introduction
The transition from fiat currency standards to the Bitcoin standard, while highly desirable, is not necessarily inevitable or imminent. The timing and occurrence of these changes depend on the adoption choices made by individuals, organizations, and public entities. These decisions are influenced not only by rational considerations, but also by emotional and irrational factors (greed and fear above all). Collective will, shaped by the intentions of a critical mass with sufficient capital and agency, plays a crucial role in displacing central banks and entrenched power structures in favor of a new order centered around Bitcoin. Despite Bitcoin's clear technical, economic, and moral superiority over other forms of money, this struggle will undoubtedly be enormous, and its outcome will be far from guaranteed.
However, it is crucial to think about the consequences that this potential revolution, if it materializes (as we all hope), might have on every aspect of social existence. These effects extend from the nature of states and international relations to the performance of economic systems, prevailing value systems, and even the energy market and technological innovation. In this article, without pretending to be exhaustive, we aim to briefly explore some of these aspects and suggest plausible paths.
Bitcoin and Fractional Reserve Banking
As Hal Finney correctly predicted, a hypothetical Bitcoin standard would be incompatible with central banks but not necessarily with fractional reserve banking. Algorithmic limitations on the number of transactions per block would certainly prevent the first layer from functioning as a retail payment system. Over time, fewer transactions will be made on them, and these transactions will be of very high value (in practice, only whales or large public and private institutions will be able to afford them, given the high costs).
Some form of free banking 2.0 on the second layer will be absolutely inevitable in the medium to long term for a bitcoin-based monetary system. In the absence of a central bank as lender of last resort and with reserves much more easily verifiable than gold, this second tier/third tier (fractional reserve banking) would be far more fragile than the current fractional reserve system backed by legal tender, a central bank, and no practical distinction between… Monetary base and money supply. This will only reinforce the importance of the first layer as the solid foundation of the monetary system, similar to the role that gold played in the past thousands of years.
Macroeconomic implications
Ceteris paribus, in the medium term, adopting a virtual Bitcoin standard would significantly smooth out economic cyclical fluctuations, preventing excessive indebtedness, misinvestment, and credit bubbles in the private sector, leading to systemic debt crises. Monetary repression would also lead to much slower but stable real growth rates in economies in the medium to long term. In the absence of the engine of monetary and credit expansion, that is, the inflationary policies of central banks, the nominal growth of output within the Bitcoin standard will be modest, but real growth will remain large. In other words, any increase in multifactor productivity will lead to a decrease in consumer prices measured in satoshis rather than an increase in nominal output. In this context, even in the short term, economic growth will depend on demographic, environmental and economic factors and not on monetary or credit factors.
In this regard, with the Bitcoin standard, there will be a gradual transfer of wealth from the financial sector, which has become voracious today, to the real and productive economy. This is a result of the significant reduction in the size of the bond and money markets (the decline in the level of debt of economies) and thus the entire industry benefits from it.
Among the companies that will see the most downsizing are central payment and clearing systems, traditional credit institutions, fiduciary agents such as notaries (replaced by smart contracts on layers 2 and 3 of Bitcoin), and those involved in finance, real estate, and insurance. mediation.
Conversely, anything that leverages the layered potential of Bitcoin (for smart contracts) and decentralized finance will see a real boom.
(Geopolitical) Implications.
Regarding the immutability of the monetary base, this would force countries into strict fiscal discipline, as the option of converting deficits or debt into cash as a form of financing public spending would disappear. This will profoundly affect the ability of nation-states to provide social welfare or wage wars. In the absence of a monetary printing press, and hence the insidious tax called inflation, fiscal pressure and the allocation of public spending will become the subject of serious negotiations and political disagreements, because it will directly affect the pockets of citizens/subjects/taxpayers.
On the one hand, this may encourage more direct forms of democracy (facilitated by the spread of blockchains and decentralized autonomous organizations) to give citizens a greater voice in tax and spending decisions. On the other hand, a world based on the Bitcoin standard could lead to a more fragmented and non-polar geopolitical landscape, given the fundamental unsustainability of maintaining such massive and inefficient state apparatuses, resembling classical medieval feudalism. Instead of a sword/blood/robe aristocracy, Bitcoin whales will become the dominant social class, where non-coins will be a kind of new slavery. First, individuals, families and institutions with huge Bitcoin holdings (created in the early stages of adoption of this technology, i.e. in the first two decades of its existence), will be able to provide welfare, work and protection to citizens. Subjects in exchange for loyalty, services and obedience to their “feudal” rule. The last category, the vast majority of the population whose ancestors arrived too late to adopt and convert their fiat capital into Bitcoin (for various ideological or practical reasons, including economic constraints), will find themselves at the bottom of the pyramid and will be forced to do so. They make their living through the sweat of their brow or (more likely, given technological advances) through the generosity of benevolent, somewhat caring whales. This dynamic also applies at the international level: there will be leading regions or countries that will have a significant relative wealth advantage, having adopted Bitcoin as legal tender first, which will be difficult for latecomers to match.
These will not necessarily be the currently dominant countries; In fact, some of them may not even exist today. The end result will be an international order even more fragmented than the current one, consisting of a mix of democratic, socialist, or oligarchic city-states, hidden aristocratic fiefdoms centered around individual families, and large, anarchic regions. All of these entities will be in competition/cooperation with each other, forming an entirely new and constantly evolving geopolitical-ideological landscape. In a world where old identity affiliations (national, ideological, religious) overlap and mix with new identities based on the interpretation of the Bitcoin revolution. Given the technological assumptions and ideological underpinnings of Bitcoin culture, it is possible that a “practical” religion will emerge, linked to some of the ritual and theistic aspects that have already been hinted at among its loyal supporters (immaculate conception, decentralization, Satoshi cult, algorithmic infallibility). However, the Bitcoin standard will impose on societies that adopt it certain economic standards that closely impact public morality. Among them are a sense of boundaries, the ethics of saving, prudence in investments, prudence over the long term, honesty in business dealings, individual responsibility, financial discipline and, of course, the independence and incorruptibility of money from state authorities.
Contracts, mining and geopolitics
Nodes are the heart of the Bitcoin network, and therefore will receive a lot of attention from political forces. Control of full nodes (and thus potential miners) within a given area by public authorities will be extremely important for claiming sovereignty internally and influencing the international scene. Of course, given other variables, countries able to produce energy at lower costs or on a larger scale will have an advantage in allocating and thus controlling significant shares of the global Bitcoin hashrate. The eternal struggle for control of the global hash rate will be the new center of geo-economic disputes. However, it is by no means guaranteed that most regional political entities will be able to exercise such control effectively, and it is uncertain how they will do so.
Although legitimate physical coercion may seem like an obvious choice, given the specific nature of states, it may not necessarily be the most successful approach in a landscape that is more fragmented and geopolitically competitive than the current one. Thanks to the high mobility of Bitcoin and the financial constraints imposed on traditional countries by this monetary system, miners and whales alike could easily choose to move elsewhere if their property rights and entrepreneurial freedom end up being jeopardized, finding refuge in more liberal jurisdictions. On the other hand, a different scenario may unfold for new “neo-aristocratic” state entities built around one or more whales; In this case, the monopoly on mining and necessary energy resources may be more evident, given the enormous economic power possessed by its governing bodies.
Energy market impacts
Bitcoin is not a commodity currency but an energy currency. The force it encapsulates is the energy expended to create and transmit it. Therefore, energy, as the lifeblood of the new monetary model, will be at the heart of the economic system even more than today. This would radically lead to progress in the energy sector, generating a race for technological innovations on both sides of extraction and energy provision. A whole range of energy sources that were previously neglected as uneconomical can now become convenient and accessible thanks to their use in mining. Think of the sun in African and Asian deserts, methane and natural gas deposits in remote locations, geothermal energy from volcanoes and geysers, or even some systems that rely on wave action and temperature differences in the deep ocean.
With ever-increasing demand for energy, there will be an increasing incentive to generate more energy and do so more efficiently in a virtuous circle that could lead to a major energy revolution, potentially bringing humanity closer to a Level II civilization on the Kardashev scale. Which certainly contributes to the electrification of the planet even in the most remote places. Another possible outcome of the Bitcoin standard is a reversal of the roles between energy producers and consumers. Over time, the largest energy consumers (mining farms) will become the main producers of energy in a vertical integration of energy assets and infrastructure, which, starting from the bottom, will absorb the entire energy industry. It remains to be seen whether this will lead to greater or less concentration versus decentralization of energy producers, but it will certainly depend on the commercial dynamics of the mining industry.
This is a guest post by Michele Uberti. The opinions expressed are entirely their own and do not necessarily reflect the opinions of BTC Inc or Bitcoin Magazine.
