The Bitcoin revolution: The new ‘Bank of England’ is 'no bank at all'

As one of the first countries to industrialize in the 1760s, Britain’s manufacturing revolution instigated one of the greatest practical and ubiquitous changes in human history. But even more extraordinary than the cultural shift itself, is the fact that Britain’s industrialization remained way ahead of potential competition for decades. Only in the early 1900s did historians come to grips with the issues of causation. Max Weber’s pithy answer, “the Protestant work ethic,” pointed to Puritan seriousness, diligence, fiscal prudence and hard work. Others point to the establishment of the Bank of England in 1694 as a foundation for financial stability.

In contrast, continental Europe lurched from one national debt crisis to another, then threw itself headlong into the Napoleonic wars. Unsurprisingly, it was not until after 1815 that industrialization took place on the European mainland, where it was spearheaded by the new country of Belgium.

250 years later, another revolution has begun with the launch of Bitcoin (BTC), but this one is more commercial in nature than industrial. Though the full impact has yet to play out, the parallels between these two historical events are already striking.

Bitcoin may not match the obviousness of industrialization, but the underlying pragmatics touch on the very foundations of the non-barter economy. Like the establishment of the Bank of England, the creation of the cryptocurrency infrastructure has been prompted by ongoing and worsening threats to financial stability: systemic fault-lines created by macroeconomic challenges stemming from the 2008 financial crisis.

If you can’t beat ‘em, join ‘em...right?

Where a central bank once anchored financial enlightenment, it now plays the role of antagonist. For those who could “connect the dots” in 2008, there was the realization that central banks no longer existed as guardians and protectors of national currencies, but rather as tools for creating politicized market distortions, abandoning their duty to preserve wealth in favor of creating the conditions for limitless, cheap government debt. While many of the underlying intentions were benign, the process inherently worked to punish savers and reward reckless debt.

Meanwhile, it has steadily taken time for the potential of digital assets to reach their potential and approach something like critical mass, though thankfully full acceptance shouldn’t take as long as Britain’s industrial revolution. Over the past 12 years, cryptocurrencies have moved from unknown to novel to significant, growing interest. As a result, profound changes are underway, affecting the mechanics by which investors, the investment industry, wealth managers and even the commercial banking sector are engaging with cryptocurrencies.

This interest has accelerated as we enter into a period of deep economic uncertainty and growing awareness that structural soundness is shifting away from traditional investment options. Not only that, this growing financial innovation and public interest has largely occurred outside of the central banks’ control, if not outright antagonism led by the banks’ regulatory arms in government.

Now, many central banks are trying to join a game they’ve tried almost every way of beating, with digital currencies that adopt the glowing sheen of crypto innovation, but which also eschew the underlying innovations and philosophy that made those innovations so popular to begin with.

Follow or get out of the way

The popularity of cryptocurrency has largely been due to its protean fungibility — it has been whatever the independent financial community has needed it to be, from digital currency to speculative financial instruments to smart contracts that can power smart financial technology.

However hard central banks might try to co-opt the hype of cryptocurrency, cryptocurrency succeeding will mark the fundamental end of critical aspects of the central banking monopoly by offering a more competitive vehicle for facilitating commercial transactions and providing a more stable medium to store monetized assets. Cryptocurrencies actually offer real returns on “cash” deposits, something that the fiat banking system has long since abandoned. Most of all, cryptocurrencies reveal the fictitious nature of fiat currencies as a principle.

Cryptocurrencies as an ecosystem will increasingly constrain, redirect and set the parameters for government macroeconomic policies. Certainly, sound alternatives to fiat currencies will drive the latter to the periphery of commercial life, concomitantly reducing the number of tools the nation-state has at its disposal to regulate or respond to changing economic conditions. Above all, this means that government financial engagement can no longer be a rule unto itself. It will have to engage by the same principles as everyone else. A level playing field here has dramatic implications.

Against the backdrop of the essential limits of fiat currencies, current geo- and macroeconomic policies and a new emerging world order, cryptocurrencies offer vast potential as an efficiency facilitating frictionless commerce and investment, a medium of stability against uncertainty and inflation, increased security in value transfer and wealth management, optimum autonomy in an increasingly intrusive climate, and “cash” asset preservation/growth in a world of negative interest rates.

The edifice that supports the concept of a “global reserve currency” is also weakening. This will reduce political influence over global finance, as well as nations’ abilities to run a long-term balance of payments deficits, current account deficits and borrow at little or no interest. Indeed, given current trends, changes in trading mechanics may speedily evolve to the point that such “reserve currencies” no longer have a function at all. And cryptocurrency success will hasten the end of the U.S. dollar monopoly in global commerce.