The website Sifr recently published an article titled “The Illusions of Digital Currencies,” in which the author argues that cryptocurrencies have failed to solve problems in the global financial system, and have in fact created more problems. We believe it is premature to eulogize emerging technologies like blockchain, and unwise to withdraw from a technology that will impact various aspects of our lives in the future, rather than engage with it and steer it in a direction that better serves our values and needs. In this response, we review some of the flaws in Sifr’s logic, and clarify some of the most important aspects of blockchain technology and cryptocurrencies for the global financial system and the people of the Arab region.
Let’s start by clarifying some conceptual confusions in the Safir article. The most important misconception is the conflation of blockchain technology with cryptocurrencies, which is akin to conflating the internet with email. Email is one of many applications of the internet, and cryptocurrencies are one of many applications of blockchain technology. In this article, we will discuss the potential and promise of blockchain technology as a whole, not just cryptocurrencies. Another significant misconception is the assumption that all cryptocurrencies are volatile in price, failing to acknowledge the existence of stablecoins – cryptocurrencies pegged to the value of national currencies like the US dollar, and among the most widely circulated and prevalent cryptocurrencies. According to CoinMetrics statistics, stablecoins were used to settle financial transactions worth $7 trillion in 2022 alone.
There are also several types of reductionism and selectivity in the article, starting with ideological reductionism, where the article assumes crypto is a libertarian/anarchist technology. While a significant portion of the crypto community belongs to these currents, this does not mean the technology itself is inherently libertarian/anarchist; there is leftist, rightist, socialist, and centrist presence and adoption, and as blockchain adoption increases, its audience becomes more diverse. There is conceptual reductionism, where the author discusses limited specific goals for blockchain technology, focusing on goals that have not produced major tangible results yet, such as resisting inflation, while there are other goals and aspects of this technology that have already achieved great success. Finally, there is technical reductionism, where the focus is solely on Bitcoin while ignoring dozens of other blockchain networks and thousands of other cryptocurrencies. With a similar degree of multidimensional reductionism, theoretically any technology or movement could be dismissed.
We will discuss blockchain on two levels, first as a technology, and second as a social movement. As a technology, blockchain is considered a General Purpose Technology, meaning that, similar to electricity, the internet, and artificial intelligence, it is a technology capable of profoundly impacting diverse and broad sectors, such as finance, governance, data, healthcare, culture, and supply chains. We can generalize this feature to cryptocurrencies, as they enable a wide range of use cases, such as voting, governance, proof of stake, fractionalized ownership, micropayments, loyalty programs, tokenization, financial inclusion, instant settlement, and increased transparency, and yes, resisting inflation.
As we can see, fighting inflation is not the primary or sole purpose of blockchain technology and cryptocurrencies. Still, saying that cryptocurrencies have failed to achieve success in this regard is a hasty, simply incorrect conclusion. For starters, the author uses Bitcoin, one of thousands of cryptocurrencies, as the sole example in the article, and reaches his conclusion by pointing to the sharp volatility in Bitcoin’s value over the past two years. This volatility can be attributed to Bitcoin still being in an extremely early stage of adoption (around 4.5% of the planet’s population according to one estimate), and increased adoption is expected to stabilize it to a degree close to gold price stability, hence Bitcoin’s description as digital gold (not digital money).
On the other hand, looking at Bitcoin’s historical pricing since its launch in 2009 until today, we see that the overall trend line is in cyclical ascent, with each cycle starting at Bitcoin’s halving (reduction of Bitcoin mining rewards distributed to miners by half), which occurs every four years. Therefore, it is premature to say that Bitcoin’s deflationary model has proven to be a failure; so far, this model has proven successful by steadily increasing Bitcoin’s median value in each four-year cycle.
Finally, we can find even more interesting success stories by looking at other cryptocurrencies like Ethereum. Until recently, Ethereum transaction fees were distributed as rewards to miners, but after two major amendments to the network in the past two years, a new mechanism was implemented that buys and burns Ethereum tokens with most of the proceeds from transaction fees. Thus, the higher the network usage rate, the more Ethereum tokens get burned, making Ethereum deflationary in a dynamic way, unlike Bitcoin which relies on a fixed model (placing a maximum cap on the total number of Bitcoin tokens) to achieve deflation.
But let’s talk about cryptocurrency use cases that have already proven remarkable success, especially those that address our needs as Arab region residents. We can’t help but start with financial inclusion, as the Arab region remains among the most globally underbanked, with a large portion of the population partially or completely deprived of banking services, unable to build financial lives or join the digital economy.
I don’t have to look very far to find examples, as personally, despite my many attempts, I have been unable to open a bank account as a Syrian citizen during my life in Lebanon and before that Egypt, which exposed me to difficulties receiving and sending money, and left me at the mercy of money transfer companies that charge high fees even when refusing or returning transfers. Thanks to the permissionless nature of blockchain technology, I now have a robust financial life, with access to the full range of services and opportunities available to a Wall Street broker, from sending and receiving, to investing or trading simple and complex financial products, and using and offering services like lending, borrowing and providing liquidity.
This aspect of cryptocurrencies makes them ideal for use in crises and disasters, as many Ukrainians smuggled their money out of the country through stablecoins, and these currencies were used to transfer global aid to the Ukrainian government. Finally, cryptocurrencies were recently used to deliver aid in the fastest and most efficient way to Syrians affected by the latest earthquake between Syria and Turkey (around $6 million was sent to victims in the first 10 days).
In addition to financial inclusion, blockchain technology and cryptocurrencies have succeeded in radically reducing the cost and time of financial transactions, and today increasing numbers of banks around the world use blockchain instead of legacy clearing house systems. We at Tahkeer received a grant last year, and a friend helped us receive it and transfer it to stablecoins then send it to us in Lebanon, which cost us only 1% of the total amount, while it would have cost us between 5-7% if we had used Western Union for example, in fees for sending, receiving, and converting. Residents of countries like Lebanon and Syria rely heavily on remittances from expatriates, and similar savings in transfer costs can make a real difference over time.
In addition to the above, removing the middleman in finance directly contributes to reducing, or at least slowing, the expansion of the wealth gap. In traditional finance, we pay a portion of our money to the wealthiest people every time we use a credit card, ATM, or transfer money from one currency to another or from one account to another. In the decentralized finance world, known in crypto as DeFi, there is no similar leakage of value from bottom to top, with parallel financial services built on fully automated smart contract applications requiring negligible fees to use.
Let’s now shift to discussing blockchain as a social movement. The Safir article depicts blockchain as a group of libertarian crypto-anarchists thirsty for profit. To tell the truth, there is some accuracy in this image, as this group is strongly represented in the blockchain space. This does not mean that portraying blockchain in this way is free of misleading reductionism. (Note: We will refer to anarchism using the term libertarian, instead of anarchy which Safir used and has negative connotations).
If we read the editorial on Radical Decentralization, which serves as a manifesto for the blockchain movement, we would find a clear and logical argument explaining blockchain’s tendency to move away from centralized authorities. The authors speak of the crisis of trust in global centralized systems, and point out that “the most common reaction from both right and left (retreat from technology, markets, and global cooperation) may destroy some of the most valuable things about our contemporary societies, while exacerbating the very problems it seeks to solve,” and call for “finding ways to use markets and technology to radically decentralize power in all its forms, to shift from reliance on authorities to reliance on formal rules.”
So the call here is not to create a power vacuum for capitalists to exploit, but for a systematic and careful transition from reliance on trust systems, which require us to trust that the legislative, executive and judicial authorities are doing their best to serve the interests of their constituents, to trust-less systems governed by formal rules and executed automatically using technologies like smart contracts. For example, we can issue programmed money containing smart contracts that automatically deduct taxes, eliminating the need for centralized authorities to play the role of tax auditors and intentionally or inadvertently fail at it.
We can understand blockchain as a social movement more profoundly by comparing the Occupy Wall Street (2011) and WallStreetBets saga (2021) movements. In 2011, we witnessed the Occupy Wall Street movement which lasted for about two months without achieving any significant results. That movement was emotional, moralistic, ideological, rhetorical and performative. The result? All that remains of it is this video of Wall Street investors drinking champagne, laughing at the protesters and filming them with their mobile phones.
Ten years later, in 2021, another movement emerged, with tens of thousands of Reddit users investing in companies threatened with bankruptcy due to targeting by Wall Street investors. This movement, later described as a saga, was systematic, scientific, planned, and aimed at manipulating the system from within rather than withdrawing and protesting from a position of weakness. The result? Wall Street firms lost more than seven billion dollars in a matter of days, and hedge fund managers appeared on TV crying, pleading for a government bailout that never came, and many ended up bankrupt.
As a social movement, blockchain shares many characteristics with the 2021 WallStreetBets saga. This movement aims to make existing organizations and systems obsolete not by protest, but by building better alternatives, thus demonstrating that construction can be a radical and more dangerous form of protest than (attempted) destruction. At the height of the crypto market in late 2021, the total market value reached nearly three trillion dollars, a huge amount withdrawn from Wall Street and Silicon Valley to mostly decentralized, permissionless global companies. Not a bad outcome for a movement that started just over a decade ago.
In conclusion, I would say that blockchain, like the internet, is a neutral technology, and it is our responsibility to steer it towards a path that suits our values and aspirations. It is true that the open market anarcho-capitalists and libertarians have a loud voice in the arena today (and good for them, by the way), but this is not due to a problem with blockchain itself, as much as the passivity and apprehension of currents like the progressive left, Marxism, and critical theory, which have taken a puritanical stance towards this emerging technology, preferring to withdraw and protest from the outside. When these currents voluntarily withdraw from the table, they should not expect the remaining currents to defend their values and aspirations.
This article was written in accordance with AbjaDAO Dictionary for Blockchain and Web 3 Terms.
