Bitcoin - analysis on its practicality based on Marxian monetary theory

 

          Money without which we cant get through this world we live in, has taken several forms throughout history. Bitcoin, a blockchain based crypto currency and several other cryptocurrencies are the newest entrants in to the present monetary system projected to cause disruption in the financial ecosystem.

          Bitcoin is a blockchain based system with a decentralised ledger system operated through complex mathematical function with digital miners mining currencies through high end computing systems.

          Money and its nature of evolution and its function can be best understood with Marxian monetary theory. Primitive economies developed rudimentary concept of money as intermediary for facilitating commodity exchanges. Marxian theory developed in 19^th century as mercantilism is going through changes effected by industrial revolution regards money as a commodity, that follows labour theory of value. In simplified terms, theory of labour value assumes that price of commodity is based on the value of labour put in making that the specified commodity, even though final price realised is differs in use value and exchange value.

          When mercantilism started growing, the requirement of a standard medium of exchange, whose value is accepted across brought in metallic money. Gold and silver, which are rare and labour-intensive materials acted as intermediary commodity to facilitate exchange of goods and services. Marx believed that important function of money lies in its usefulness in trade and exchange as a means of circulation.

          As the volume of trade grew, surpassing the available gold and silver for circulation, the paper money that act as representative of gold limited to amount of gold it symbolically represents came into use. Money achieved a status of transient symbol and as such metallic money is  now replaced by other symbols such as paper money with no intrinsic value.

          Marx noted that time and spatial separation in the process of buying and selling creates a creditor and debtor relation between the seller and buyer. Marx points out that this is the reason credit is endogenous to the monetary system. This credit relation expanding with the banking systems led to development of credit systems of present-day financial systems.

          As the present monetary system has gone through sea change, where is no longer backed by gold, the bitcoin and other cryptocurrencies are the new challenges to the current form of money. To realize the basic function of money as a medium of exchange a bitcoin must meet certain basic requirements.

          The lack of monetary standards for Bitcoin is its critical challenge. All standard fiat currencies have certain sub-divisions like dollar and cents, while bitcoin has no such standard sub division. Lack of monetary standards makes it hard to use it as a measure of value against goods and accepted as means of payment.

          Marx treats money as commodity used for commodity transaction, the amount of money required within an economy will be a factor of aggregate price of commodity to the velocity of circulation of money. Marx also points out the amount of money will have to be controlled accordingly with the variation in price of the commodity and velocity of the circulation. Bitcoin by its nature has limited its coin to 21 million and it is estimated to take another 100 years for mining all the currencies. Though in its electronic form, the velocity of circulation has leaped by huge margins and with little currency a huge volume of transaction could be done, lack of monetary standards leads to shortfall in using bitcoin for commodity transaction.

          Fiat money is traded in exchanges, but unlike bitcoin its value depends on the economic capability of the nation’s economy. Exchanges reduces the volatility and ensures smooth realisation of market value of the currencies. However, in case of bitcoin, which is not backed by any nation’s economy, it tends to be highly volatile and subjected through wild fluctuation in its value reducing its use as a means of exchange.

          In a scenario, where a vendor sells his goods in exchange for 1 bitcoin assuming that this bitcoin would buy him 5 $ worth of goods. High volatility may lead to drop in value of bitcoin to 1$, which would create a huge loss. Such fluctuation erodes the trust required for any money to act as medium of exchange and bitcoin is neither backed by any real economy nor does it have a sovereign government enforcing discipline in the fluctuation.

          Marx also points out that with the commodity circulation, the power of money to facilitate such transfer has grown and money has become a social form of wealth. Money has grown into an important source of reserve fund more than as independent source of wealth. As the process of selling and realisation of money from that sale has grown wide in time, to ensure continuous commodity transaction a reserve fund is required to be maintained. Thus another important function of money i.e hoarding came into existence and it gives the means to accumulate social wealth and expand social rights.

          Altogether taking into account of this important functions, a central bank classifies its money reserves under broad categories namely, money in circulation, fixed and time demand deposits and foreign reserves. They are a combination of money and quasi money. Central banks usually denote it as M0, M1 and M3. Since Bitcoin is out of bounds of such controls put by central banks as the conventional banking system don’t accept bitcoins as deposits.

Bitcoin is not controlled by 3 major functions of Central banks of sovereign nations such as control over the money in circulation, capital mechanism for controlling the amount of money available in the market and the hoarding of money for future. Thus, bitcoin puts forward a frontal assault on central banking systems of sovereign nations. It intends to remove the shackles of the controls put forward by the central banking system. In the liberal Keynesian model, whenever capitalism due to its exploitative nature runs out of steam, the central banking system is designed for its rescue through such controls and bitcoin along with other cryptocurrencies intends to diminish the role of state completely and put in forward a purely market oriented system not controlled by any central banks. Bitcoin thus play along with the neo-liberal order of completely playing into market forces untrammelled by restrictions of sovereign state.

Marxian idea of collective society also aims to wither away the state, as Marxism views the state as instrument of bourgeoise. However, in the Marxian collective society, the labour expended in production of commodities are not represented as value of commodity and properties of something which they possess and eventually money and commodity economy would no longer exist. Every individual will be compensated for his labour from the social stock, a means of compensation equal to the labour the person supplied. Bitcoin is at odds with the Marxism, as it intends to remove the state from whatever minimum protection the state offers unlike Marxism which intends to replace the state with more egalitarian society.

          The central banks play a different role from the commercial banks, as it acts as the arm of the sovereign governments in implementing controls over the capital within its domestic market. Bitcoin, is a potential threat to government’s ability to control over the movement of capital and hoard reserves to participate in the international markets and manage its balance of Payment systems. Bitcoin may directly affect the capability of state to raise debts and issue sovereign bonds.

Bitcoin market itself as tool of direct democracy, where anyone with a computer and network can participate in the bitcoin ecosystem, in true sense only a handful of technocrats and powerful states and corporations have the ability to control the functioning of bitcoin. It is most undemocratic system with no accountability and challenging the monopoly of money creation of sovereign governments.

The most concerning aspect is the bitcoin’s ability to capital transfer evading taxation from the respective state. The anonymous nature makes it impossible to track and pinpoint individual engaging in the transaction and it is possible to subvert the tax liability by conducting transaction through bitcoins. Even more alarming is such free transfer of capital enhances the risk of bitcoin being used to transfer funds for terrorism.

          It is undeniable that bitcoin and other cryptocurrencies has the ability  to cut transaction cost and time, and its ability to maintain decentralised ledger recording of every transaction is catching the attention of Fintech. In spite of the limitation in acting as a means of payment, the underlying technology of blockchain will soon be adopted in a wide scale in the transition from physical currency to complete electronic mode of payment systems.