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What is money?: On Bitcoin


In the London Review of Books, John Lanchester provides a brief history of money and shows how bitcoin represents a natural evolution of this history. Prior to the emergence of modern banking, private currencies were common, sometimes many of them in a single city or region. Now that the internet and mobile technology is making it possible to conduct financial transactions, such as lending and borrowing, without banks as intermediaries, private currencies like bitcoin or re-emerging. Here’s an excerpt:

Bitcoin is a new form of electronic money, launched in a paper published on 31 October 2008 by a pseudonymous person or persons calling himself, herself or themselves Satoshi Nakamoto. Note the date: this was shortly after the collapse of Lehman Brothers on 15 September, and the near death of the global financial system. Just as the Civil War was the prompt for the United States to end private money, and the crisis of Kenyan democracy led to the explosive growth of M-Pesa, the global financial crisis seems to have been a crucial spur, if not to the development of bitcoin, then certainly to the timing of its launch.

Bitcoin’s central and most exciting piece of technology is something called the blockchain. This is a register of all the bitcoin transactions that have ever happened. Every time something is bought or sold using bitcoin – remember, that means every time something moves from one place in the register to somewhere else – the new transaction is added to the blockchain and authenticated by a network of computers. The techniques are cryptographic. It’s impossible to fake a new addition to the chain, but it’s relatively easy (by relatively easy, I mean relatively easy for a huge assembled array of computing power) to verify a legitimate transaction. So: impossible to fake but simple to verify. The entities transferring the money are anonymous, and at the same time completely transparent: anyone can see the bitcoin addresses involved, but nobody necessarily knows to whom they belong.

This combination of features has extraordinary power. It means that you can trust the blockchain, while knowing nothing about anyone else attached to it. Bitcoin is in effect a register like the one kept in people’s memory on Yap, but it’s a register that anyone can see and to which everyone assents. For the first time in human history, we have a register that does not need to be underwritten by some form of authority or state power, other than itself – and, as I’ve argued, that register isn’t some glossy add-on to the nature of money, it actually is how money works. A decentralised, anonymous, self-verifying and completely reliable register of this sort is the biggest potential change to the money system since the Medici. It’s banking without banks, and money without money.