PARIS — Michiel Van Aarnhem is a young and elegant advisor to the Dutch finance minister. He's also an award-winning video producer. The educational video Bitcoin, Money of the Future?, which he made with his friend Jason Halbgewachs, a Justice Ministry official, took first prize in the European Central Bank (ECB)-sponsored Euro Video Challenge 2017.
In 150 seconds, Aarnhem and Halbgewachs destroy the cryptocurrency. It's much too volatile to be a unit of account, allow exchanges or be a store of value — the three main functions of money, they argue. But when Benoît Coeuré, a member of the ECB's executive board, asked them what they would do with the 4,000 euros they'd won with the prize, they suddenly flipped the script: The winners said they'd use it to buy… Bitcoin!
At first glance, Bitcoin and its hundreds of competitors look nothing like real currencies. All experts make that same claim, sometimes with a touch of condescension. "It's a speculative asset by definition," says Vitor Constancio, the vice-president of the ECB. But these experts, all very competent, could have used the same arguments a few centuries ago against what is now the most obvious symbol of a currency: the banknote.
Just like assignats did in late 18th century France, Bitcoin shows us a possible future for currency, a future that reflects technical disruptions, the emergence of new institutions and human aspirations all at once.
Cryptocurrency is to digital what the banknote was to paper.
Money was born of mankind's desire to exchange goods, thousands of years ago. People needed a material that was scarce, solid and small. So they chose shells, gold, silver. Around 600 BC, King Alyattes of Lydia had coins minted in his own image and guaranteed their value. But he wasn't the only one. Merchants also minted their own currencies, and Greek cities soon followed suit. Athens, for example, has its famous owls.
Precious metals eventually became the norm. Weight units, such as the mark or the pound, became names of currencies. Saint Joachim's Valley, a place in Bohemia with many silver mines, also gave its name to a currency, the thaler (thal means valley in German), which later became the dollar. In French, l'argent (silver) became the incarnation of wealth.
There are two aspects to the reign of metallic coins we need to keep in mind. First, there was never a monopoly, even though rulers — like John the Good, who created the franc in 1360 — tried to impose their monetary order. The currencies competed with one another, and every major city had its "exchange street," or in the case of Paris, a bridge: the Pont aux Changes. Kings and lords would cheat by reducing the amount of gold or silver in their coins. "Bad money drives out good," the 16th-century English financier Thomas Gresham famously said.
Back then, the amount of money would depend on the amount of precious metals in stock. This scarcity is what made their value. But it's also a stupid constraint. In the Middle Ages, growth was limited by the amount of money available, so when the Spaniards brought back hundreds of tons of gold and silver from the Americas, the whole of Europe experienced an economic boost.
Monetary disorder began to change in the 17th century. The Westphalian treaties, finalized in 1648 to put an end to the interminable wars of religion, laid the foundations for modern states that would soon rise to power. And currency was one of the symbols of this rise to power.
In 1694, the Bank of England was created to issue banknotes. In the 18th century, the penniless French state tried to loosen financial constraints twice by developing paper money: Law's system (1716-1720) and the revolutionary assignats (1791-1796). The efforts led to bankruptcy each time because the state would print left and right and the French people would lose confidence. It was the Consul Bonaparte who reassured them in 1803 by ordering the mining of 20-francs gold coins, or Napoléons, as they came to be known.
Physical representations of Bitcoin coins — Photo: Marco Verch
But with the growth of industrial revolutions, gold and silver were definitely not enough. The economist John Maynard Keynes soon spoke of a "barbarous relic" that was "remote from the spirit and the requirements of the age." Governments eventually imposed banknotes, just like they imposed scriptural money later. The last bond between currency and metal disappeared in 1971, when U.S. President Richard Nixon did away with the so-called gold standard, ending the convertibility of dollars to gold.
To reinforce confidence in the currency, governments resign themselves to making their central banks independent. In 1999, the euro was created without the slightest metallic reference, a first in monetary history.
In that sense, Bitcoin isn't a monetary absurdity. Its value supposedly comes from its scarcity, like that of gold. And it is part of a long history of dematerialization. Cryptocurrency is to digital what the banknote was to paper. The comparison goes further. Like the banknote, it promotes anonymity and so criminals love it. Its first steps are accompanied by volatility and speculation. Like the French Revolution's assignat, Bitcoin will, in all likelihood, lose most of its value. But cryptocurrencies as a whole have a bright future ahead of them, just like banknotes did.
There is, of course, an essential difference. The banknote reflects a highly-centralized monetary order guaranteed by the state. It bears the signature of the president of the ECB in the eurozone, or that of the secretary of the treasury in the United States. By nature, cryptocurrency is the polar opposite of this system. Its value comes from its supposed scarcity. It is managed peer-to-peer, on a decentralized computer network. The only guarantee it can claim to have is the trust that its users give it. The government is out of the picture.
In that sense, Bitcoin isn't a monetary absurdity.
And yet, this is hardly surprising. For one thing, information technologies favor decentralization, flat organizations with little hierarchy and diversification, whereas the industrial revolutions of energy and mass production required, on the contrary, a strong centralization, strong hierarchies, and standardization. Also, "unconventional" policies induced by the financial crises of the past few years have translated into a strong monetary creation, which has weakened confidence in traditional currencies.
The monetary world of tomorrow could very well resemble the scenario that existed in the Middle Ages, with state-backed currencies, cryptocurrencies and local currencies, both rival and complementary, all in open competition. Just because it's hard to imagine, and even more so to regulate, doesn't mean it won't happen.