As the peer economy expands into every conceivable niche, established companies in those niches will seek some form of defense. Taxi companies, hotel chains, broadcast TV networks, and other old-
school firms increasingly depend upon twentieth-century laws and regulations to protect their businesses from interlopers who apply tactics honed in the digital domain to services in the real world. The battle has shifted. It’s no longer digital insurgents versus old-school companies. Now it’s digital insurgents versus government regulations.
Technology firms have begun to redirect their attention towards the institutions of government that thwart their progress. A basic premise of the Internet is that the signals reroute around damage in the network. Something similar is happening when tech startups encounter seemingly arbitrary licensing rules. The old-fashioned tactics of lobbying, legislation, and regulation seem like bugs instead of solutions.
So instead of disrupting companies, technologists seek to disrupt government—or render it
irrelevant. They seek to deconstruct or bypass the laws, the regulatory bodies, and the central banks and centralized apparatus that governed the twentieth-century economy. They argue for the wholesale reinvention of government institutions. Cheered by taxpayer groups, techno-libertarians, and
advocates for small government, and sped by a general trend of declining support for big federal programs and corporate welfare, startups from Silicon Valley have grown adept at inflaming public opinion against government handouts to big business and cartels. All of this politicking is framed in business-friendly terms: pro–free market, pro-entrepreneur, pro-capital, and pro-employment. It’s high-tech populism where the insurgents are capitalists and entrepreneurs rather than revolutionaries, communists, or populists with a thirst for redistribution.
And nobody mentions that these new private marketplaces rake in 20 percent fees on every transaction, even as they supplant government and erode the local tax base.
Such resistance is part of a grand tradition of American progress: confronting laws that are out of sync with the times and calling for the removal of policies that enshrine injustice or favoritism.
Supporters of the P2P markets cite philosopher John Locke, the father of classical liberalism, who espoused the principle that government is valid so long as the governed consent to be ruled. Citizens have the right to question government, and, if necessary, replace the government. Locke’s writing inspired the founders of the US and every subsequent democratic revolution. His principles were enshrined in the Declaration of Independence and echoed in the US Constitution.
It may be grandiose to cast Uber and the other P2P markets in the same light as the American
Revolution, civil rights, equal rights, and the labor movement. Fair enough. But Uber does fit squarely in the tradition of American entrepreneurs proceeding boldly to bring a better mousetrap to market even if the law prohibits it. This streak runs deep in American society, and it includes colorful historical figures like homesteaders, Sooners, bootleggers, moonshiners, and smugglers, all the way back to the veterans who started the Whiskey Rebellion. Laws were broken and lawbreakers were punished, but in some cases the laws were changed. For many entrepreneurs, it’s worth a shot.
What’s in question is the role of government in a rapidly evolving digital economy. From this viewpoint, the government moves too slowly and treads too heavily on free markets.
Is vaporized government next? Technologists are beginning to ask serious questions about the role and function of governments in the age of instantaneous communication and distributed computer power. Many functions of government could, in theory, be done cheaper, faster, and more accurately by software. This line of questioning inevitably extends beyond regulation and licensing into other government activities, and while some dismiss the concept of software supplanting governments as utopian, or technotopian, it strikes me as a mistake to dismiss the question without considering it.
As we spend more and more time and money in digital environments, we owe it to ourselves to contemplate whether the old rules that govern society in the physical world are appropriate or even relevant in this new domain. If not, we run the risk of sleepwalking into the future, dragging the old rules with us.
THE CURRENCY QUESTION
The most heavily regulated industry of all is finance and banking, and the need to maintain stable and reliable currencies ensures that government plays a large role as intermediary and arbiter. Bitcoin was designed to blow all of that infrastructure and regulation away. Cue the eye-rolling and smirking.
If you’re familiar with bitcoin, you probably know it as the most controversial technology startup of recent years. Or maybe you got burned as a speculator, trying to ride the rollercoaster of bitcoin’s gyrating valuation.
Bitcoin was conceived of in 2008 and implemented as open-source code in 2009 as
cryptocurrency, a new form of digital cash that could enable payments to be made privately via the Internet without a middleman. The system is great for people who want to bypass the mainstream banking system. In practice, in the early days, that meant the only people who needed bitcoin were those running offshore casinos or scams, or selling illicit merchandise. And a huge number of Chinese investors who had no other place to put their savings. When Chinese speculators began to accumulate huge holdings of bitcoin, the price skyrocketed from $13 to more than $1,000 per bitcoin in a single year, nearly matching the price of gold on November 29, 2013, as reported by CNN Money. At that point the total market capitalization for the experimental digital currency exceeded $10 billion.
And then the bitcoin bubble burst. The bubble was pricked by one disaster after another, piled upon an epic fail. In 2014 dodgy bitcoin exchanges in India, France, and the US were raided by authorities; millions of dollars of bitcoin were stolen by hackers; the owner of the Silk Road trading site for illegal goods was arrested by the Federal Bureau of Investigation (FBI); and the Chinese government prohibited banks and payment companies from dealing with it. The digital currency crashed hard, falling below $180 per coin in January 2014. By 2015 it was trading at $200 to $250, less than one-third of its 2013 high value. Cynics wrote it off as a failure: way too volatile to serve as a proper currency, too cumbersome for the average punter, and too tainted by scandal to be taken seriously.
It’s tempting to dismiss bitcoin. But that would be a big mistake. Every frontier town attracts its fair share of flimflam men, con artists, and grifters, and bitcoin, operating at the fringe of the shadow economy, was no exception. A big part of the crush in 2013–14 involved clearing these bad actors from the bitcoin stage. And although 2014 was a brutal year for bitcoin currency, it also happened to be the year that venture capital firms poured record amounts of investment dollars into bitcoin
startups. One way to look at the company’s annus horribilis is as a reset: the first wave of dodgy con men were shut down and replaced by a new generation of legitimate businesses building more secure, scalable digital currency infrastructure.
Investors see a boom coming. Fred Wilson of Union Square Ventures described his rationale on his blog, AVC, by comparing the potential of bitcoin to the spectacular rise of social media in the
previous decade: “Our 2004 fund was built during social. Our 2008 fund was built during social and mobile. Our 2014 fund will be built during the blockchain cycle.” What do investors see that the skeptics miss?
Bitcoin was designed as a medium of value exchange between total strangers. That’s different from every other type of digital transaction, which requires a trusted intermediary of one sort or another to ensure that the money flows from one account and arrives safely in the other. Bitcoin presents the possibility of frictionless transactions between individuals with no banks, no credit card companies or payment processing firms, no fees in the middle. No governments, no exchange rates, no
manipulation of interest rates by central banks, and no inflation. That’s potentially explosive. It is an opportunity to rethink the way transactions work on the Internet.
If bitcoin works as theorized, it matters to far more people than just the fringe players in the shadow economy. Consider any e-commerce site that deals in electronics, for instance. These
companies suffer from brutal downward pressure on profit margins exerted by Amazon and the big- box stores. The 3 to 5 percent transaction fee raked off by the credit card company doesn’t sound like much, but when competing against Amazon, that slim percentage might be all of the profit margin a business gets out of a transaction. No wonder 50,000 retailers now accept bitcoin.
Banking (and much more) on the blockchain
What makes bitcoin profoundly significant in the Vaporized Era is the remarkable software protocol known as the blockchain. The simple way to describe it is as a “distributed ledger,” but this phrase tells us very little until we consider the function of a ledger and the implications of decentralizing it.
Introduced in Italy in the late thirteenth century, the ledger combined two innovations: Arabic
numerals and double-entry bookkeeping, to record and keep track of economic transactions. Debits and credits are posted in separate columns with an ending balance posted at the bottom. It’s a tool to manage a complex business with accuracy and detect errors, and it’s considered a cornerstone of modern finance. Now imagine that instead of a ledger that recorded transactions for a single private enterprise you had a universal ledger that tracked every transaction everywhere in the Vaporized Economy. That’s the idea of the blockchain.
The remarkable part of the blockchain is that no single entity controls it; instead every bitcoin transaction is part of a networked public record. Anyone can freely download it and inspect it
because the data is dispersed across all of the computers in the bitcoin ecosystem, which register and verify all transactions made. And because the blockchain is distributed across multiple computers, it is more secure than centrally stored databases: every computer around the world mining bitcoin is constantly verifying its integrity. What bitcoin entrepreneurs now realize is that the blockchain can be used to record any number of transactions—even those where no money changes hands.
Bitcoin enthusiasts maintain that the algorithm could—in theory—substitute for certain institutions that regulate the economy and society. It could provide a way to conduct any type of secure
transaction, including exchanging or transferring contracts or other legal documents, in the digital environment. Here’s a sample of some of the topics that are under consideration.
> Central banks: The policies of the US central banking system, known as the Federal Reserve, have been blamed for worsening the Great Depression of the 1930s, creating the Great Inflation of the 1960s, pumping up the housing bubble of the 2000s, and a host of other calamities. After the 2008 financial crash, the Fed was lambasted in a letter signed by twenty-three prominent economists for potentially fueling inflation by buying trillions of dollars of long-term treasury bonds in an intervention known as quantitative easing. And in his book Deception and Abuse at
the Fed, Robert Auerbach, a former economist at the Fed and investigator for the US House Committee on Financial Service (also known as the House Banking Committee), describes a bureaucratic culture of conformity, secrecy, and strict hierarchy that stifles objectivity and
dissent. No wonder Nobel Laureate Milton Friedman groused that he would prefer to abolish the Federal Reserve and replace it with a computer. When he made the remark in 1997, it was gruff comedy. Today, bitcoin offers the prospect of doing just that: replacing central banking policies set by bureaucrats with an inviolable rules-based system of regulation by algorithm.
> Smart contracts: The concept of self-executing and self-enforcing agreements has been around since computer scientist Nick Szabo introduced the term in 1993. Now, however, it’s possible to conceive of real-world applications such as smart contracts that could transfer ownership of property represented by a token that is recorded in the blockchain. This is a step towards automating the transfer of property. Similarly, as computers and network connectivity are embedded in more and more devices, it might become possible for them to transact among
themselves, ordering and restocking their own supplies and recording the transfer of data among machines.
> Digital voting: Electronic voting systems have been “coming soon” for two decades but, so far, deployments have been marred by malfunctions and dark allegations of tampering. A Danish political party called the Liberal Alliance has already used the blockchain to manage internal polling, a step that may be a precursor to using it to verify the actual voting process for an election. As a member of the party’s executive committee was quoted saying in
CryptoCoinsNews, “The blockchain removes the need for trust, because the technology can run autonomously without interference from humans, and it is at the same time open source and transparent, so that everybody can look under the hood and see what’s going on.”
> Digitally time-stamped documents: Today getting a document notarized means having to find a notary public, and then driving to the office and signing the document in person. The fingerprints and signature of the document owner are recorded in the notary’s ledger, and the document is
stamped with the notary’s seal. Proof of Existence, a demonstration app developed by a twenty- three-year-old game developer in Argentina, uses bitcoin to verify the date and integrity of a digital document by inserting a unique digital timestamp that is entered into the blockchain. The entire process can take place on a laptop computer, effectively vaporizing the notary public.
> Decentralized storage: Cloud computing and cloud storage services are incredibly handy, but they are also completely centralized—and therefore vulnerable to attack. Customers take a bigger risk than they realize when they place their data on the cloud storage. A bitcoin project called Storj is developing a decentralized cloud storage system that uses the blockchain to enable home users to rent excess space on home drives—just like a P2P marketplace.
> Transparent economy: Zoom out. If an entire economy ran on a digital currency like bitcoin,
economists would have instant real-time access to accurate data about how money was moving through the economy. Bitcoin could present the possibility of a truly P2P marketplace with no central authority, all data about transactions in the free and clear. We’d have a global ledger of economic activity that would enable the entire economy to optimize and improve. Even if bitcoin ultimately fails entirely, the possibilities it presents for a software-defined society have already succeeded in convincing thousands of smart people all over the world to feverishly build ever- more-sophisticated apps and services running on the blockchain.