The Age of Cryptocurrency: How Bitcoin and the Blockchain Are Challenging the Global Economic Order

The Age of Cryptocurrency: How Bitcoin and the Blockchain Are Challenging the Global Economic Order

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Product Details

ISBN-13: 9785001007470
Publisher: Mann, Ivanov and Ferber
Publication date: 04/15/2017
Sold by: Bookwire
Format: NOOK Book
Pages: 517
File size: 3 MB

About the Author

Пол Винья — репортер The Wall Street Journal. Майкл Кейси – колумнист The Wall Street Journal, автор статей в The Washington Post и The Financial Times, автор нескольких книг.

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The Age of Cryptocurrency

How Bitcoin and Digital Money are Challenging the Global Economic Order

By Paul Vigna, Michael J. Casey

St. Martin's Press

Copyright © 2015 Paul Vigna and Michael J. Casey
All rights reserved.
ISBN: 978-1-4668-7306-3



The eye has never seen, nor the hand touched a dollar.

Alfred Mitchell Innes

For any currency to be viable, be it a decentralized cryptocurrency issued by a computer program or a traditional "fiat" currency issued by a government, it must win the trust of the community using it. For cryptocurrency advocates, as we'll learn in the chapters ahead, the whole point is to offer an alternative model for that trust. They tout a system of payments in which the payee no longer has to trust "third-party" institutions such as banks or governments to assure that the payer can deliver the agreed-upon funds. Instead, cryptocurrency systems imbue trust in an inviolable, decentralized computer program that is, in theory, incapable of defrauding people. None of this, however, gets cryptocurrencies off the hook. They, too, must win people's trust if they are to become relevant.

Trust is at the core of any system of money. For it to work, people must feel confident that a currency will be held in the right esteem by others. So before we get into bitcoin's dramatic arrival on the scene and its bid to change the way we think about such things, we need to explore that notion of trust in more depth as it has evolved through history. This chapter will takes us on a journey through the evolution of money, one of society's most remarkable yet poorly understood inventions.

Let's start with some basic questions. What is money? What does it represent? How did society come to develop such a system for exchanging goods and measuring their value? As is the case in any field of study, figuring out how something functions is often best approached by examining cases where the system hasn't worked.

One contemporary example of failure is in Zimbabwe, whose defunct multibillion-denominated notes now sit on the desks of financial reporters and currency traders as reminders of how unhinged things can become with money. But the strongest lesson Western societies have learned comes from farther back: the 1920s Weimar Republic. The German government then, unwilling to court military conflict with its European neighbors but also reluctant to upset the public by raising taxes, instead printed money to cover its debts and sent the German mark into an uncontrollable downward spiral. As inflation soared beyond anything anyone could imagine, children would arrange stacks of worthless 50-million-mark notes into playhouses. The greatest caution from all this comes from the knowledge that this monetary and governmental chaos opened a door to Adolf Hitler.

Germany was eventually converted into a functioning, generally peace-loving nation, showing that it's possible for democratic societies to restore order after a bout of financial and political chaos. The same goes for Brazil, which, through tough monetary-policy reforms, put the 30,000-plus percent inflation rates and the dictatorship of the 1980s behind it. But some places live with monetary dysfunction almost permanently, and for this they pay a formidable price. We learn from their experience that the core problem is not irresponsible policy decisions by money-printing central banks, though this is the mechanism through which hyperinflation is created. Rather, the problem stems from a deep-seated breakdown of trust between the people who use a currency and the monetary authority that issues it. Since those monetary authorities are ordinarily national governments, this breakdown reflects a society's flawed relationship with its government. It's an instructive way to think about what a cryptocurrency, with its "trustless," math-based system of monetary exchange, offers as an alternative.

If citizens don't trust a government to represent their interests, they won't trust its currency—or better put, they won't trust the monetary system around which their economy is organized. So when given a chance, they will sell that currency and flee it for something they regard as more trustworthy, whether it's the U.S. dollar, gold, or some other safe haven. When this dysfunction is entrenched, such beliefs are self-fulfilling. The loss of value in its currency depletes the government's financial resources, which leaves money-printing as the only means to pay its debts and ensure political survival. Pretty soon, the excess money in circulation further undermines trust, which can give way to a vicious cycle of spiraling inflation and plummeting exchange rates.

Argentina has lived with this broken relationship for a long time. A century of failure to resolve the trust problem explains why Argentina has been through many, many currency crises and why it has fallen from the world's seventh-richest country at start of the twentieth century to rank around eightieth in mid-2014. That puts Argentina, which for many years portrayed itself as a beacon of European sophistication in a continent of New World backwardness, more or less on par with Peru.

Mike knows a thing or two about Argentina. He picks up the story from here:

My family and I spent six and a half happy years in Buenos Aires. Sunshine, steak, Malbec wine, all rounded out the experience. The best part was the friends we made, people who would give you bear hugs, who would always go out of their way to help you, and who thought nothing of taking a four-hour lunch to engage in intense conversation about the state of the world.

But mine was a love-hate relationship with their country. For all of Argentines' passionate embrace of friends and family, their society is in permanent war with itself. This is manifest in the dog feces littering Buenos Aires' sidewalks, the graffiti defacing the city's once-beautiful Parisian architecture, and the interminable traffic jams caused by drivers' unwillingness to yield. The country's bitterly divided politicians espouse competing, outdated ideologies, but in truth their loyalty lies with a unifying, corrupt political machine installed by Juan Domingo Perón half a century ago. Peronism's system of Machiavellian power has trapped Argentine politics in a vicious cycle of shortsightedness and corruption, a failure that has left Argentines with zero faith in their governments. Skipping taxes is the norm—why, people reason, would you pay crooks who will steal your money? In this environment, self-interest constantly asserts itself, and the country's deep pool of natural resources is squandered. Bucketloads of money will be made in short multiyear bursts by those savvy enough to ride the pump-and-dump schemes that masquerade as policies, but that only means the economy rushes toward an oncoming cliff every ten years or so.

I arrived in Argentina in early 2003, right when the last such crisis was barely subsiding. Banks, which were still keeping people's savings frozen in accounts that the government had forcibly converted from dollars to devalued pesos, had enclosed their downtown branches in steel plates to protect their windows from the barrages of bricks hurled by protesting depositors. When I left, in 2009, the next crisis was brewing. Inflation was pushing toward 30 percent a year, but the government was openly lying about it, an act of bad faith that only made Argentines mistrust their currency further and led businesses to hike prices preemptively in a self-reinforcing cycle. People were slowly withdrawing pesos from banks again, and the government was putting restrictions on purchases of foreign currencies, which, predictably, further undermined confidence in the national currency. This cat-and-mouse game, as Argentines knew too well, was destined to end badly.

It also complicated our departure. A year after we left, we finally sold the lovely apartment we'd bought in the leafy Buenos Aires suburb of Palermo. But when I returned to the city to close the deal, it was now difficult to get our money out of the country.

Residential property in Argentina has historically been sold in dollars—literally, physical greenbacks. History has made Argentines wary not only of their own currency but also untrusting of checks, money orders, and anything else that requires the provision of credit. Cold, hard dollar notes can cut through all that. That's what our buyers wanted. Reluctant to wire money to our U.S. bank account, they wanted to do things in that old, traditional way. They suggested we complete the deal at a casa de cambio in Buenos Aires' financial district, one of numerous exchange houses that help Argentines manage their complicated financial affairs. The casa would take our newly obtained cash and credit our U.S. bank account. Easy. What could possibly go wrong?

With shiny lobbies, Victorian-style insignia, and names conveying integrity and security, these exchange houses can look similar to bank branches, but they operate outside the banking system. In addition to swapping dollars for pesos, they manage a network of accounts to shift money overseas at lower costs than bank wires. Now that the government was placing strict constraints on offshore bank wires, these places were in demand as convenient, extra-official money transmitters.

I was uncomfortable with this seemingly shady option, but Miguel, my closest friend in Buenos Aires, told me that this casa de cambio handled his business weekly in fully legal transactions with his associates overseas. He trusted them fully and I trusted him. This was the way things worked in Argentina: you trusted whom you knew, and to resolve your business affairs you frequently leaned on those relationships more than you relied on the legal protection of a corrupt judicial system.

To be certain, however, I had an initial meeting with the casa de cambio, in which I was assured that the overseas transfer would be fully verifiable and legal since we would have the real estate contract as backing documentation. Satisfied, I agreed to the buyers' plan. Days later, eight people gathered in one of the firm's sealed rooms to complete the closing: two staff members; the couple buying our apartment; one of their fathers, who was paying for it; an official escribano, or notary public, required by law to authenticate the settlement; Miguel; and I.

A man entered carrying ten or so stacks of bills and gave them to me. I'd never had my hands on so much cash, but was still struck by how small $280,000 packed down to. It was counted by staff from the casa de cambio, after which the signing of the transfer papers began. Once the escribano had ascertained that all was aboveboard and fair, he and the father bid their farewell, and arrangement of the international transfer began.

Suddenly, a staff member rushed in, hurriedly yelling, "You can't do it! This has to go through the banking system!" I looked at Miguel and it sank in. The staff had misunderstood a key documentation requirement under the ever-changing Argentine foreign-exchange laws. Or perhaps—the conspiratorial Argentine in me was now kicking in—we'd been set up. Why did this happen after the escribano had left and signed over the property? Either way, we were stuck.

These were my options: I could gather up the money, our life savings, and take them across town—in what? A backpack? In my socks?—and hope the local bank branch at which I'd maintained a mostly inactive account to pay my electricity bills would happily accept a massive stack of dollars, convert them into pesos for a fee and at a confiscatory exchange rate, and then immediately convert them back into dollars for another fee and at another expensive exchange rate before wiring the money to my bank for a bigger fee. We were facing security risks and some $15,000 more in costs, assuming the plan would fly with the bank's compliance officers. Or, the casa de cambio offered, I could complete the deal with them but without the documentation I'd been promised. The institution would take my money, and an agent overseas would deposit the equivalent amount in our account—but I would receive no paper record of ever having handed over any money. I would have to trust—that word again—that twenty-four hours later I could call my bank and ascertain that the money was en route to my account, although it would take three days before the credit actually registered.

I thought hard about it. Tens of thousands of Argentines did such transactions every day. To them, it was, ironically, a more trustworthy method of exchanging value than dealing with a banking system that had repeatedly robbed them of their savings. More important, Miguel, the man I trusted more than anyone else in Argentina, trusted this group of people to look after his accounts. He did so in a more transparent, aboveboard way than I was contemplating, but he dealt with them regularly. Indeed, the casa de cambio needed to maintain Miguel's trust. The confidence of their customers was the foundation of their business. On the other hand, I was unlikely to be a repeat customer.

I reluctantly agreed to the unofficial transaction. All the exchange house could give me as a "record" was a cutoff piece of ticker tape from a basic, receipt-printing calculator that simply showed numbers in text: the total amount transferred, minus the fee, and nothing else. I misplaced it that very evening.

The next day, Miguel and I returned to the casa de cambio to get a special code with which my bank could trace the payment. The gentleman we were supposed to meet wasn't there, or so we were told by the security guard looking after the heavily fortified entrance to the back offices. As my blood pressure spiked, I asked to see another staff member. The guard called him, then relayed his message: the money was already deposited in my account. I was incredulous. It was supposed to take three days. My heart raced. Were they lying? Had I been swindled? Nervous beyond belief, I went outside to the street and called an agent at my bank. The reply came back: "Yes, Mr. Casey, the money is in your account." Miguel and I bear-hugged.

* * *

We tell this story because it illustrates the link between trust and money, which is in turn critical for understanding cryptocurrencies and the notion that they substitute trust in a government money-issuer with trust in a computerized algorithm. (In this sense, calling bitcoin "trustless" is inaccurate, even though it's a convenient descriptor all the time.) You need some kind of model of trust to run a monetary system. Bitcoin seeks to address this challenge by offering users a system of trust based not on human beings but on the inviolable laws of mathematics. Its own trust challenge lies in the fact that not many people are filled with confidence by the overall image of bitcoin—its sense of insecurity, its volatility. To many, too, math is kind of scary, as is the notion that computers, rather than human beings, are running things—though applying such concerns to bitcoin alone would betray an ignorance of how computerized our fiat-currency-based financial markets have become.

In places such as Argentina, where confidence in political institutions is weak, the trust problem is resolved by elevating the trust that society holds in families, friends, and reputation-based relationships. Unfortunately, this is exceedingly inefficient. Such circles of trust are too small for any economy that has a complex network of economic interactions outside of small communities, let along one that purports to be integrated with the rest of the world. What's more, the system gets stretched to the breaking point when a crisis prompts everyone to rush for the exits and dump their untrustworthy pesos.

Solving this problem is what cryptocurrencies purport to do. They are marketed as such because no government-run monetary system is perfect. Argentina might be an extreme case, but as the events of 2008 showed, every other nation's model is also vulnerable to breakdowns of trust.

To comprehend why trust is so important to money, and before we delve into the workings and grand promise of cryptocurrency, let's take a trip through history and explore competing theories of money that have developed over the centuries. We hope that by its end you will have an idea of what money actually is. You'd think the answer to that would be simple by now, with people having used the stuff for millennia. But in reality, the practice of exchanging money lies so deep in the cultural evolution of society that we give it little thought.

* * *

In his recent and provocative book, Money: The Unauthorized Biography, Felix Martin argues that to focus on money as a "thing"—the commodity, or "metallist," conception of money, which we will come to later—is to miss the powerful, civilization-building force that this invention unleashed. Calling money a "social technology," he declares that "currency is not itself money. Money is the system of credit accounts and their clearing that currency represents." Conceived this way, we see how money allowed for a new form of social organization beyond tribalism. It provided a universal value system, which meant that power structures in prehistoric tribal communities, where order was maintained through the threat of violence at the hands of whoever was the most brutally powerful, could give way to something that allowed all members of society, not just the physically powerful or connected, to thrive. Wealth as defined by the accumulation of this new, abstract measure of value would become the benchmark of power. It completely changed the rules of the game.


Excerpted from The Age of Cryptocurrency by Paul Vigna, Michael J. Casey. Copyright © 2015 Paul Vigna and Michael J. Casey. Excerpted by permission of St. Martin's Press.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

Table of Contents

INTRODUCTION: Digital Cash for a Digital Age


CHAPTER TWO: From Barter to Bitcoin

CHAPTER THREE: A Tree Grows in Bitcoin


CHAPTER FIVE: Satoshi's Mill

CHAPTER SIX: The Unbanked

CHAPTER SEVEN: The Everything Blockchain

CHAPTER EIGHT: The Promises and Perils of Cryptocurrency

CHAPTER NINE: Square Peg Meets Round Hole

CHAPTER TEN: The 21st Century vs. The 16th Century


EPILOGUE: Boom, Bubble, or Beginning?

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The Age of Cryptocurrency: How Bitcoin and the Blockchain Are Challenging the Global Economic Order 3 out of 5 based on 0 ratings. 1 reviews.
Anonymous More than 1 year ago
Fair warning