The Shock of Bitcoin — Money Without a State

In the autumn of 2008, the world was in the throes of a financial crisis. A giant American investment bank collapsed, and the breakdown of credit spread in a chain reaction, swallowing banks and markets across the globe. As we saw in the previous episode, money had changed its shape from paper into numbers, piling credit upon credit and swelling ever larger. When that tower fell, people were forced to recognize a hard truth: the money we use without a second thought rests, in the end, on trust in the machinery of states and banks.

It was in the very midst of that turmoil that a short paper was posted to a mailing list of people interested in cryptography. The signature read Satoshi Nakamoto. Despite the Japanese-sounding name, the identity behind it remains unknown to this day. That paper, just nine pages long, set out a way for people to send money directly to one another, relying on neither states nor banks.

Erasing the ‘trusted third party’

The paper’s title is translated as ‘Bitcoin: A Peer-to-Peer Electronic Cash System.’ At the outset, what Satoshi Nakamoto took issue with was that all electronic transfers up to then had required a ‘trusted third party’ such as a bank.

When you think about it, the reason we can send money with peace of mind is that we trust the bank standing in the middle to prevent double-spending and to record balances correctly. Yet that arrangement only works if the third party is trusted without fail. And the crisis of 2008 showed, in vivid terms, that such trust could collapse.

Satoshi Nakamoto’s idea was to do away with that ‘trusted third party’ altogether. The record of transactions would be shared not by a particular institution but by countless computers participating in a network, each verifying the others. Rather than any one person holding the ledger, everyone would hold a copy of the same ledger. With this distributed arrangement, money could be sent without a central administrator — that was the idea at the very foundation of Bitcoin.

The invention of the blockchain

The technology that supports this arrangement came to be called the ‘blockchain.’

Records of transactions are bundled into ‘blocks’ of a fixed size and linked to past blocks like a chain. To add a new block, participants around the world must compete in computation and confirm its correctness with one another. Once a record is linked into the chain, it becomes extremely difficult to quietly rewrite it afterward. This property is said to be the device that keeps the ledger correct even without a central administrator.

In early 2009, Satoshi Nakamoto generated the first block and set the Bitcoin network into operation. The first block is said to have carried a newspaper headline of the day — a line from an article about a bank bailout. Perhaps it was a quiet objection to the existing finance that was crumbling away. Before long, Satoshi Nakamoto vanished from the public stage, and the identity was left a mystery. Yet because the mechanism itself was designed to keep running without an administrator, it went on being operated by participants around the world even after its founder was gone.

Euphoria, wild swings, and the divide of opinion

At first, Bitcoin was no more than an experiment among a handful of engineers. It carried no real price to speak of, and there was reportedly a time when large amounts of Bitcoin changed hands for trifling sums. As time passed, however, people appeared who regarded it as a new asset, and the price moved sharply while swinging up and down.

In 2017, the price surged, and crypto assets swept into the conversation worldwide. Trading spread in Japan too, and while some people gained enormous profits, it was reported that the plunge that followed left many others with losses. In 2021 the price is said to have reached record-high territory, but it has frequently been struck by steep declines since then. Large moves within a single day are not unusual, and that violence invited the criticism that it is ‘nothing more than an object of speculation.’

The assessments remain sharply divided even now.

How states confront crypto assets also differs greatly from country to country. In 2021, one country adopted Bitcoin as legal tender and drew the world’s attention, but it was later reported that its use did not spread as much as the government had hoped, and the arrangement is said to have been reconsidered. Some countries welcome it, while others move to regulate or ban it. For the state, which had remained the protagonist of money, money without a state became a challenge it could not ignore and, at the same time, a hard problem with no easy answer.

Asking again: what is money?

Whether Bitcoin is truly ‘money’ is a matter on which views remain unsettled even among experts. Its use in everyday payments is still limited, and the criticism that it is too unstable to serve as a measure of value runs deep. At the same time, it is also a fact that somewhere in the world a number of people too large to ignore find value in it, and enormous sums of money are in motion.

Yet the question its very existence posed to us was a weighty one. What, in the end, supports the value of money? As we have seen throughout this series, shells, metal coins, banknotes, and the numbers in banks all stood, in the end, on people’s credit — the belief that ‘this has value.’ Bitcoin threw before the world a grand experiment: whether that credit could be severed from the state.

Whether that experiment is a success or a failure cannot be declared now. What is certain is that, for the first time, the premise that money belongs to the state has been questioned at its very root. And the state, too, was preparing to answer that question. Central banks themselves were beginning to move toward issuing digital money.