How bitcoin and blockchain could solve our crisis of trust
Dominic Frisby discusses how trust in the world’s financial institutions has collapsed, and asks if blockchain and cryptocurrencies such as bitcoin can help restore it.
Last weekend I found myself in the beautiful Irish town of Kilkenny, about a couple of hours drive south-south-west of Dublin.
I was there for Kilkenomics, the festival where comedy meets economics.
The festival was born in 2010 in the wake of the financial crisis, the brainchild of the Irish economist, David McWilliams, and comedy promoter Roger Cook.
It has been running every year since. If you are free next year, I'd recommend making the trip. It's fun, it's interesting, you meet lots of people, and the town of Kilkenny itself is beautiful. What more could you want from a long weekend in early November?
For those of you who missed this year's festival, let me quickly share some of my observations.
It's all about trust or the lack of it
The format of each show is simple. There'll be a subject for example, why are some countries richer than others? What will be the impact of AI and robots on the future of work? Brexit: what is the best case and worst-case scenario? That kind of thing.
There'll be a panel of four or five guests usually economists or journalists all dressed in informal attire. And the conversation will be chaired by a comedian, dressed in a suit and tie (and sometimes looking out of sorts in such unfamiliar clothing).
The job of the comedian is to be the middleman between audience and panel, to put the incomprehensible in layman's terms, to poke fun at the pompous or absurd, and to discipline those who would ramble from going on too long. The format works.
The shows take place in various venues around the town Kilkenny's Set Theatre is one of the most gorgeous venues I have been to they last about an hour, and there are plenty to choose from. They start in the morning and go on till late. Just about every major economic theme of the day, whether national or international, gets covered.
Of all the talks I attended or spoke at, one word kept recurring. That word was "trust". It's quite amazing how often it appeared.
As you might expect, there were many shows discussing current political issues the rise of strong men in politics; Brexit; Trump; the rise of populism; the future of democracy.
Trust was the main issue at all them. People have lost faith in governments.
There were several shows about tech, big data and AI. How is large tech using people's data? To what extent is privacy being violated?
Again, the loss of trust was a big theme here.
There was a show about Lehman Brothers and so the loss of trust in financial institutions became a theme. The failure of economists warning of crises when none are imminent, then failing to spot them when they do occur has led to a loss of trust in economics.
And there were several shows about the future of money. "All money is belief" said Adam Smith. "In God we trust" it says on the US dollar. The point I made was that, as people lose trust in their governments, they will soon lose faith in government money too.
I sat on a panel to discuss cryptocurrencies with Jim Rickards, author of Currency Wars; Bill Bonner, author and entrepreneur (and regular MoneyWeek columnist); and Barbadian blockchain expert, Marla Dukharan.
At the very beginning I ran a quick survey of the audience to see how many people had ever been paid in bitcoin, used it to pay someone else, or invested in it somehow. A smattering of hands went up. I then asked why the others hadn't tried it out.
"I don't trust it", somebody from the audience shouted out.
How on earth is trust to be regained?
Could bitcoin and blockchain help to solve the collapse in trust?
With every evolution in the global economy, I have more and more admiration for the designers of bitcoin and the crypto-economy. Here is a system that has been specifically designed to remove the need for trust.
Where "trusted third parties" banks, basically once processed transactions; now money can be sent from A to B without the need for them.
The code to enable this is written on an open source basis and is transparent for all to see. The process of creating of bitcoins is transparent; the inflation of the money supply is transparent on the blockchain, so there is no need to trust central banks either. The quantity of transactions taking place money velocity is all visible on the blockchain and set in code. There is total transparency.
It may be baffling to those that cannot write code, but nonetheless it is there in the permanent, unhackable, visible-to-all, public, international record that is the bitcoin blockchain. It is all backed by gazillions of gigabytes of computer power, spent over the ten years of bitcoin's evolution.
Blockchain tech is evolving into to other areas of the economy: to register and trade ownership, to store online reputation, in automated contracts, in voting. The loss of trust in existing systems is not an issue.
The new technology obviates the need for it. "In proof we trust", as the saying goes.
I suggested to the audience that they should download a wallet onto their phones from the app store, try out bitcoin for themselves and make their own minds up about whether it is any good.
Jim Rickards, who sat on the panel with me, advised against this. You shouldn't download a wallet because if you do, the NSA will be spying on you, he advised. Bitcoin is probably the invention of people working for the US government.
Satoshi Nakamoto's invention was no breakthrough blockchain tech has been around for 40 years, he said. Bitcoin is a massive fraud and it is going to go to $200. It's for drug dealers and criminals. The bull market in crypto has not created any new wealth, it has extracted it from elsewhere.
I guess he doesn't trust it.
If you'd rather figure it out for yourself, read my guide to making your first bitcoin transaction here.