San Francisco Chronicle LogoHearst Newspapers Logo

Promise of bitcoin undone by resurgent populism

By Updated
Steven Boyle, The Chronicle

“Money makes the world go around.”

Liza Minnelli sang the phrase for the 1972 movie musical “Cabaret” as a biting critique of greed and poverty. But there’s another way to read it: Money unites us because, like it or not, we all need it. In a divisive age, it may be the only connector.

Bitcoin was an attempt to reflect that universality. Unlike the clinking, clanking coins Minnelli sang about, the digital currency exists entirely in cyberspace, free to instantly traverse the world without interference from governments, central banks or corporations. No more exchange rates set by sharky currency traders. No more attempts by nations to artificially inflate or deflate currencies for political purposes. The market — speaking with the clarity of an algorithm — would set the value of a bitcoin.

Advertisement

Article continues below this ad

What happened? Well, Minnelli sang it: It’s “a mark, a yen, a buck, or a pound” that moves people to move money. (Make that “a euro,” and the line still holds up.)

Meanwhile, like most utopian visions championed by Silicon Valley, bitcoin has so far failed to realize its lofty ambitions. Because money was always about more than, well, money.

Silicon Valley thinks of money as digits and algorithms, a bit to be flipped. The rest of the world sees currency as the ultimate symbol of sovereignty. Why does Mao Zedong grace the face of a yuan in China? We put images of heads of state or important historical figures on money to bestow it with cultural power. From the Roman aureus to the Tibetan skar, money has conveyed a sense of identity. And those are the sorts of things no piece of software can easily replace.

“Money reflects a lot about about the history of the country,” said John Sedunov, an assistant professor of finance at Villanova School of Business. “It takes us back to our heritage and origins.”

Bitcoin exists entirely in cyberspace, free to instantly traverse the world without interference from governments, central banks or corporations.
Bitcoin exists entirely in cyberspace, free to instantly traverse the world without interference from governments, central banks or corporations.Stephane De Sakutin/AFP/Getty Images

Since the global financial crisis of 2007-09, a surge of populism has swept through the United States, Europe and Asia. At first rooted in a distrust of the political and financial elite, the movements it spawned came to question the free movement of money, goods and people. Great Britain’s decision to leave the European Union, known as Brexit, reflected a desire by those who voted for it to tighten borders and more narrowly define what it means to be British. Donald Trump’s election as president, many believe, reflects a similar attempt to redefine “American.”

Advertisement

Article continues below this ad

In this era of populist nationalism, it’s hard to imagine any country bowing to a global currency.

“We have a populist wave right now with Brexit and the U.S. election that would make it problematic for bitcoin,” Sedunov said. “We don’t want the one world government, the one world economy.”

Even the Internet, the most global of all technologies, has become increasingly fragmented. China still maintains a tight grip over cyberspace, while European nations demand Google and Facebook offer its citizens greater privacy protections than what’s required in the United States.

In many ways, bitcoin represents the latest struggle for “apolitical currency” or “free banking,” a concept that dates back to at least the 18th century. The idea then was to prevent a government or bank from printing too much money, an abuse of power by an unaccountable entity.

Such an argument animated President Andrew Jackson’s successful campaign in the 1830s to deny a charter to the Second Bank of the United States.

Advertisement

Article continues below this ad

While “Bloody Bloody Andrew Jackson” never got quite as popular as “Hamilton,” Jackson’s economic populism was music to Trump’s ears. During a recent visit to his tomb, he praised him for having “defied an arrogant elite.”

Satoshi Nakamoto, the pseudonym of a computer scientist who supposedly created bitcoin in 2009, also defied the elite consensus about the links between an expanding money supply and economic growth. He capped the supply of bitcoins at 21 million. But the very thing that makes bitcoin so appealing to supporters — the lack of any controlling body — is the very factor that has prevented the currency from gaining mainstream acceptance, said Andy Schmidt, executive adviser to CEB, a financial services consulting firm.

“We’re still a ways away” from the bitcoin era, Schmidt said. “Bitcoin is hard to exchange. It’s very volatile because there is no central authority to govern it. It’s hard to make a case for bitcoin being an effective payment system right now.”

That Nakamoto is such a shadowy figure — the opposite of the kind of famous names adorning conventional currency — only further undermines bitcoin’s credibility, he said.

“No one really knows if the person who invented it even exists,” Schmidt said.

Advertisement

Article continues below this ad

Bart Stephens, managing partner of Blockchain Capital, stands for a portrait on Tuesday, March 28, 2017 in San Francisco, Calif. Blockchain Capital is the only venture capital firm in the country that invests solely in bitcoin and blockchain technologies.
Bart Stephens, managing partner of Blockchain Capital, stands for a portrait on Tuesday, March 28, 2017 in San Francisco, Calif. Blockchain Capital is the only venture capital firm in the country that invests solely in bitcoin and blockchain technologies.Lea Suzuki/The Chronicle

Bitcoin nonetheless offers intriguing possibilities. Bart Stephens, founder and managing partner of Blockchain Capital in San Francisco, said the technology can really help people outside the traditional banking system.

Theoretically, you can instantly “send bitcoin to your cousin half way around the world at a fraction of the cost of Western Union,” Stephens said. “That bitcoin is digital makes it highly mobile and liquid.”

Bitcoin could also prove immune to political turmoil because governments can’t manipulate digital money that only exists in cyberspace, he said. Cyprus’ 2013 banking crisis gave the currency a boost there.

“If there’s instability in an economy, bitcoin would be a good place to move into, at least temporarily,” Sedunov, the professor, said.

Advertisement

Article continues below this ad

Venture capital investment in bitcoin and blockchain technologies has gone from near zero in 2012 to $550 million last year, according to a report by CB Insights.

But bitcoin will never be the world’s sole currency.

“If you live in the United States and Silicon Valley, there’s implicit trust in our institutions,” Stephens said. “Bitcoin is not going to replace the U.S. dollar, which is backed by our incredibly strong institutions, including our military.”

Digital currencies like bitcoin may help facilitate the movement of money, but it turns out that one of the most popular features for bitcoin startups is helping people convert it back into regular currency.

When it comes to money, “psychology plays just as important (a) role as the technology,” Sedunov said.

The disconnect between the two is a shame, because banking could use a Silicon Valley reboot.

Mainstream banks have only begun to figure out how to fuse digital technology with personal finance, said Bill Harris, the former CEO of PayPal and Intuit who is now head of Personal Capital, a startup with offices in San Francisco and San Carlos.

“Money has changed,” Harris said. “It’s no longer just pieces of paper or gold bricks. Banks have to get good at technology” because they are so bad at it right now.

One fix is to acquire more Web cred: In recent years, Capital One bought Adaptive Path, a San Francisco interactive design firm, and BBVA bought Simple, an online banking startup.

But even though banks are trying to make Internet transactions more compelling, there’s a stunning fact: Paper bills are on the rise.

From 2000 to 2010, the amount of paper currency in circulation across the world more than doubled, from $2 trillion to $5 trillion, according to Smithers Pira, a market research and consulting firm in Great Britain. The company estimates that paper currency will hit $9 trillion by 2022.

People are creatures of habit, especially when it comes to money. Our devotion to paper bills stems not only from fear of the future but our attachment to the past.

Look at the euro, the first successful attempt to form a common currency across an entire continent. The original idea was to form an economic bloc to rival the United States.

But the euro was about much more than money. Proponents hoped that forging one currency would prevent military conflicts by getting people to think of themselves as Europeans instead of Germans, French and Italians. Euro bills feature examples of the continent’s architecture rather than people.

In 2015, Belgium issued a special 2-euro coin to commemorate the 200th anniversary of the Battle of Waterloo, in which a combined force of British and Prussian soldiers defeated Napoleon of France. But the French strenuously objected, arguing that it would undermine European unity.

“It would have been a big embarrassment to the French to have a coin with Waterloo in your own country,” Sedunov said.

And now Brexit has emboldened nationalists like French presidential candidate Marine Le Pen. She too wants to withdraw from the European Union and return to the franc.

Aside from a country’s flag, there’s no stronger symbol of an individual country than its money. Perhaps one day we’ll be ready for a unifying currency of ones and zeroes. But for now, we have a yen for the yen. And we can’t seem to buck the buck.

Thomas Lee is a San Francisco Chronicle columnist. Email: tlee@sfchronicle.com Twitter: @ByTomLee

|Updated

Thomas Lee is a business columnist for the San Francisco Chronicle. He is the author of “Rebuilding Empires,” (Palgrave Macmillan/St. Martin’s Press), a book about the future of big box retail in the digital age. Lee has previously written for the Star Tribune (Minneapolis), St. Louis Post-Dispatch, Seattle Times and China Daily USA. He also served as bureau chief for two Internet news startups: MedCityNews.com and Xconomy.com.