The Economics of trust – C M Nafi
In our class ‘Money, Credit, and Banking’, we are reading Felix Martin’s book ‘Money, the unauthorized bibliography’. From the very beginning of the book, we have seen the importance of trust.
In the First chapter where we were discussing the stone currency of Yap, we get to know about their trust in their stone. In local words’ Non-Aes, sed Fides’, which translates into ‘Not the metal, but trust’. And this trust issue has been a very important part of the economy from the beginning. The form and shape of money has changed over time. But one important aspect always remained at the core, that is trust. The world has changed so much over the years, and technology has introduced many wonders in our economy. One of them is Bitcoin. The time it was introduced in the market, it was a very rough time for the economy and the banks. In the year 2008, we have seen one of the biggest financial crisis in history, housing price fell 31%, the unemployment rate rose up to 9%. People had very little trust in the economic system at that time. And this is one of many examples when people lost their trust in the monetary system. Every financial crisis, people were skeptic about the future.
On October 31st, 2008, a simple paper titled’ Bitcoin” A Peer-to-Peer Electronic Cash System’ was published. A pseudo-name Satoshi Nakamoto was used to publish the paper. Till the date, no one really knows who Satoshi Nakamoto is. But this paper has challenged the idea of trust in our online transaction. The author proposed a system of an electronic transaction without relying on trust. Anyone can make any transaction without keeping their trust on the other person or business entity. All they need to do is trust the blockchain technology. Before diving deep into Satoshi Nakamoto’s proposal, we need to know more about our electronic transaction system. Thanks to the success of Amazon or E-bay, everything we need can be found online.
Everyone is trying to sell something online now, social media websites like Facebook or We chat have their own marketplace, money transaction system. At the early stage of the internet, the business transferred data via computer networks. When in 1991, the National Science Foundation lifted its ban on commercial internet use, e-commerce was made possible and now it has changed the way we buy and sell anything! But as soon as e-commerce started to bloom, the electronic transaction has started to see different problems like Identity theft or fraud. Once you put your information on the internet, there is always a chance that someone might hack that information. There is always a possibility of information getting leaked. Sometimes the third party applications uses this information in their market analysis to get more profit out of it.
The promise of the internet is to create the world as a global village. The Internet has the power to make the world more connected than it ever was. And entrepreneur’s took that opportunity. Soon we started to do business with the whole world. Everyone demanded a secure way to buy and sell product from any place in the world. Banks made it possible, but there is always a hefty fee you needed to pay to the middleman in the business. This made buying products from other countries very costly. After shipping and other fees, when we need to pay the banks to transfer money from one country to another, the whole transaction did not remain the same anymore.
There were political or economic barriers playing a huge role in the situation. Some countries have a treaty with their favorable countries, but not all the countries get the same treatment from each other. And it is general people who always pay in this kind of situation. Some currency is more powerful than other currencies, there are a lot of different kind of problems for international trade and normal people are the one who has paid in this kind of situations.
Bitcoin had the answer to all these questions. A totally decentralized currency, without any national or political boundary, was a dream that Satoshi Nakamoto made true. And the effect was seen immediately. Soon the demand for bitcoin started to rise. The early adopters gained so much money in this process. The price of bitcoins was one of the most searched google queries, which proofs how much impact bitcoins already have in our life. The Golden era of bitcoin began. Soon there were other crypto-currency started to join the market. Everyone wanted their share in the market. Litecoin, Ethereum, etc are one of thousand cryptocurrencies that are available in the market now. But soon we have started to see problems decentralized money can face.
There is always a good side and a bad side of any new innovation. For bitcoin, that bad side would be the silk road. Silk road is originally an online market. Mostly famous for all the illegal trades. It was also termed as the first modern darknet market. Illegal drugs like Cocaine, LSD, etc. This marketplace made it easier for the buyer to buy anything illegal using bitcoins and other cryptocurrencies so no government agency cannot track them down. But eventually the creator of the website was caught and the website was shut for good. Government rules started to push the things, new regulations were taking place. In some places, it was regulated, for example On July 17, 2014, the New York State Department of Financial Services released details on a proposed “BitLicense”, which places regulations on any company or person that uses cryptocurrencies residing in New York. And lots of bitcoin exchange told that they are going to shut down their business in New York. Countries started to have their own rules and regulations about bitcoin. Big Economies like the USA, G7 countries and the European Union accepted bitcoin and some countries did not accept bitcoin as a medium of transaction.
The main question comes to place that how trustworthy is bitcoins are. Can we totally trust them about being anonymous or it is not truly anonymous? Will it stay forever in the market as we have seen for gold and silvers which have shaped the way we measure our currencies. If we look into how trustworthy bitcoin or any other cryptocurrency is, there is always a big question. One very good example would be Edward Snowden, who has leaked thousands of classified information from NSA. He revealed that central authority is tracking bitcoin since the beginning. After all the promises of bitcoin, are we free from all kind of surveillance we are surrounded by companies like Google or Facebook who controls the internet?
This question asks the core value of bitcoin. As every transaction in bitcoin is totally public, how hard it is to reverse engineer the whole process to find the people behind every transaction? if we know one account number, it wouldn’t be difficult to track down all the transaction made through that account. Still, it would be decentralized, but it would make everything public and might be a potential threat to the whole system. Our trust in the economic system has been like a wave. Sometimes it’s going up and sometimes it goes down.
According to the financial historian, Charles Kindleberger, “financial crises have tended to appear at roughly ten-year intervals for the last 400 years or so”. And it has been proven by the price of Bitcoin (BTC)s. It has valued from 10 cents for one bitcoin to almost 20000 dollars for one bitcoin. The market simply reflects the demand and supply of bitcoins. But it is also associated with how much we trust in bitcoin. When bitcoin does not have all the answers for being anonymous on the internet, can bitcoin be a trustworthy system to replace the original currencies is a question that seems far away from reality? Our financial market has been using government-issued money for years. Though we are experiencing a change in the way we live due to technological advancement, we still need time to adapt to technology. Bitcoin is a very fascinating technology. It has opened a lot of doors. But we need to fix all the loopholes in the system first. That will give us more trust in the system.
Published at Fri, 04 Oct 2019 07:52:09 +0000
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