Bitcoin and Ancient economies
This past year has seen a rise in talk about bitcoin and other cryptocurrencies, whether it be as a form of legitimate payment, or whether they can make money investing in the currency to sell at a later date. In September of 2021, El Salvador president Nayib Bukele announced that it would add bitcoin as legal tender in the country (BBC News, 2021). Despite warnings from the International Monetary Fund about the risks associated with this decision, the country has plans to develop a “bitcoin city” near the gulf of Fonseca (Elnagar, 2022). The country cites Alexander the Great's cities as inspiration for the plan (Melendez, 2021).
While the technology surrounding digital currency is certainly novel, we may be able to look into the past for insight into what a society using bitcoin as a major form of currency. An article published in the Economic Anthropology in 2019 compares Bitcoin to a form of currency used in Western Micronesia, rai, or stone money (Fitzpatrick, 2019). Bitcoin and the Yapese currency both have constraints on the supply which create scarcity. The large stone coins were constructed out of limestone deposits on an island of Yap, and had to be transported back to Palau. In addition, the country controlled who had access to the limestone deposits and the production. Bitcoin mining also requires a great deal of manual labor in the form of solving math problems which progressively get harder. A limit to the amount in production has already been set in code. In this way, the system of currency creation in both rai and Bitcoin is regulated by an individual’s incentive to contribute rather than a government or institutional regulation. One other unique element to both bitcoin and rai is the use of a distributed ledger, to make payments transparent and open to the public. While bitcoin does this through a complex system of chains and blocks, members of the Yapese community used an oral transmission of ownership. The stone sculptures were each unique and not easily moveable, so actual physical possession of the currency was not required for it to have value.
The benefits of these forms of currency are very attractive. The scarcity limits the inflation we see with fiat money and less government regulation means potentially less in taxes and transaction fees. A system like this may support the growth of more localized economies. In the late 1800s however, European countries took control of the Island and the monetary system eventually collapsed. New technology made the carving process easier and as supply grew, so did inflation. The supply limit set on bitcoin mitigates the issue of inflation. One potential concern, however, is the centralization of bitcoin mining. The National Bureau of Economic Analysis found that 90% of bitcoin mining is controlled by the top 10% of miners, and half is controlled by only around 50 miners. Big mining pools and farms have developed in which mining becomes easier and more efficient. In contrast to rai, the majority of money creation is not based on an individual’s hard work and craftsmanship, but the computing power of large companies. It is the people with control the mining process that have the most influence in the distribution of bitcoin wealth.
Edited by Stephen Adams
Citation
Fitzpatrick, Scott M., and Stephen McKeon. “Banking on Stone Money: Ancient Antecedents to Bitcoin.” Economic Anthropology, no. 1, Wiley, June 2019, pp. 7–21. Crossref, doi:10.1002/sea2.12154.
Melendez, Salvador. “A ‘Bitcoin City’ in El Salvador Inspired by Ancient Greeks? Here’s a Reality Check.” NBC News, 30 Nov. 2021, https://www.nbcnews.com/news/latino/bitcoin-city-el-salvador-inspired-ancient-greeks-s-reality-check-rcna6944.
News. “El Salvador Bitcoin City Planned at Base of Conchagua Volcano - BBC News.” BBC News, BBC News, 21 Nov. 2021, https://www.bbc.com/news/world-latin-america-59368483.
Elnagar, Randa. “IMF Executive Board Concludes 2021 Article IV Consultation with El Salvador .” International Monetary Fund , 25 2022, https://www.imf.org/en/News/Articles/2022/01/25/pr2213-el-salvador-imf-executive-board-concludes-2021-article-iv-consultation.
