector. They keep enough of the freedom produced that they are able to own several houses, travel indiscriminately, and make massive recreational expenditures[36]. There is quite a bit of freedom distributed throughout the economy, however. For instance, the massive quantities of freedom produced in the run up to the 2008 collapse enabled never- before- seen extravagances by those in finance in banking, but it also allowed more people than ever before to live in a house. When their inflated freedoms evaporated, so did our own. We face in this the chilling reality, that our freedoms, however small, are in part, and increasingly, contingent on the financial sectors’ continued production of them. The houses we live in, the schools we attend, the cars we drive- all of these are rooted in value produced and maintained by financial institutions. If we suddenly end this production, the implication to ourselves would be immediate and profound. In the example of 2008, when the production and circulation of freedom halted, the savings for many everyday people also disappeared. There was no action taken on their part to justify this loss; no exchange was made. The only thing removed from the situation when people began to default was the value (freedom) emanating from the creation of AAA- rated, supposedly low risk, mortgage- backed securities. Once the asset collapsed, then the value collapsed also[37].   Another example is the institution of the university. As it is currently constructed, it is predicated on the financial market. The physical force circulating through the university that enables the transmission of freedom to people within its system is deeply rooted in a financialized framework. Taking the example of the University of California, much of the university’s endowment (as is true for many universities) is not held in dollars, it is held in a diversified pool of assets that, ideally, increases in value over time ahead of inflation[38]. A sudden collapse of the financial system would mean the sudden halt of the university. The circulation of force that causes the individuals within the university to continue performing its functions is currently predicated on the financial sector. The same could be said for airlines, most medium and large sized business, even hospitals. A sudden collapse or stark curtailment of the financial sector would not be in our favor- in fact it would be disastrous for us.

Then, why not allow them to continue producing value indiscriminately, if it is also increasing our own? Because without outside interference, the sector will continue to produce freedom until the structure producing it collapses. What increased freedom allows for is increased consumption, or, alternatively, innovation. To understand the drives that cause this desire for unlimited freedom to exist, and its function within a society, we turn to Georges Bataille. He argues that desire for consumption is rooted in our drive toward, and desire for death. We desire death because we desire imminence, or complete fluidity between us and our universe. Death is the purest form of imminence, however we know that if we died, we could not enjoy the experience of death, so we turn to imminent consumption as an outlet. This could mean excessive drinking, eating, or sexual intercourse. Georges Bataille gives an eloquent description of this drive toward and its societal manifestation in his text “The Accursed Share, Volume 2.” Through the lens of the Aztec festival, he illustrates how the drive toward death is manifested in immanent consumption on a society- wide scale. The Aztec festival is so elaborate and expansive that it approaches the brink of consuming the society, but does not tread past the brink. Societal constraints (in this case, specific traditions within the festival) allow for enough energy and resources to be left afterward that the surplus resources can again be built into abundance, which are then consumed again in either festival or war. Note that the festival also serves the purpose of expending the surplus abundance, which allows us to avoid expending the excess energy through war. Without societal constraint, i.e. regulation, the financial sector will produce freedom until the system consumes itself and dies[39]. Another reason to constrain the production of value is because the value created by our current system has proven volatile and unstable. In 1920, 1990, and again in 2008, value and freedom were produced too quickly and in quantities too large to be maintained, and the freedom evaporated unexpectedly. This, practically, manifests as individuals losing access to resources and the ability to influence others to the extent that their ability was predicated on that value. In the face of unconstrained consumption driven by desire for immanence, coupled with intolerable volatility, we must look for alternatives to the current production and distribution of freedom in our society[40].

The first option for increasing stability and equity in the financial system is nationalization of the sector. However, it is unlikely that a redefinition of the financial sector by the government, with careful controls on the creation and rate of production of value- symbols produced by entities within the sector would occur. Such a redefinition would include very strong controls on executive pay, on traders’ ability to take risks, and the rate at which new financial assets may be issued. This could not occur without nationalization, or near- nationalization of the financial sector[41], possibly placing it under the control of and in coordination with the central bank (or, central investment bank). This is congruent with claims by both the government and the private sector that the financial sector is essential to the functioning of the economy. If this is true, then it should not be left purely to a private financial sector. As a metaphorical comparison, we can examine another economic indicator whose control is considered essential to the smooth functioning of the economy- the rate of inflation. Inflationary control would be difficult if not impossible to leave in the hands of the private sector, as individual firms buy and sell bonds according to their personal gain, not to control liquidity in the economy.   This is why we task our central bank to control it. It is difficult to believe that risk diversification (the supposed benefit of complex financial instruments) will be carefully controlled by self- interested private institutions with complex managerial incentive arrangements. Although at face value it sounds equally absurd that the US would consider nationalization, a movement toward nationalization of this sector has, in fact, already begun, with the government purchase of majority shares in Sallie Mae, Freddie Mac, and AIG, as well as government assistance of other large banking institutions through Quantitative Easing[42]. The chances of this movement occurring are very small, though.

It is extremely unlikely that complete nationalization of the financial sector would occur, for several reasons. There is considerable evidence that within the sphere of financial economics, government officials and regulators, private financial executives, and leading academics are closely intertwined personally and financially, and in many cases are the same people. Also, because there is enormous profit to be had for those in the current financial system, it is unlikely that their control would be relinquished willingly, and it also calls into question whether governmental control of the industry would result in dramatic reformation, even if nationalization took place.

If there is small possibility for regulation through the application of pure force from the government, what other options exist? There are increasing freedoms from the financial market, but their distribution is profoundly unequal, and after 2008, there is doubt of its long- term stability. Lately, even the stability of the dollar has been called into question. To where do we flee?

Bitcoin:

Bitcoin began its debut in 2009 with the issue of the first block of 50 Bitcoins. The creator, an anonymous individual who uses the pseudonym Satoshi Nakamoto, named the block “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” Embedded in the code was the following message:

Yes, [we will not find a solution to political problems in cryptography,] but we can win a major battle in the arms race and gain a new territory of freedom for several years.

Governments are good at cutting off the heads of a centrally controlled networks like Napster, but pure P2P networks like Gnutella and Tor seem to be holding their own.

It’s very attractive to the libertarian viewpoint if we can explain it properly. I’m better with code than with words though.[43]

Of the few opportunities available to us, Bitcoin is distinct. Its concept is elegant, but complex. It is worthy of a very close examination of its possibility as alternative because of its uniqueness. A child of the underground, Bitcoin made its quiet debut on a www.mailarchive.com forum titled simply “cryptography.”[44] It quickly became a favorite of the deepnet, the vast expanse of information, nine times larger than the commercial internet, which is home to hackers, geeks, and the very curious. Bitcoin entered the public sphere suddenly, and not in the best light, but since then it has gained serious consideration, if not respect. Bitcoin, as we will find below, does not, in fact, represent an opposition to the current logic of financial capital, but in fact takes this logic to its extreme limit. Examining this case will allow us to determine whether salvation, or rather, subversion can come from within this framework. If there was a financial technology that could significantly alter or subvert the current financial system, then it would be Bitcoin- there is no more extreme case possible.

For readers who are unfamiliar with Bitcoin, we will start with a description of its structure. This will lay the foundation of our analysis, in which we compare the Bitcoin system’s mechanisms for producing and distributing freedom throughout its network to the methods currently in use. Following a conceptual analysis, we will examine Bitcoin’s brief but vibrant history. By comparing this to our conceptual analysis, we can determine where the Bitcoin concept, applied practically, succeeds or fails in producing a more equitable and reliable system of exchange. Although we will find that Bitcoin is far from a complete alternative, it does present some new possibilities, especially in the realm of online exchange. Most importantly, by combining Bitcoin’s concept with the concept of social capital originally developed by Pierre Bordieu, we can present a simple and practical shift in our understanding and production of value, with the possibility of a reliable and equitable production and distribution of freedom.

Bitcoin’s structure:

Bitcoin, although unfamiliar, is not difficult to understand conceptually. As we move through this description, you may find some gaps, particularly regarding Bitcoin’s financial services (exchanges, Forex, etc.) This section will describe mostly the structure of Bitcoin itself; the surrounding services will be discussed after we develop a theory of Bitcoin in situ, so that as we move through a description of its financial services, we carry in our “conceptual briefcase” the tools to understanding their implications[45].

Although Bitcoin is quite complex, it is simple compared to the complications of the central bank- regulated United States dollar.   Ultimately, Bitcoins are merely a string of computer code that is extremely difficult to replicate, and that can be transferred easily from one person to another in precise increments. Bitcoin’s exchange structure has become possible with the invention of computers with considerable processing power, and very advanced network capabilities.[46] This technological innovation allows Bitcoin to exist only as a peer- to- peer network, without the backing of any government, company, or partnership, or asset. This places it firmly outside the realm of a fiat currency.

Peer- to- peer computer networks allow services to avoid the need for a central server.[47] With most services, information regarding the service must be stored somewhere. This information is usually put on a server that is owned by the person distributing the service, or in rented space in someone else’s server. With a peer- to- peer network, a central program instead links many personal computers into a network that shares storage and processing power, removing the need for a central location or individual. Bitcoin is the world’s first peer- to- peer financial asset. In the past, a peer- to- peer electronic asset was impossible because of the potential for “double spending”- basically, spending the same unit of currency twice.[48]  Bitcoin solves this by reversing the traditional structure of online transactions run by third- party entities such as Paypal. With a third- party structure, all transaction information is entrusted to an entity that is known to be secure and reliable, and only the people involved with the transaction and the central entity know that the transaction has occurred. With Bitcoin, identities are anonymous to everyone except the people conducting the transaction, but all transaction amounts and times are available to the public through a central register. When a user makes a transaction, a request is sent to the Bitcoin network. The transaction can only go through if several other computers in the network “agree” that the transaction has never happened before. Through this structure, Bitcoin has avoided needing the support of any government or large institution- the currency is instead backed by trust in the network. This structure has been given the rather bombastic name crypto- currency[49][50].

A Bitcoin is created through the solution of a complex mathematical problem that creates the long string of code that is a Bitcoin. Each time that the problem is solved, new Bitcoins are added into the network. How these new Bitcoins are distributed is dependent on who is giving processing power to the network- the more processing power a computer delivers, the more likely it is that it will be awarded new Bitcoins (for a more detailed explanation, see “Mining,” below). Another way of acquiring Bitcoins is through a Bitcoin exchange, however, this done in identical fashion to other traditional currency exchanges, and does not reflect the peer-to-peer (bit) concept. It is the peer- to- peer aspect of Bitcoin that makes it possible to remove the third party. This is done by making every transaction public through the network, and leaving the identities of those conducting the transaction unrecorded. Because all transactions are public, the automatic “checks” can occur through the network, where before the responsibility for preventing double- counting would have lain with the intermediary.[51][52] This structure has profound effects for regulation, both from the outside and within. It makes Bitcoin nearly impossible to “shut down” like liberty dollars or e-gold, because if there are two computers in the world with the Bitcoin client, then Bitcoin is completely preserved.[53][54] It also makes it difficult, for Bitcoin to be regulated by a central bank- like entity.

This is not to say that Bitcoin has no central bank, its does. It is simply built into the structure of the asset. It’s like having a central bank that is extremely predictable, never changes its policy, and is completely transparent. The internal “regulation” of Bitcoin takes the place of what would usually be external regulation. Coins are released on a schedule predetermined by the structure of an algorithm embedded in Bitcoin’s structure. The limit amount of coins released into the world will be 21 million, and it should reach this number around 2140, although the number will be over 20.5 million at around 2050. According to some, including Paul Krugman[55], this means that there is deflation built into Bitcoin’s structure, however, there has been little sign of this as of yet. There are no checks on the amount of transactions that can be made within a given time period, or to whom they can be made. However, if there are many transactions in the network at once, then payments with higher voluntary transaction costs will be sent earlier[56]. The value of Bitcoin is dependent completely on supply and demand- what people will pay for a Bitcoin is what the Bitcoin is worth- no more, no less. Unless a third party voluntarily acquired a massive amount of Bitcoins and began regulating it through sale and purchase of coins in large quantities (as, in fact, is done by the central bank of the United States with dollars), the price of Bitcoin would go unchecked[57].   The slowing release of Bitcoins happens naturally over time, as well as through the timed release. As mentioned before, a Bitcoin is created through the solution of a complex mathematical problem. This mathematical problem gets more difficult to solve over time, which slows the rate of creation of Bitcoins. The difficulty also increases in response to the amount of processing power in the network. More processing power added to the solution of Bitcoin blocks increases the difficulty of unlocking/creating Bitcoins, which keeps the release of Bitcoins on a steady rate of release. The rate of Bitcoins released decreases over time[58]. This may have an effect on the future of Bitcoin creation, or mining[59].

Mining:

In the central bank of the United States, currency is released into the economy through the sale of government bonds. If the Fed wants currency removed from the economy, it sells bonds at an attractive price. When the Fed wants currency injected into the economy, they buy bonds for cash[60]. Bitcoin only releases assets into the economy, it does not remove them. The creation of Bitcoins is known as mining. Simply put, users are rewarded in Bitcoins for devoting computing power to the Bitcoin network. The computing power is used to solve a “block”, which is a brute- force mathematical problem with a low degree of probability of success. When the “block” is solved, the computer that solved it is rewarded by the network (right now, this number is 50 Bitcoins, however, over time this will decrease). The more computing power there is in the network, the more difficult the problem becomes to solve, which keeps the rate of release of Bitcoins mostly stable over time. The rate at which Bitcoins are released is intended to approximately mimic the rate at which precious metals are mined[61].

Mining is essential to the functioning of Bitcoin, as it is both the way by which money is released into the economy, and also the mechanism by which Bitcoin incentivizes participation in the network. It is at this point difficult to make money off of mining, often requiring participation in a mining pool[62] (a group of linked processors that mine together, with the reward from solved blocks being shared among the pool, and the pool operator taking a fee), or through the purchase of carefully designed mining rigs. This is a result of blocks becoming more difficult to solve over time, meaning that the risk of spending more on electricity and hardware than one does from solving blocks gets higher. Most Bitcoin users do not mine, and many who do do so to secure the network and support Bitcoin’s success as opposed to as a for- profit venture[63]. Miners also process transaction fees, so they also make some small returns from the optional transaction fees that are paid for using their servers. Lately the phenomenon of mining contracts has sprung up, where a person pays up- front for the work of a miner, who delivers a specified amount of Bitcoins at a later date[64].

How to use Bitcoin

Every Bitcoin used must first download a Bitcoin client. Bitcoin clients are simple computer programs that allow the transfer of Bitcoins to and from a computer[65]. A user uses this client in conjunction with an electronic “wallet” to manage their Bitcoins, which is usually stored on the hard drive of the user[66]. If a user wants to transfer Bitcoins, then they type a code into the client that is specific to the user that is receiving the coins. They then specify the amount that they want to send. When they hit send, the person to whom they are transferring receives the coins. It is not normally possible to tell from where the coins were transferred, and there are no “chargebacks”. The fee for transactions is nearly zero, with small fees for small transactions to prevent DDOS[67] attacks on the network. Most clients come paired with a wallet, but there are many options for storing Bitcoins, in varying levels of security and complexity. There are third- party wallet sites that will store a user’s Bitcoins for them, in which case liability for protecting your Bitcoins is shifted to the wallet site. In many cases, in the event of theft, there has been some kind of payout to the wallet holders, as in the case of myBitcoin.com[68]. However, there has also been the opposite case- many people lost thousands of dollars after the fall of Bitcoinica[69], and have not seen any payout as of now. Wallet sites have proven very vulnerable to attack, as have wallets kept on user’s own computers. There are ways to encrypt wallets to make them less vulnerable to attack, but without some level of technical skill one might not even know that this extra protection is necessary. This has led to many users having their Bitcoins “stolen” from their computers[70].   A more effective way of protecting ones Bitcoins is “cold storage”, where a user keeps most of their Bitcoins in a wallet that is not connected to the network, such as on a hard drive, with another wallet that is used only for transfers[71].

Each user has their own unique code which other users use to transfer money to their accounts. This is their public key. When a user sends money, the sender gives the recipient a private key which allows them to access the funds. The unique codes that users issue to accept a transfer are called a “public key.” The codes are generated by a key generator that comes embedded in the Bitcoin client. When a user wants to send money, the sender will have to know the key the recipient uses for accepting coins. A single user may have many different addresses for accepting coins (similar to a single individual possessing multiple bank accounts for different transactions).   Having access to this key allows a user to transfer funds to that wallet, but there is no way to ascertain certainly who sent the Bitcoins simply through their receipt[72]. A recipient can keep track of senders by using a different code for each one, however the code could be used by anyone to send money to the account, and the recipient relies on the sender not to distribute the code. This feature of being unable to identify the sender of money coming into an account is what has made Bitcoin popular with online insurgent sites such as Wikileaks[73] and sects of the Anonymous hacking group such as the Peoples’ Liberation Front[74], and underground commerce sites such as Silkroad[75].

The theory of Bitcoin’s value:

Now that we have a description of Bitcoins structure, we can observe the development of its value in theory. We will do this in two ways, by attempting to identify what kind of object Bitcoin is, and by examining the theoretical dynamics of force and freedom within the Bitcoin network. From this we see two different stories emerge. In one story, Bitcoin truly holds potential to be a stable, equitable, and dependable system of exchange. In the other, Bitcoin embodies the problems of financialization, and provides opportunities for its expansion and entrenchment. With these two conceptions in our theoretical suitcase, we will walk through the short but vibrant history of Bitcoin, and emerge with a conclusion to the question, is Bitcoin an alternative?

In Bitcoin, freedom is produced through an interaction between an idea and a series of electrical currents. Bitcoin’s value comes from the fact that it is scarce, difficult to reproduce, and easy to trade. It’s not that Bitcoin has no backing to it, it is that Bitcoin is backed by itself, and people’s trust in the Bitcoin network’s continued existence. Bitcoin’s existence is predicated on the difficulty of counterfeiting it. However, as we are dealing with the internet, it is not physical force that is at play with Bitcoin. The peer- to- peer structure prevents human regulation from without or within, without the consent of the majority of the Bitcoin network.   Because Bitcoin exists purely in the electronic realm; this indicates that our main concern is with cultural force. With a centrally- located service such as megaupload.com, the government can trump this cultural force through the seizing the servers- the cultural force is trumped by attacking the symbology at its physical root (meaning the symbology of the numbers and letters that compose both the files on the servers and the cryptology defending them from online attack). With Bitcoin, no seizure is possible, as every computer with a Bitcoin client would need to be shut down individually.

Bitcoin is still a symbol of force and freedom, however, its effectiveness is affected by its liquidity. Although within the Bitcoin network, it is an extremely liquid asset, capable of nearly free and instantaneous exchange, outside of the network, this is not the case, as Bitcoin must pass through several intermediaries to convert it into dollars before exchanging them. In theory, as the network grows, this problem will be ameliorated.

If we examine the structures of force within Bitcoin, there is an electromagnetic force which converts to a symbol of physical force, and is exchangeable through a network. The important distinction in its structure from a fiat currency is the production and ownership of freedom- in Bitcoin, the theory is that this will be dispersed. The cultural force surrounding Bitcoin (its cryptography) prevents outside interference from outside the network, including from the government. On the internet, the government is no longer on its own turf, and its ability to enforce is greatly limited.

At the root of all this is, what is a Bitcoin? It is true that it merely a string of numbers in a computer. What is it about this string of numbers that makes them different from other strings? There are many different types of code on the internet, and no one is claiming that they are currencies. This because Bitcoin has created what is essentially a new form of electronic object. It creates a very narrow definition of a Bitcoin, which it allows itself to produce, and makes it impossible for others to create it. We can use the previous example of the US government’s monopoly of force, which is tautological. There are many people walking around with guns, most of them not claiming to be governments. This can be applied to Bitcoin- there are many strings of code, few of them bounded by enough cultural force to maintain their own rule of law. Bitcoin was created to be scarce, difficult to reproduce and easy to trade. The extent to which people begin to use Bitcoin is the extent to which these qualities continue to remain true. The creation of Bitcoin gives us some echoes of Manyard Keynes comical suggestion for stimulating the US economy: put hundred dollar bills in glass bottles and bury them.

In the case of Bitcoin, the production of value is in the hands of each individual user, but not equally. More Bitcoins are received (as a rule) with the donation of more processing power to the network. Bitcoin can, in one viewpoint, be thought of as an electronic metal, with a lot of premade methods for exchanging it. It was deliberately developed to be rare enough to be worth something.   This again bears similarities to metals- although gold is theoretically available to anyone who can find it, the ability to accrue it is dependent on how many resources you are able to input into a mining operation.

Bitcoin, although it mimics a metal in that it is a tautologically valuable, does not mimic a metal in its liquidity. Although at one time, gold and other may have been widely acceptable as money, this is no longer the case. Also, without some sort of financialization of the gold, it cannot be sent through electronic means. Bitcoin, on the other hand, can be sent through the internet very quickly, although not instantaneously. Assuming that someone accepts Bitcoins[76] as payment, then the Bitcoins can be transferred to another user immediately. This gives Bitcoin a currency- like quality that other financial instruments do not have. If Bitcoin really does come to behave like a metal, then it will probably hold value fairly well; precious metals historically hold value stably. Here we find the first story of Bitcoin, that it holds the potential to be the currency of the new global economy- one that is stable, equitable, and reliable.

In many ways, however, Bitcoin is a child of the logic of financial capital, not an answer to it. Two theoretical frameworks emphasize these qualities: the derivative view and the corporate view. Within the derivative view, Bitcoin can be conceptualized as a security based on nothing but itself- it is a physical tautology.   It is a security created by an entity, which in the case of Bitcoin happens to prefer to remain anonymous, which can only gain in value, and cannot lose value, because the value begins at zero[77]. If say, J. P. Morgan was issuing the currency, instead of Satoshi Nakamoto, it could be designed to ensure that J.P. Morgan begins with a sizable percentage of the currency, which would begin with a value of zero, and increase in value according to demand as the currency was issued. In fact, it is possible that issuance of currencies will become dominated by large institutions. Certainly, the combination of technical skills required to produce Bitcoin, in economics, cryptography, and programming would more easily be developed by a team with a well- backed base than a single individual on their own. However, we can also hold some faith in the continued prowess black- hat hackers, which, at least in the chess game of virtual security, have managed to take down many of the world’s largest and well established online institutions[78]. Whatever the motive of the issuer, however, the fact remains that there is no client for which it is issued. When an investment bank underwrites an IPO, it is issuing securities as a service for a client. The security is based on the client, and its value is connected to perception in the company underlying the stock. Because there is an underlying entity, the stock price begins with an existing value, and the potential for gain or loss exists in the stocks’ movement according to supply and demand for the stock, in part determined by the strength of the underlying company. With Bitcoin, its value is produced simply by its use at that value. With the peer- to- peer network, there is no maintenance cost by the institution. Through this view, we see Bitcoin as a security qua security, a derivative ad infinitum.

Without changing the mechanics, we can shift the location of our lens, so to speak, and define Bitcoin as a corporation without a corporeal entity, that is, a corporate structure and corporate identity lacking any mission statement, profits, or physical existence. In this way the system raises money as a corporation does, by attracting shareholders that contribute to the corporations’ capital through purchase of ownership shares in a corporation, but without the expectation that the capital will be used to build up the company. There is a slight difference also because of the manner of creation and issuance of the currency- each individual person who mines Bitcoins becomes an underwriter, at least in part, instead of the investment bank.

Even if Bitcoin really does come to behave like a metal, then it will probably hold value fairly well- precious metals historically hold value stably. However, a reliable store of value (a conclusion that we are far from being able to draw with Bitcoin) with the potential for low transaction costs is an innovation within the current system, not an alternative system, it is an innovation within the current system that allows for its expansion. Bitcoin does not represent a revolution in finance, it represents the ultimate embodiment of the current trends in finance, and creates the potential for its ultimate entrenchment.

We see through our different theoretical formulations two different stories emerge, one with Bitcoin as the answer, and a viable alternative to our current exchange structures. In the other, Bitcoin, although interesting, is merely more of the same problem, perhaps an intensification of it. We will now examine the history of Bitcoin, its surrounding financial services, its regulation, and its value. This will allow us to view the actual production and distribution of freedom that has occurred in Bitcoin’s short existence. This will allow us to see where Bitcoin is an alternative to our current system, and where it is not.

Public discourse around Bitcoin[79]:

Originally, public discourse around Bitcoin was divided into two distinct camps, the formal camp, and the informal camp. The formal camp is based in large online and offline media publications, and the informal camp is based in almost exclusively forum- based online discussion. Although discussion and development around Bitcoin had been running for some time, it first entered the formal sphere in a decidedly negative light. Bitcoin, in its similarity to cash, mimics its semi- anonymous nature. This creates the possibility for its use in illegal purchases online. On June 1, 2011, the online publication Gawker published an article titled “The Underground Website Where You Can Buy Any Drug Imaginable.[80]” They were referencing a site called Silk Road, which exists on the Tor network. The Tor network has a close relation to Bitcoin in its structure- it is a peer- to- peer anonymizing proxy. When operating on the Tor network, instead of downloading a website directly from a server to your computer, a small piece is downloaded through many different computers throughout the network. This greatly increases the difficulty of discovering who is accessing the webpage. There is a series of sites (ending in .onion instead of .com or .org) that are accessible only while using the Tor network[81]. Silk Road is similar to Amazon.com without the aspect of mediation. Users post items, and consumers purchase them- the only way to tell the reliability of a Silk Road seller is user ratings. What Gawker said about Silk Road is true- you are able to purchase illegal drugs, counterfeits, and, occasionally, weapons. The story was picked up by Rolling Stone Magazine[82], and so Bitcoin entered the national stage branded as a favorite of online criminals and n’er- do- wells. In fact, at the time, Gawker was not too far from the mark- a significant portion of Bitcoin’s usage was for illegal uses such as could be found on the Silk Road marketplace.

However, the informal discourse had been discussing Bitcoin for some time before the publication of the Gawker article. Bitcoin had gained popularity primarily with libertarians and anarchists, who valued its anonymity and lack of a central regulatory agency for its political implications. The first forum discussion immediately followed Satoshi Nakamoto’s release of the original Bitcoin client at www.mailarchive.com forum titled “cryptography.[83]” The discussion touched on many aspects of which the formal sector has caught up to only recently, including its legality, value, and global potential. The perceived political benefits of Bitcoin, from the libertarian viewpoint, generally include: Freedom from a central bank, inability of government to regulate or track the currency, global reach, and its potential to supplant Paypal and Western Union, on the basis that they are, willingly or not, in collusion with the government[84]. Many of these same people are former “gold bugs,” or people who see investment in gold as both the only safe move in a dangerously unstable monetary system, and as a method of moving off the monetary grid. In fact, one of the first people to start regularly covering Bitcoin was Mark Herpel of DGCMagazine (DGC stands for digital gold currencies)[85]. These individuals, along with other anti- government organizations such as the Anonymous hacking group, were the first proselytizers of Bitcoin. It is likely that this is the group that formed the initial nucleus of users that allowed Bitcoin to gain value.

After the Gawker and Rolling Stone articles, prominent publications began covering Bitcoin. All of them, with the exception of Wired Magazine[86] and (much later) the New Yorker Magazine[87] all predicted that Bitcoin had no chance of success, and declared it nothing more than a fad. Usually this was done in concert with a focus either on the potential of Bitcoin for illegal activity, or a discussion of the possible identity of Satoshi Nakamoto.[88][89][90] Economic analysis of Bitcoin tended to point to built- in- deflation as a downfall. Notably, Paul Krugman published a dismissive article about Bitcoin, citing its soaring value (Bitcoin’s value exploded initially before stabilizing. For more information, see “A brief history of Bitcoin’s value”, below) as an indication that it may be a good investment (at the time it was), but a terrible currency.

Criticism of Bitcoin intensified with the crash of the Bitcoin value bubble in June 2011. Critics of Bitcoin, online and otherwise, cited the crash in value as a sign that Bitcoin was finished, substantiating their previous claims.[91][92] Those within the Bitcoin community and proselytizers of the currency remained optimistic- justifications usually centered around “giving Bitcoin more than a few months’ chance,” or pointing out that even at below 3USD/ BTC, there was still ten times the value in Bitcoin then there had been 7 months previously. Most people in the informal network didn’t see the crash coming- there were some who foretold a crash, but even as it began, most didn’t predict that it would fall lower than 18- 20 BTC[93].

The most interesting development came after the crash, however. Bitcoin, after hitting an ultimate low of 2.51 BTC, began to slowly climb to between 5 and 6.5BTC/ USD, and has stayed within that range since[94]. What’s interesting is that along with the stabilization of the value of Bitcoin, we have also seen a stabilization of the discourse surrounding Bitcoin. Most remarkable is Forbes magazine, who, through author John Matonis, has been covering new Bitcoin developments almost weekly[95]. Other large scale publications have started debuting or following Bitcoin, but the tone has changed considerably. Al Jazeera, in June 2012, published as article about Bitcoin that was very in- depth and did not demonize the currency (although they certainly did address its faults)[96]. Publications such as the Financial Post[97] and Business Insider[98] have started covering Bitcoin also- at least within the tech industry media, it has begun to gain interest, if not respect.

Note that there is fundamental problem with the analysis of Bitcoin, which is the conflict of interest from the fact that nearly everyone who is analyzing Bitcoin holds some sort of stake in it. This an issue that pervades the economics discipline as a whole, and came sharply to light during the 2008 financial crisis. Those who hold Bitcoins have a stake in making positive analyses about the currency, as higher demand for Bitcoin increases its value. Many high profile commentators, Forbes columnist John Matonis included, have a stake in multiple Bitcoin- based companies.[99]

Overall, since Bitcoin’s inception, its credibility with large online and offline publications has considerably increased. However, this may be better news for investors than revolutionaries- this positivism is based in part on the rise of financial services and online institutions that are facilitating Bitcoin’s use, but are also consolidating control of the asset in the hands of a few companies instead of a decentralized, widespread network.

Surrounding financial services:

Bitcoin is worthless unless it can be exchanged. When someone is discussing the value of Bitcoin, they are for the most part referencing its price on one of the many Bitcoin exchanges. The largest exchanges are Mt. Gox and Britcoin & Intersango, after the fall of the second- largest Bitcoin exchange, Tradehill. Mt. Gox has by far the largest market share, and has held this position for some time[100]. The exchanges work similar to a traditional currency exchange. A user transfers money to the exchange through an accepted service, and then user then receives Bitcoins in return for their currency. The exchange makes money on the spread between the asking price and the bid price of the currency, as is true in a normal currency exchange market (by which we mean to imply that Bitcoin’s exchange market is not too far deviated from the norm). Although Mt. Gox, the oldest Bitcoin exchange, originally traded only in dollars, there are now exchange rates and instruments for most major currencies. Mt Gox alone trades Bitcoins for 17 different currencies[101]. Most exchanges work on a limit pricing system (a market- determined system), however there are some fixed- rate exchanges. The exchanges are not entirely secure, and have encountered some payment problems. The biggest exchange failure occurred with Tradehill, which was until February 13, 2012, the second- largest Bitcoin exchange[102]. More lately, about 9 million dollars was reportedly stolen from Mt. Gox during an attack on the exchange[103]. The issue of security remains one of the most profoundly troubling barriers to Bitcoin’s adoption, as no sector besides the client itself has proven invulnerable to attack.

Also important is that merchants accept Bitcoin as payment. There are hundreds of merchants that accept Bitcoin as payment. A partial list can be found at https://en.Bitcoin.it/wiki/Trade. A look through the list (assuming that it is relatively complete- there is no “official” list), quickly reveals that most companies on the list are web- based, and provide virtual services. Although this makes sense given that the community of Bitcoin users is largely web- based, it is a sign that adoptability is still an issue for non- internet companies trying to use Bitcoin. There are some new platforms emerging that are supposed to be more user friendly, but it remains to be seen how widely they will be adopted[104].

We see here that although Bitcoin is in theory decentralized, its surrounding financial services are not. Almost all of Bitcoin exchange happens through one single institution, Mt. Gox. In addition, it appears that this institution is insecure. A centralized, unregulated, and insecure institution is exactly the center of the problem that we face with our current exchange structure. We find no answers here.
Bitcoin complex financial services:

Lately, there has been a rise in services dedicated to Bitcoin’s packaging as a financial asset. Using services such as Bitoption.org and bitcoin-otc[105], users can purchase options or derivatives with Bitcoin as the underlying asset. There has even been an attempt at a bank- like institution for Bitcoin, called Flexcoin.   Flexcoin securely stores Bitcoins for users, allows for instantaneous transfers, and even pays a discount rate to users with positive account balances[106]. The rise of these institutions reveals the weaknesses in Bitcoin’s use as an alternative to the current financial system. Although the creation of Bitcoins is decentralized, there is no way to prevent these institutions from growing dominant enough to control the further production of value through Bitcoin. Currently, these two companies dominate these niches, with no sign yet of competition. The development of a semi- monopolistic, unregulated company that has the potential to produce further financial value within the Bitcoin economy is extremely exciting to investors, however, for those looking at an alternative it is disconcerting.

Mining Again:

We return briefly to mining to make an observation on the progress of mining behaviors in Bitcoin. As we outlined above, individual miners have all but disappeared. At first, users used their CPU. When that became too little to profit, they switched to graphics cards. When it became unavoidable, people bought specially constructed mining rigs to mine their Bitcoins. However, even this became too little, so in the present day, we see mining dominated by mining pools- large networks of computers working in concert with the payout shared between them, and the pool operator taking a cut. There are two pools that dominate the mining sector of Bitcoin- Deepbit and Slush[107].  At one point, if Deepbit and Slush had combined their computing capacity, they would have controlled over half of the network, leaving Bitcoin open to attack. Again, we see that Bitcoin, despite its theoretical possibility, in practice results in centralized, oligopolistic control controlled by a couple of (relatively) large organizations.

A Very Brief History of Bitcoin’s Value:

After its release in 2009, Bitcoin’s value quickly skyrocketed, driven by speculators who had interest in Bitcoin as an investment opportunity, not as a currency. The bubble popped in June 2011, and the value dropped to around 3USD/Bitcoin (BTC). This draws into question Bitcoin’s use as a store of value, and its status as a currency (see below). However, over the last few months, Bitcoin has stabilized between 5USD/ BTC and 6.5 USD/BTC, and shows no sign of sudden spikes, even in light of major attacks on some of Bitcoin’s surrounding financial services such as the exchanges where it is traded for USD and other currencies.[108] Bitcoin appears to be stabilizing since around January. It hit its peak on June 8, 2012 at around 1BTC/32USD and dropped by November to a value of 1BTC/2USD. It climbed slowly, and has stabilized at a value of about 5[109]. Whether this will remain a stable situation is yet to be seen. If it does, it means that the inflation of Bitcoin is tied to the inflation of the dollar. In the past weeks, we have seen the Euro having a stronger effect on Bitcoin, as fears of Spain’s default drove individuals out of the Euro, some turning to Bitcoin[110]. It also remains to be seen whether Bitcoin is susceptible to “crisis” in the same way that other world markets are susceptible to crisis. Because Bitcoin has stabilized for a few months is no indication that it will continue to remain stable; relative financial stability from World War 2 until 2007 did not indicate stability within the current financial system. It is this volatility, along with security faults, that has created the largest barrier to Bitcoin adoption. It also makes it difficult for us to consider it a viable alternative exchange structure, although there is hope that the stability we have seen will continue.

Bitcoin in the context of the history of alternative currencies in the United States.

The regulation around Bitcoin is still developing. There has been no concrete action taken by the US or any other government to control Bitcoin. Looking at past responses by the government can give us some clue as to how they will proceed. It will also give us an understanding of why Bitcoin is different from other previous attempts at a virtual currency. After, we will put Bitcoin in the context of the US’s past history with commodity- backed currencies, to examine what it might mean if Bitcoin were, in fact, to behave like a virtual metal.

There have been many attempts throughout the history of the United States to create alternative currencies to the dollar, usually resulting in removal by the United States government. The first paper currencies in the United States were issued in the pre- revolutionary colonies by private banks and individuals who were frustrated by a lack of liquidity in their area of the continent. The Currency Act enacted by Britain was the first alternative- currency crackdown on US soil. It declared null and void the numerous (at one point over 10,000) different forms of bank notes and credit issued by private entities such as banks and individuals. [111] After the United States became one country, and issued their currency- the dollar- there have been some other attempts to create alternative currencies, however, few have been successful. According to the constitution, the government has the right to issue currency, and to regulate that currency. The constitution of the United States has nothing to say about privately issued currencies. However, the Stamp Payments Act of 1862 does state that “Whoever makes, issues, circulates, or pays out any note, check,

memorandum, token, or other obligation for a less sum than $1, intended to circulate as money or to be received or used in lieu of lawful money of the United States, shall be fined under this title or imprisoned not more than six months, or both.”[112] In recent times, it has been the policy of the United States government to remove non- dollar currencies that are competitive with the dollar by some method, demonstrated repeatedly over the last few years. The most recent notable case of a non- electronic currency being destroyed was Liberty Dollars, which was a platinum- backed currency that began to gain some popularity. As soon as the currency gained too much momentum, it was shut down by the United States government, on the claim that the coins looked too much like dollar- increment coins (private currencies also fall within the purview of US counterfeit law)[113]. There have also been issuances of electronic currencies with the use of third- party entities, notably “e- Gold” in the US. The company was eventually shut down by the United States government because of the potential it had for money laundering, on accusations that they were conspiring to conduct such activities (the three directors pleaded guilty)[114]. Community currencies, intended to circulate only within a limited area, are used frequently in the US, and have not been removed, as they pose no risk to the value of the dollar. In other countries, web- based currencies have had greater success. One such currency in Russia named WebPay gained considerable attention after the fall of the Soviet banking system (most electronic currencies do not require a bank account), and has continued to grow since then to customer base numbered in the millions.[115] Bitcoin takes a new step in the evolution of digital currency (and currency in general) through its peer- to- peer structure. Other currencies pre- Bitcoin have merely been variations on a two themes- fiat currency and asset- backed currency.   For instance, e-Gold is a precious metals- backed electronic currency issued by a third party (Gold & Silver Reserve Inc. under e-gold Ltd)[116]. The users could instantly transfer gold ownership online through the e-gold website (e-gold has since been shut down on money laundering charges to the three directors, who pleaded guilty). There is no real distinction between this structure and a government- issued asset- backed currency, except that it is a limited partnership and not a government that controls the store of the commodity (usually, and also in this case, precious metals). The step forward that e-gold made was an easy online transfer system with low transaction costs. This did not however, represent a revolutionary break or a new concept. This shows us that even Bitcoin’s potential in the online payments arena is not new. In fact, online exchange with low transaction costs has been tried before, but was shut down. The past history of alternative currencies in the United States seems to suggest that the US government will eventually take some action against Bitcoin. How they will do so remains to be seen. For investors, their best hope is probably that Bitcoin is defined as some version of a security or options contract, both forms of asset that are not very well regulated in the US. For those searching for an alternative exchange system, the best hope for its revolutionary potential might be a crackdown by the US government.

It is interesting to mention that most nation- states ceased to use asset- backed currencies long before the advent of asset- backed electronic currencies. The United States was the last to drop the gold standard permanently in 1971, long before the internet and electronic commerce became popular. It can be assumed that the web- based currencies were presupposing a charge by users that the currency was unreliable, or held no value because it was virtual. The commodity could have provided a symbolic and tangible stability to the currency that would have been impossible without the commodity. A fiat currency can be conceptualized approximately as an option on the entity that issues it. This means that there is a prediction needed regarding the health of the entity (underlying asset). Internet companies are notoriously unstable, and so to ensure faith in the currency, a commodity is perhaps necessary to back it. It should be mentioned that a commodity- backed currency does not result, necessarily, in a more stable value, and can in some cases cause extremely harmful effects to an economy. It is thought by many scholars that the gold standard contributed to the severity and duration of the Great Depression[117]. The fact that Bitcoin may behave like a metal becomes problematic in this context, however it is difficult to make a comparison, as the Bitcoin “interest rate” would currently be controlled by Flexcoin, whose market share is tiny. To complete this analysis, we will unfortunately need to wait for the loans market to appear in Bitcoin.

But is Bitcoin a “viable currency”?

This question is little more than a question of category, and it is largely unimportant for the purposes of our exploration. Although it has some consequences for Bitcoin’s regulation (see above), we mostly entertain this question because it so prevalent in public discourse, and for this deserves some sort of answer. There is considerable argument over whether or not Bitcoin is a currency, How can we determine this? If it is a currency, is it “viable”? Before we determine if Bitcoin is a viable currency, we must first define whether it is a currency at all. There are three qualifications for something to be defined as a currency- that it be a store of value, that it be a numeraire[118], and that it serve as a medium of exchange. Bitcoin clearly fits two of these qualifications. There are hundreds of merchants online that will accept Bitcoins directly as payment. Although the size of the economy is not large, it is not insubstantial- according to Bitcoincharts.com, the market cap for Bitcoin currently hovers around 50 million USD, value which can be traded for anything from Alpaca socks to software. It is also a numeraire, as it could be used to trade, say, apples for oranges. Whether or not Bitcoin is a store of value, however, is more complicated. Something stores value if its value stable over time- a security issued by a company generally does not store value because of its high volatility. Bitcoin has no underlying commodity or company to which it is pegged, however, its volatility has until very recently been very high (see “History of Bitcoin). This draws into question Bitcoin’s use as a store of value, and its status as a currency.

Another aspect of a currency, which we addressed briefly earlier, is its liquidity and negotiability.   This, in part, is what distinguishes currency from other assets and commodities, is its widespread capacity for exchange. Although a financial derivative is a symbol that carries value, I cannot buy groceries with that value- I must first convert it into currency. Although Bitcoin is highly liquid and negotiable within the small network of merchants that accept it, these number in the hundreds, and there are no recognizably large organizations besides Wikileaks and Anonymous that accept Bitcoin. This also affects our ability to define Bitcoin as a currency, and its capacity as an alternative.

Bitcoin’s ability to facilitate micropayments, and avoid the need for a bank account:

Although from our analysis we conclude that Bitcoin is not necessarily an alternative to the current financial sector, it does provide the potential to solve very large barriers that currently exist in internet commerce. Currently, transaction costs for moving money virtually are very high. There are three ways of doing this: bank wire, PayPal, or Western Union. Both PayPal and bank wires require access to a bank account, although Western Union does not. All three of these options are so prohibitively expensive as to make small electronic payments nearly impossible, currently. Paypal takes ten percent of every transaction, and requires that the user have a credit card[119]. Bank transfers, if they are large or inter- bank, generally have a flat rate. Wester Union charges above 10% for small transactions, and below 10% for large transactions[120]. With Bitcoin, transaction costs are nearly zero. Transaction fees in Bitcoin are attached to blocks of Bitcoins voluntarily by miners who solve the block. Later, if the network wants to use their servers to send Bitcoins, they charge the network a fee for the transaction. Whether or not their server is used then depends on the sender, who chooses a transaction fee they are willing to pay. If there is high traffic on the network, a Bitcoin transfer will result in an “auction”, the sender with the highest transfer fee will be sent first. However, this distinction is a matter of cents, not of tens of dollars[121]. Transfers of 1000 can be equal in cost to transfers of .10- both cost as little as a cent to process, depending on how fast you want the transfer made. Whatever individual or firm that solves the problem of security, usability and adoptability for Bitcoin (or another digital currency) will supplant much of Western Union and Paypal’s control of the virtual transfers market simultaneously. If mobile transfers of Bitcoin gain in ease of use and popularity, it could even eat into the credit card industry.

What makes this possible with Bitcoin over, say, the US dollar, is the ability to store Bitcoins on a personal hard drive, and the lack of a need to maintain large archives of information about transactions. There is no way to keep dollars on a flashdrive without connection to some outside institution. Because of this, large virtual transaction firms such as Western Union or Paypal must maintain, protect, and process lots of information about every transaction. Even aside from their profit margin, there are significant overhead costs. Also, with Paypal (or a credit card company), there is the ability to “chargeback” if there is some issue with the merchant who is begin paid. Bitcoin retains very little information about transactions, which prevents chargebacks or mediation[122]. Bitcoin also lacks the security of an FDIC- insured bank account. However, for many different areas of the world, and many kinds of transactions, these qualities are frankly unnecessary. One example might be a magazine site that charges 10 cents for an article. Another potential application is in the developing world, where many people do not have bank accounts, and are dealing with extremely small amounts of currency, but where massive infiltration of mobile technologies might make Bitcoin a viable alternative. This might prove especially true if Bitcoin’s value remains stable, for areas that do not have a reliable and stable currency of their own. It may also have an application to the remittances market.

Conclusion:

There are some elements that give Bitcoin true distinction- its decentralized creation and initial distribution. However, there is nothing particularly revolutionary even in this. It is startlingly similar the manner in which precious metals interact in real space. Gold also can be mined by anyone, there is also a finite amount, and it also gets difficult over time to make a profit from it, as it becomes more scarce. Bitcoin can be conceptualized as a virtual metal[123] with high liquidity. Although this is interesting, it is has no quality about it that would suggest a Bitcoin would be qualitatively different from our current system. There are some clear advantages to Bitcoin, in that it allows for extremely low transaction costs, and does not require a bank account, both of which greatly facilitate web- based micropayments. This, potentially, could have profound effects on exchange in areas with unreliable banking sector, and could allow for much more internet commerce than occurs now. However, there is no reason why Bitcoin could not be, and would not be, controlled by large, private institutions in the same way our current system has come to be constructed. In fact, it appears that this has already happened. There is one large exchange- Mt. Gox, which controls the vast majority of the Bitcoin exchange market. Most of the Bitcoin mining happens through a couple large pools- Deepbit and Slush. Until recently, there was only one reliable Bitcoin client, developed by a central core development team. According to some analyses, some decentralization has begun to occur due to innovation[124], however, the danger is patently there that issues with oligopoly control in our current financial sector are replicating themselves with Bitcoin. Although Bitcoin is interesting, and does represent some theoretical leaps, it falls short of having potential for real change, and does not present the possibility for an equitable, stable, and reliable system of the production of freedom and its distribution.

However, we should not forget that for a single moment, Bitcoin did have these qualities. In those short months before its massive explosion of value that generated so much of the initial interest in the asset, it was what we thought it could be. From the time it began to gain value in January 2011, to May 2011, just before the bubble, there were few users, but no one really dominated the market yet. Mining was lucrative, and fairly equally distributed, there weren’t any dominating mining pools yet. Mt. Gox, and Tradehill happily boxed for the tiny Bitcoin exchange market share, along with a few other small but not insignificant competitors. The asset was still mostly underground, the favorite of hackers, online revolutionaries like Julian Assange or Wikileaks, and criminal activity like on the Silk Road market place. For an instant, we saw what Bitcoin could have been- a really new system of exchange- one in which we defined the rules for ourselves and created our own freedom. That this initial structure has quickly disappeared is no surprise; it is the price of Bitcoin’s success. As Foucault famously pointed out, the only real revolution is a failed one. If Bitcoin is to really be revolutionary, then the best it can hope for is a massive crackdown by the US government. Bitcoin’s structure virtually guarantees that it would not die; it would remain just below the surface, just out of reach.

Even then though, this utopic system of freedom would be available to just a few, and in very limited circumstances. Thus must our search for an alternative continue.

If not only Bitcoin, what then?

There is never going to be a silver bullet (or gold, or digital) that will solve all of our problems- we must constantly consider and reconsider the available opportunities to produce the results we need at that time. In the near term, a possible outlet toward effective disentanglement comes from Pierre Bordieu. Combined with parts of the Bitcoin concept, we approach a possible alternative. Bordieu breaks down capital into three different forms: economic, social, and cultural capital. Financial capital is generally considered a form of economic capital. Economic capital is the form of capital with which we are familiar: capital in the form money, or goods easily convertible to money. Cultural capital and social capital fall outside of the balance sheet so to speak, and carry varying importance depending on their value within society. They can be exchanged for economic capital, although their conversion occurs with varying levels of difficulty. Cultural capital is the inculcation or embodiment of a skill within an individual, for instance, the ability to perform martial arts or to play an instrument. It can also be institutionalized in the form of something like a college degree. More important to our discussion, though, is social capital. Bordieu defines social capital as such:

Social capital is the aggregate of the actual or potential resources which are linked to possession of a durable network of more or less institutionalized relationships of mutual acquaintance and recognition–or in other words, to membership in a group-which provides each of its members with the backing of the collectivity-owned capital, a ‘credential’ which entitles them to credit, in the various senses of the word. These relationships may exist only in the practical state, in material and/or symbolic exchanges which help to maintain them. They may also be socially instituted and guaranteed by the application of a common name (the name of a family, a class, or a tribe or of a school, a party, etc.) and by a whole set of instituting acts designed simultaneously to form and inform those who undergo them; in this case, they are more or less really enacted and so maintained and reinforced, in exchanges. Being based on indissolubly material and symbolic exchanges, the establishment and maintenance of which presuppose reacknowledgment of proximity, they are also partially irreducible to objective relations of proximity in physical (geographical) space or even in economic and social space[125]. (Italics added)

Social capital and its distributions present another alternative to the current definitions of freedom within our current system of freedom production. Because social capital relies on “indissoulubly material and symbolic exchanges,” it still, in many cases, exists outside the scope of mediation by the financial sphere. The amount of resources controlled in this way in today’s United States is quite small- nearly anything of significant value is financially bundled. However, there is still significant exchange through social means. Increased emphasis on social capital could provide an alternative framework for exchange in the face of an unstable and inequitable system.

This is the quality that is most attractive about Bitcoin, is its social aspect. It is the idea on which it was founded, was the political idea of an electronically mediated community all contributing to a single project, and that it is the sum total of these contributions that keeps it secure. This mimics the structures of social capital, which exist only through recognition of its existence, and exists even beyond force, although it is ultimately convertible to force (economic capital, which is convertible to money). A real- world peer- to- peer freedom distribution structure is possible, although it would lack the regularity and structure of Bitcoin. This occurs through relationships of accountability between individuals. When a person knows another person directly, then they have a knowledge of a person’s accountability, and to what they have accountability. Knowing that one’s neighbor has a garden gives his promise to give you a zucchini more validity. This, at the outset, would appear to be an atrociously impoverished and inefficient form of network- imagine grocery shopping one zucchini at a time, one person at a time- starvation would result. However, social relationships are durable, they are flows of reciprocation that have the potential, in sum, to act with a velocity and variability that, although it does not approach the instantaneous flows of wealth and seemingly infinite ability for acquisition provided by financialization, does provide a secondary network and framework if the first is no longer a viable option. Bitcoin continues to provide us with an apt metaphor- it is not necessary to connect with each computer directly with fiber optic cables, however, connection to one computer in the network means connection to the entire network. Through a durable connection with one person, you gain partial access to their network of resources accessible by social capital, which increases over time as the reliability and accountability in the relationship is established. Bordieu, in fact, describes a similar process that occurs with social capital:

[The time, effort, and skill put into reaffirming social relationships] is one of the factors which explain why the profitability of this labor of accumulating and maintaining social capital rises in proportion to the size of the capital. Because the social capital accruing from a relationship is that much greater to the extent that the person who is the object of it is richly endowed with capital (mainly social, but also cultural and even economic capital), the possessors of an inherited social capital, symbolized by a great name, are able to transform all circumstantial relationships into lasting connections. They are sought after for their social capital and, because they are well known, are worthy of being known (‘I know him well’); they do not need to ‘make the acquaintance’ of all their ‘acquaintances’; they are known to more people than they know, and their work of sociability, when it is exerted, is highly productive.

Although this ‘network effect’ that Bordieu describes here cannot approach the efficiency of connection that results from an electronic network, it does point out that social networks are more efficient to the extent of their magnitude, and the amount of energy allocated to them by an individual. The process described above has close correlation to Bitcoin mining- more energy into the social network means rewards of greater social capital.

This form of network now has more potential than it once did, as technology allows us to maintain more reliable points of contact over time and space. One of the results of globalized capitalism and global finance has been the easy acquisition of global resources. From the United States, can I own gold in France without moving from my seat. I can, alternatively, easily acquire French wine, purchased with value based assets pegged to my French gold, also without ever moving from my seat. Communication technologies and transportation technologies would allow for a replication of this through social networks, although it would be less efficient.[126] However, it does mean that social networks no longer imply geographic proximity. Social networks now have the potential to match financial markets in geographic scope.

A significant disadvantage of the social capital framework is its finite quality through space and time. It does not allow for the potentially infinite creation of value that financial logic allows for. However, its finite amount has the potential to increase over time, through the capacity of the individual as a freedom generating entity.

We examine Bataille’s concept of sovereignty, which gives us the theoretical tool to examine this phenomenon. Sovereignty is an inner relation between a person and their own desire. There are impediments to a person’s surrender to their desire, through wage labor, which subordinates an action to its utility (a person works to eat and eats to work), or through scientific thought (which is unconcerned with the moment, and only with the anticipated result.) A person finds ‘sovereignty’ in a surrender to their desire, for instance when they indulge in a bottle of wine. However, through social capital, the useless, sovereign act produces returns[127]. Surrendering to one’s desires in the company of others solidifies networks of trust- “accumulated history” which allows for greater efficiency and durability in networks of social capital. This is a great advantage over financial capital, in which freedom (partially but not completely congruent with soveriengty) is produced, but only in work separate from its enjoyment. With social capital, we see returns to the individual and to the network of individuals through sovereign enjoyment.

Can a social network have a currency?

What Bitcoin’s concept successfully proves absolutely is that an object need only be difficult to reproduce, scarce, and durable to become an object that carries exchange value. Bitcoin proves this by starting with nothing more than a symbol and building value from zero. This proof makes the time spent analyzing Bitcoin worthwhile. However, this has also been demonstrated outside of the electronic realm, with the case of the Swiss dinar. Swiss dinars were the Iraqi currency prior to the Gulf War. They were printed using state- of- the- art Swiss plates that were extremely difficult to counterfeit. Unfortunately, the notes were printed in Switzerland, so after international sanctions were imposed on Iraq, there was no way to import more of these notes. This resulted in the printing of “Saddam dinars” which were low quality and issued in large amounts. Northern Iraq continued to circulate the Swiss dinar, which maintained its value even while Saddam dinars underwent massive inflation. The important emphasis here is that although the Saddam government has disavowed the currency which it issued, the currency maintained value, even over the new official currency[128].

The case of the Swiss dinar proves that there need not be a central register and a complex system of maintenance for a currency to function without a central regulator. In the case of the Swiss dinar, the value of the currency is determined through social capital. Because the currency is backed only by the network that upholds its value, which in this case is the people in the network, the currency would hold represent social force. Bitcoin proved that it is possible to create a material electronically that contains qualities that will allow it to hold value. This solves a major problem with the Swiss dinar, which is that the bills began to erode quickly from constant use. Assuming that mobile technology continues its rapid adoption in the developing areas of the globe, we see the potential for a global currency rooted in existing social networks. With or without a currency to represent it, am exchange system rooted in social capital networks provides a clue toward disentanglement from our current financial system.

Conclusion:

The case of the Swiss dinar is not conclusive. It lasted only a short time, and who knows how stable the value was compared to something like the dollar, but we at least we have faith that it worked for some time, in one place. This is also what we see in Bitcoin. Who knows what it will become, but we do see that it worked for what it said it would do, if only for a few months, and among just a few people. This is the real message of our examination, is that technology is not going to save us, there is not going to be any innovation that will suddenly and dramatically equalize and stabilize our liberty, and ensure our freedom. Even a network based on social capital is far from immune to the effects of monopoly, hierarchy, and inequity. It will take constant attention, dedication, and force to continually find alternatives to oppression, instability, and unreliability, even if it exists for only a few months at a time. Those who are encouraging this movement, who we are fighting against, work tirelessly. They wake early, and they sleep little. They are driven endlessly and unconstrained by the death drive’s desire for immanent consumption. Because they work tirelessly for continually expanding amounts of immanent consumption, they understand that work is never over, that every week of 80 hour days calculating doctorate level mathematics for something they don’t care about means a weekend of debauchery, but that there will never be a week to end all weeks, and that to continue the one they must always continue the other. This is what we face. If we are content to point to an idea and call it the answer, and sit on our laurels to enjoy this discovery even for a moment, then we have already lost. With constant dedication to reexamination and work to practically implement our ideas, perhaps we can see the emergence of an alternative, if only for a moment.

[1] Inside Job. Dir. Charles Ferguson. Perf. Matt Damon, William Ackman, Daniel Alpert. Representational Pictures, 2012. DVD.

[2] Inside Job, 2012

[3] Maxfield, John. “The Dow and Quantitative Easing.” DailyFinance.com. Daily Finance, 8 June 2012. Web. June 2012. <http://www.dailyfinance.com/2012/06/08/the-dow-and-quantitative-easing/>

[4] Andresen, Gavin etc.. “Bitcoin P2P Digital Currency.” Bitcoin. Bitcoin.org, n.d. Web. June 2012. <http://www.Bitcoin.org/>.

[5] The term “freedom generating entities” is the product of a series of conversations between myself and Alan Gamage, a researcher in the Chemistry department at UC Davis.

[6] Bordieu, Pierre. “Forms of Capital.” Http://econ.tau.ac.il/papers/publicf/Zeltzer1.pdf (n.d.): 46-58. Print.

[7] The word “currency” instead of “money” is used here deliberately. “Money” will refer to the M2 definition, which includes all physical money such as coins and currency, checking accounts, Negotiable Order of Withdrawal (NOW) Accounts, time-related deposits, savings deposits, and non-institutional money-market funds.

[8] The object can be either electronic or material.

[9] Freedom is not an absolute metric- it exists only in relativity. The ability to exercise will over another with money depends on their marginal returns for the amount of money you are offering. Someone with 10 dollars to their name in the middle of San Francisco may be convinced to (forced to) do any manner of unpleasant, menial things for 10 dollars an hour. A person with a net worth of several million could never be convinced, with money, to do those things for 10 dollars an hour, as their marginal return of freedom relative to the influence they already enjoy is too low to be worth it.

[10] These categories are based directly on Pierre Bordieu’s Forms of Capital, addressed later in this paper.

[11] The idea in this paper that freedom and ideology are reducible to force, and the emphasis on physical force in this paper is taken from Carl Schmitt’s “The Concept of the Poltical”. (1976)

[12] For a detailed analysis of what we are calling “social force” and its mechanisms, please see “Discipline and Punishment” by Michel Foucault.

[13] An example is a car with several people stopped at a stoplight with no one else around, and no camera on the stoplight. The driver might restrain themselves from moving the gas pedal, without outside force applied. The passengers, were the driver to attempt to move the gas pedal, may grab their arm and restrain them from proceeding. Both of these are examples where social force converts to physical force.

[14] An example of this would be a machine operator typing commands into a computer, which causes the machine to move. The knowledge (cultural force) of the operator results in physical force exerted on objects and people. More tenuously, perhaps, we could call a dancer’s response to a musician a conversion of the cultural force of the musician converted into a physical force within the body of the dancer.

[15] This doesn’t mean that no other individuals or entities in the US use force, it does mean that they may do so only at the consent of the US government.

[16] In some cases, such as with modern day North Korea or the USSR under Stalin, the government will claim a monopoly on cultural force, and tightly control the use of symbols within its borders. This is the case in modern day North Korea, and was the case in Stalinist Russia. Censors are the material manifestation of an enforced cultural monopoly.

[17] Here, we refer to the definitions of the Real and the symbolic order developed by Alain Badiou.

[18] For a longer discussion of this, see “Bitcoin in the context of the history of alternative currencies in the United States,” below.

[19] To say that the state has a monopoly on currency is perhaps to leave some subtleties aside. In the United States, the United States has the right to print currency and control its value. Although it is not illegal to produce a private currency, it is illegal to produce one that competes with the dollar or might undermine its value. For a more in depth discussion, please look at the “Is Bitcoin a viable currency?” section of this paper, below.

[20] The long run is a term used by economists to describe the undefined point in the future in which their theory becomes true.

[21] Bullard, James. “Testing Long- Run Neutrality Propositions:Lessons from the Recent Research.” Federal Reserve of St. Louis Review (1999): 58-78. Print.

[22] In this example, we ignore that the value of an apple or orange would be a non- constant that is a function partly dependent upon their ability to be exchanged for grapefruit. We are able to do this because of the given respective desires of Person O and Person A in this specific instance.

[23] Because the effect on the increase in value decreases very quickly as the number of dollars rises relative to the amount of goods in the room, we achieve the semblance of monetary neutrality very quickly. Because of this, it is probably more useful to think of money as neutral when dealing with small additional amounts of an asset which already exists in large numbers.

[24] Because the effect on the increase in value decreases very quickly as the number of dollars rises relative to the amount of goods in the room, we achieve the semblance of monetary neutrality very quickly. Because of this, it is probably more useful to think of money as neutral when dealing with small additional amounts of an asset which already exists in large numbers.

[25] Shiller, Robert J. The Subprime Solution: How Today’s Global Financial Crisis Happened, and What to Do about It. Princeton, N.J: Princeton UP, 0820. Print.

[26] For those already familiar with Bitcoin: In the case of Bitcoin, it would mean that someone developed a way of outpacing the Bitcoin code and was able to double- spend Bitcoins, or if the majority of the network was controlled by malicious users.

[27] An important exception to this rule is the case of the Swiss dinar. This will be discussed further below, as it has important applications to the Bitcoin case.

[28] How much value exactly is added by currency in an economy would require serious study, and is not approached here. For the purposes of our consideration, it is sufficient to demonstrate the amount is nonzero.

[29] Although Bitcoin is not, see http://www.lextechnologiae.com/2011/06/26/why-Bitcoin-isnt-a-security-under-federal-securities-law/ for a discussion of Bitcoin, currency, and US securities law.

[30] This is not to imply that this is a “fair” permission. Clearly more wealth would grant more decision- making power in this instance.

[31] It should be mentioned that the security may not necessarily rise, a fall would be a loss of total value.

[32] Clearly, the knowledge of cryptography, economics, and computer programming means that the time and energy to create Bitcoin has significant opportunity costs and initial cost for research and development. However, in the case of Bitcoin the total value of Bitcoins (approximately 40 million), has far exceeded this value. Although a person or institution issuing a peer- to- peer currency would always risk this initial cost, the initial creation would be highly cost effective with practice, as “new” currencies issued could have smaller and smaller deviations in structure than previous currencies.

[33] Certainly, democracy does not ensure equal input by all members of a nation, however, for the purposes of this paper, we will use the theoretical framework, as it is sufficient to make our point, and the additional complexity of a more realistic framework with racial and class inequalities does not alter the argument.

[34] In 1973, the Chicago Board of Options Exchange opened, part of the movement that allowed the trade of derivatives to explode.   Chance, Don. “A Brief History of Derivatives.” Essays in Derivatives (1998): n. pag. Print.

[35] Currency is already a form of financial asset.

[36] Inside Job, 2012

[37] It should be mentioned that there is no particular reason why the mortgage- backed securities should have lost their value when people began defaulting on their loans- they did merely because everybody thought they did. Mechanically speaking, if people had continued to consider them as an asset with exchange value, then their value might have remained constant, even with the mortgages defaulting “under” them. This is unlikely, and mentioning it is merely meant to emphasize the metaphorical relation of the value relationship between a security and its underlying asset. This is not to discredit the implications of a metaphorical relation, however, and a metaphorical relation is certainly still a relation with very practical effects.

[38] http://www.ucop.edu/treasurer/report/UC_Annual_Endowment_Rpt_2010.pdf

[39] The idea of self- regulation is not particularly hopeful. It is probably true that the financial sector will regulate itself to some extent.   However, there is no guarantee that they will be regulations useful to the nation as a whole- a forest fire creates its own weather patterns which in turn help regulate its movement, this does not imply the patterns produced would automatically be useful to a fire fighter.

[40] Bataille, Georges. The Accursed Share: An Essay on General Economy. Vol. 2. New York: Zone, 1988. Print.

[41] As arms- length regulatory controls have not proven effective.

[42] Quantitative easing is a new methodology developed by the Bernanke Federal Reserve. Money is electronically created by the Federal Reserve, which is then used to purchase assets from banks. The Fed had to resort to this when banks refused to lend money even when the Fed funds rate was reduced to zero, and banks were still refusing to lend, slowing the economy. Two rounds of QE have not convinced the banks to lend- the Fed is now considering QE3.

[43] http://www.cob.calpoly.edu/wp-content/uploads/media/files/econ/Top-Senior-Project-F2011-Daniel.pdf

[44] http://www.mail-archive.com/cryptography@metzdowd.com/msg10142.html

[45] My apologies for the rather stilted order of presentation- ideally a reader would come to this analysis already with an understanding of Bitcoin. However, since this is extremely unlikely, we proceed as we are able.

[46] It is possible to conceive of a non- electronic version of Bitcoin that involves a public informational roster and a mutually agreed- upon set of rules within a community, however it would be prohibitively time intensive, assumes near- perfect informational efficiencies, and would require so many regulating personnel that it would more or less create a third party regulatory body the lack of which is Bitcoin’s claim to distinction.

[47] There are physical Bitcoins produced by Casascius (see https://www.casascius.com/), however they are an extension of the electronic network only, and rely on it for their value and transference. It is possible that they could be traded for goods, but it would remove much of the possible benefits of Bitcoins.

[48] Because an electronic currency would generally be string of numbers and nothing else, in some past cases a clever programmer could essentially “copy” the code and spend the same coin multiple times. Bitcoin uses a clever system with “blocks” of code, where each block requires information from previous transactions, and is verified against the list of transactions listed in every computer in the network. For a more detailed and technical description of this process, please see the original white paper by Satoshi Natsumoto on the Bitcoin.org main site (http://Bitcoin.org/Bitcoin.pdf)

[49] Although, some qualities of Bitcoin call its identity as a currency into question. See “Is Bitcoin a viable currency?” below.

[50] http://bitcoin.org/about.html

[51] More on Bitcoin financial intermediaries will be discussed later in the paper.

[52] http://arstechnica.com/tech-policy/2011/06/bitcoin-inside-the-encrypted-peer-to-peer-currency/

[53] This does not mean that Bitcoin is invulnerable. Bitcoin is protected by an extremely robust encryption known as SHA-256, with additional encryptions augmenting this. Although there is no-one who has yet cracked any of the SHA-2 series of encryptions (of which SHA-256 is a part), there are some indications that the SHA-1 series of encryptions may be cracked, which could provide clues to those trying to crack SHA-2. Without cracking the encryption, the only other way to destroy Bitcoin would be if there were more malignant users in the network than benign, which would allow the network to be overwhelmed. For a full discussion see Weaknesses in the bitcoin protocol, and excellent presentation of the idea of “moving” to a new currency when there is anough concern about the algorithm, mooncakes

Bitcoin is not decentralized

[54] http://bitcoin.org/bitcoin.pdf

[55] http://krugman.blogs.nytimes.com/2011/09/07/golden-cyberfetters/

[56] Bitcoin costs are assigned voluntarily by users. Transaction costs are collected by the miner who solves a bitcoin block, who is free to assign a transfer fee to these blocks.

[57] This is not so far- fetched. As the market cap for Bitcoin is currently around 40 million USD, significant influnce could be exercised over the price without too much money.

[58] https://en.bitcoin.it/wiki/FAQ The reader will notice that Wikipedia is used as a citation at a couple points throughout the paper. Because the bitcoin community has heavily utilized the wiki platform to organize their information, in some cases there is absolutely no better source, and the page is cited directly.

[59] http://bitcoin.stackexchange.com/questions/876/how-much-will-transaction-fees-eventually-be

[60] http://www.newyorkfed.org/aboutthefed/fedpoint/fed32.html

[61] http://www.weusecoins.com/mining-guide.php

[62] Mining pools do not increase profit, they simply decrease variance. If mining solo, all of the reward from solving a block belong to the user, however, there is no guarantee as to the regularity with which the client will accidentally happen upon a solution to the block, so the payout can be very irregular. With a pool, the payment is more regular, however, there is a small amount lost through payment to the pool operator.

[63]

[64] https://bitcointalk.org/index.php?topic=2883.0

[65] http://bitcoin.org/clients.html

[66] http://www.weusecoins.com/getting-started.php

[67] DDOS stands for distributed denial of service. It is a form of attack that overwhelms the system attacked by giving it more commands than it can process, causing it to shut down. The simplest form of this would be 100 people hitting the refresh button repeatedly on the same website. Adding a small transaction fee to very small transfers strongly discourages DDOS attacks because they would quickly become extremely expensive.

[68] https://en.bitcoin.it/wiki/MyBitcoin Only 49% of users’ Bitcoins were returned.

[69] https://bitcoinica.com/.

[70] The technical complexity of Bitcoin continues to be a barrier to its widespread adoption. Although not more complex than say, a typing a credit card number into a retail site to pay for an item, it still is intimidating to some computer users, and quickly gains complexity past the basic transaction, such as security or updating the software. Some steps at simplifying the interface have been made, particularly with Armory, which easily allows the user to have a “cold storage” wallet that makes their Bitcoins much more secure. Apple has recently released an app for Bitcoin, compatible with its new Iphone 5.

[71] http://bitcoin.org/clients.html

[72] http://www.weusecoins.com/getting-started.php

[73] http://shop.wikileaks.org/donate

[74] http://commanderx.tk/

[75] silkroadvb5piz3r.onion

[76] At this point in time, generally not a safe assumption.

[77] http://bitcoincharts.com/charts/mtgoxUSD#tgSzm1g10zm2g25zv

[78] http://observer.com/2010/12/4chans-anonymous-army-takes-down-mastercard-visa-paypal-joe-lieberman-in-name-of-wikileaks/

[79] Throughout this section of the paper, I make some sweeping generalizations about the standpoints of the “libertarian”, “anarchist” and “political left.” These should be taken as generalizations and not codified belief systems that are uniform across these groups. Also, most statements here are not substantiated with data or previous literature and should be treated as preliminary research.   Statistically rigorous political demographics for Bitcoin are not available to my knowledge, and the time necessary to learn proper methodologies and conduct the analysis itself would be time consuming to the point that upon completing it, it would already be inaccurate.   I will cite several Bitcoin forums and online publications throughout, however, and I encourage readers to verify the statements by visiting these forums and publications.

[80] http://gawker.com/5805928/the-underground-website-where-you-can-buy-any-drug-imaginable

[81] https://www.torproject.org/

[82] http://archive.rollingstone.com/Desktop?s=2011111093#/20111110/74

[83] http://www.mail-archive.com/cryptography@metzdowd.com/msg10142.html

[84] http://evoorhees.blogspot.com/ This is an article that represents well the libertarian viewpoint. Again, it is not intended to represent all libertarians, but it does touch on basics shared by many libertarians.

[85] http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1721076 Granted, one gold- oriented author writing about Bitcoin doesn’t prove that there is a major connection, but it is an important example.

[86] http://www.wired.com/magazine/2011/11/mf_bitcoin/

[87] http://www.newyorker.com/reporting/2011/10/10/111010fa_fact_davis

[88] Paul Krugman on Bitcoin http://krugman.blogs.nytimes.com/2011/09/07/golden-cyberfetters/

[89] The New Yorker http://www.newyorker.com/reporting/2011/10/10/111010fa_fact_davis

[90] http://www.forbes.com/sites/timworstall/2011/06/20/so-thats-the-end-of-Bitcoin-then/

[91] http://www.forbes.com/sites/timothylee/2011/08/07/the-bitcoin-crash/

[92] http://www.economist.com/blogs/babbage/2011/10/virtual-currencies

[93] https://bitcointalk.org/index.php?action=search2;params=YWR2YW5jZWR8J3wxfCJ8YnJkfCd8MSw3NCw3Nyw2LDM3LDE0LDQwLDQxLDQyLDQ0LDc2LDQsMTIsNyw1Nyw1LDUxLDc1LDUyLDUzLDU2LDcxLDY1LDc4LDczLDgsMjQsMzksMzQsOSw2Nyw1OSwxNywyNSwyNiwyNywzMSwzMiwzMywzMCwxNiwzNSwzNiw2Miw2MCw2MSw2Myw2NCwxMyw0Nyw0OCw0OSw1NCw1MCwyOCw0Niw3OSwyOSw2OSw3MCwxMCwyMywyMiwyMSwyMCwxOSw1NSwxOCw2Niw3Miw0NSwxMXwifHNob3dfY29tcGxldGV8J3x8InxzdWJqZWN0X29ubHl8J3x8Inxzb3J0X2RpcnwnfGFzY3wifHNvcnR8J3xJRF9NU0d8InxzZWFyY2h8J3xjcmFzaA==;start=360

[94] Bitcoincharts.com

[95] http://www.forbes.com/sites/jonmatonis/2012/06/13/why-apple-is-afraid-of-bitcoin/

[96] http://www.aljazeera.com/indepth/opinion/2012/05/20125309437931677.html

[97] http://business.financialpost.com/2012/06/08/euro-fears-boost-virtual-currency-bitcoin/

[98] http://articles.businessinsider.com/2012-04-11/news/31323347_1_credit-card-mastercard-from-visa

[99] Matonis is upfront about this, and clearly states this in his profile on Forbes.com.

[100] https://en.bitcoin.it/wiki/Buying_bitcoins

[101] https://mtgox.com/

[102] http://tradehillblog.com/2012/02/13/tradehill-suspending-trading-and-returning-client-funds/

[103] https://bitcointalk.org/index.php?topic=19551.0

[104] http://bitcoinarmory.com/

[105] http://bitcoin-otc.com/

[106] http://flexcoin.com/

[107] https://en.bitcoin.it/wiki/Comparison_of_mining_pools

[108] As we mentioned before, although the complex “block” structure of Bitcoin makes it difficult to hack or damage, the surrounding financial services such as “wallet” sites or Bitcoin exchanges are vulnerable, and Bitcoin’s reputation has suffered in part from fairly frequent theft from these sites.

[109] Bitcoincharts.com

[110] http://www.businessinsider.com/europeans-putting-money-into-bitcoin-2012-6

[111] http://americanhistory.about.com/od/revolutionarywar/a/Currency-Act-Of-1764.htm

[112] http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1817857

[113] http://www.usmint.gov/consumer/?action=archives#NORFED

[114] http://www.securityfocus.com/news/11528

[115] Herpel digital currencies

[116] http://www.e-gold.com/unsecure/terms.htm

[117] Burk, Kathleen. “Barry Eichengreen, Golden Fetters: The Gold Standard and the Great Depression 1919–1939 (New York/Oxford: Oxford University Press, 1992. 448 Pp. $39.95).” Financial History Review 1.01 (1994): n. pag. Print.

[118] A numaire is an economic term for a unit of account, basically a neutral standard to compute value.

[119] www.paypal.com

[120] https://wumt.westernunion.com/WUCOMWEB/shoppingAreaAction.do?method=load&nextSecurePage=Y

[121] It is yet to be seen if transaction costs will rise as use of the network increases, and as mining becomes less profitable.

[122] Flexcoin is currently attempting to develop a chargeback system, but it is still zygotic and has not been implemented.

[123] An extremely exciting manifestation of this popped up in a forum about “Loom.cc.” Loom is a platform for user- created asset- backed exchange instruments. With it, theoretically, users can make a simple financial asset backed by anything, as long as the issuer was a trusted source. Someone claimed to be working on a Bitcoin- backed loom asset- an electronic asset backed by an electric commodity. https://bitcointalk.org/index.php?topic=83574.0

[124] http://bitcoinmagazine.net/growing-decentralization-in-the-bitcoin-economy/

[125] Bordieu, Pierre. “Forms of Capital.” (1986): n. pag. Print.

[126] We are not ignoring that communications and transport technologies are constructed in a large part by, and deeply embedded in financial structures. We are not attempting to idealize in an abstract system, I am trying to examine the current possibilities for disentanglement- which must happen by degree unless we are advocating for complete secession.

[127] This, admittedly, is a great sin against Bataille, in that we again subordinate his triumphant escape from economic thought into a framework of utility.

[128] King, Mervyn, The Institutions of Monetary Policy. Bank of England Quarterly Bulletin, Autumn 2004. Available at SSRN: http://ssrn.com/abstract=700082