One of the core narratives of Bitcoin (BTC) since inception is the oft-stated goal of separating money and state. While this has certainly been a powerful creed in the currency’s early adoption by the crypto-anarchist and techno-libertarian communities, what does this actually mean? It’s quite simply a call for a neutral form of money.
When stripped of the more political messaging, Bitcoin is fundamentally the introduction of a credibly neutral, global system of value transfer that is open and permissionless yet cryptographically secure and verifiable. This burgeoning crypto economy is still relatively early in its development, yet in the ten-plus years since its launch, it has fundamentally shifted the discourse around what money could or ought to become in the future.
Bitcoin’s third halving on May 11, a 50% reduction in the BTC block subsidy that rewards miners for validating transactions and securing the network, represents a clear distinction between fiat monetary systems governed by whim and crypto monetary systems executed through software. A global crisis such as the one we’re facing now is a crucible for any monetary system, often showing what the priorities of the powers that be are.
The unlimited ability to print money in the fiat world operates in stark contrast to Bitcoin periodically reducing the issuance through an immutable monetary policy. The Bitcoin halving in the context of the pandemic provided an interesting starting point in discussing the core difference between the fiat and crypto paradigms and the distribution of power in both.
Fiat monetary systems
The predominant monetary systems of the world are fiat systems that are backed by the sovereign entity of the state through arbitrary decree. Such currencies have value because the state enforces their use as a medium of exchange, store of value and unit of account: the three qualities of money. The most obvious evidence of this enforcement is that the state requires taxes to be paid in the national currency.
This relationship between state authorities and money goes back hundreds of years to when governments and empires would stamp the visage of the current ruler of the territory into the hard metal currency. Today, fiat money takes the form of printed pieces of paper issued by a central mint overseen by a state department. This money is backed by the state rather than any commodity.
The United States used to operate on a gold standard, with bank notes backed and redeemable for precious metal reserves, but the mass capital flight to a secure store of value in gold during the Great Depression prompted the government to untether the dollar from the underlying commodity. The systemic challenges of a monetary system based on gold would have inevitably led to the state further abstracting the connection to the underlying resource to the point where the scaffolding would have become the building, in a sense. In short, fiat currency can be seen as a technical response in…