BitCon - The Book

by Izabella Kaminska

September 29, 2014
Part of the BitcoinMania series
(c) The Financial Times (Alphaville)


Jeffrey Robinson is an American author best known in media circles for his work on international financial crime via his 1995 book The Laundrymen.

Suffice to say, when one of the world’s best known financial-crime authors turns his attention to the world of cryptocurrencies, and in particular Bitcoin, it probably makes sense to pay attention. Especially when the book he publishes is called, BitCon: The Naked Truth About Bitcoin.

Sadly, for the Bitcoin faithful — as well as all the other reasonable institutions that seem to have been taken in — the verdict is not good. Robinson reduces the entire phenomenon to a classic swindle. A small cohort of ruthless predators taking advantage, as usual, of the naive and gullible via a carefully constructed and asymmetrical myth, which happens to appeal to those of a certain persuasion, encouraging them to take leave of their senses entirely.

Part of the fervour is driven by classic get-rich-quick sentiment, but the other and the more sinister part is based on the art of indoctrination, no different to that employed by cults focused on getting people to hand over their hard-earned cash for the the sake of reserving themselves a prime slot in heaven and/or the supposed system that comes after this one.

Most heinous, in Robinson’s assessment, is the fact that the predatory and cultic marketing spiel focuses on the message that “This time is different”, when an objective analysis of the evidence suggests nothing more than a common swindle that only really benefits shadowy non-contributors to the global economy.

Robinson quotes an array of respected authors, investors and academics who argue convincingly that Bitcoin “the currency” is Ponzi-esque to the Madoff level.

In fact, Robinson says, even the Austrian school academics, who Bitcoiners love to idolise, assess the phenomenon that way. Take the prognosis of Dr Gary North, economic historian and associated scholar of the Ludwig von Mises Institute, who has predicted “Bitcoins will go down in history as the most spectacular private Ponzi scheme in history. It will dwarf anything dreamed of by Bernard Madoff”.

Of course, the Bitcoin faithful don’t seem to view the Ponzi issue as a problem because they mistakenly believe the fiat currency they are displacing is no better and/or no worse. Worse than that they assume their Ponzi is transparent, and thus immune to the information asymmetry problem that plagues all other Ponzi schemes.

But, as Robinson notes, in the opinion of Mark Williams, former Federal Reserve Bank examiner — one of bitcoin’s most articulate skeptics and one of the top 10 most reviled men on the Bitcoin Foundation’s published “Most Reviled” list — the scheme is anything but transparent. It suffers not only from misinformation, but concentrated market power, hoarding, opaque and unregulated exchanges, insufficient trade reporting, elevated marketing hype and greater opportunities for market manipulation.

As Robinson observes, this is the domain of those suffering from apophenia, i.e. those who legitimise their belief by seeing meaningful patterns in random or meaningless data.

It can’t go on, Robinson argues, because the world eventually runs out of fools.

Unsurprisingly the Bitcoin faithful don’t like what Robinson has to say. In fact, most telling about the cultic nature of the whole phenomenon is that anyone making reasonable objections is set upon with ad hominem attacks full of hubristic “you’ll see when we take over the world” flavour.

The book, in any case, provides a good overview of why the economic thinking that drives the movement is toxic, as well as the twisted and malevolent forces at play.

As ever, Robinson begs us to consider, cui bono? Who does it all benefit? Guess what, it’s not the little guy. Those in prime beneficiary position are the dark and mysterious miners, anyone with illicit earnings to launder through the network, the intermediaries, the scammers, the PR industry propagating the brainwashing, the cottage industry of exchanges and even the big tech geniuses who have put their reputations on the line.

A key focus of the book is unravelling much of the misinformation that has come to dominate bitcoin coverage in the media — in large part due to the ferociously persistent nature of the PRs appointed by the movement. His biggest beef is with the notion that retail adoption is growing and that retailers are benefiting from the inclusion of bitcoin.

Robinson’s research suggests this is anything but the case. As he notes:

“In a totally unscientific, ad hoc study, I randomly phoned a couple of dozen small businesses in North America and Europe who were listed as “accepting” bitcoins.

They all had pretty much the same story. They put up their “Bitcoins Accepted Here” sign because it struck them as being a good marketing tool and, sure enough, several of them had very positive responses for a few days. If wasn’t necessarily a lot of money, but it was more than they had before they put up the sign. Then, their bitcoin takings all evaporated.”

Another interesting example of the distortion at play comes via his analysis of the Bitcoin Wikipedia page, which Robinson was directed to when one of The Faithful told him to “wise up to the truth” by reading up the Wikipedia entry, since it had been compiled by “thousands of people”.

From Robinson:

So I checked. Instead of thousands, it turned out to be a few dozen and, doubting them, Wikipedia had stopped publishing outside entries to the bitcoin listing. Why? Unsubstantiated entries and unreliable information.

All that said, all through the book Robinson separates bitcoin “the pretend currency” — which he sees as totally unnecessary and in no way revolutionary — from Bitcoin, the technology. Bitcoin the currency he notes is backed by the full faith and credit of wasted computer time. The technology, when not connected to currency, does possibly have potential.

He even refers to an exchange with tech billionaire Marc Andreessen, of “Bitcoin matters” editorial fame, in which Andreessen confirms he’s actually more interested in the power of the technology. (Though why then the $25m investment in Coinbase, the most notable of the payment processors currently bearing most of the bitcoin float risk, eh?)

But even on the technological side, there are issues due to the general complexity and cost associated with introducing digital asset systems. One of the book’s most interesting chapter, for example, discusses the lessons learned from the rise and fall of Canada’s MintChip initiative.

As Robinson explains the problem with MintChip — which was supposed to introduce the equivalent of a real digital state currency — was that it was simply too expensive for the public purse and MPs didn’t understand why the Mint was getting into the business of creating payment services, which to date had been successfully handled by the private sector. The private sector, meanwhile, had no interest in creating or supporting a system which competed with their own digital products directly.

Robinson interviews David Everett, the developer of the first electronic purse — a system called Mondex — who was brought in to the MintChip project. As he tells Robinson, had the Mint been prepared to bear the cost, the whole thing would worked really efficiently due to the simplicity. It all went wrong, he believes, because in the end people got confused about the difference between a real currency and a virtual one. This he notes, is down to the fact that not everyone understands cash or how the cash mechanism works. He suspects people got confused with MintChip and bitcoin, and started seeing the former as a virtual currency when that’s not what it was.

But as Everett notes, the reason why Mondex and MintChip had the potential to work while bitcoin will not is because they really were the equivalent to real currency. As Robinson quotes him saying:

“I think there are a lot of nice things in the bitcoin technology, but I don’t think it’s very good for cash. It doesn’t really lend itself to immediate payments. I’m surprised bitcoin has gone as far as it is.”

In other words, Bitcoin’s potential, if any, is as a publicly distributed and self-funded ledger of existing assets (but preferably not currency).

And really, this is only point with which we disagree with Robinson on. Yes, we agree, the idea of smart contracts is nifty, but we’re not sure the smartness of contracts is in any shape or form dependent on blockchain technology.

To the contrary, we suspect a lot of the “genius” of the blockchain lies in the way the system transfers the cost of clearing to users directly. It encourages people to police themselves rather than to rely on the services of a particular public or private authority of repute. The reason, consequently, why technologists and entrepreneurs love the “technology” (which is really a protocol) is because it allows them to build pyramids on the back of voluntary (instead of costly) slave labour.

To call this “technology” is consequently disingenuous. What it really amounts to is a persuasion technique focused on the roll out and adoption of a protocol on voluntary as opposed to compulsory terms, which — if constructed wisely — is supposed to help society order itself more prosperously.

This is no different to Moses persuading his followers that a world of self-discipline, as per the Ten Commandments, is better than a world without it. We don’t need Egyptian whips to build pyramids, we can discipline ourselves to achieve the same scale of growth.

Naturally, if society can be trusted to accept such commandments and live by them, the need for a supervisory agent (of the ancient Egyptian variety) can be eliminated.

But the question remains how can you be sure the public will comply with the rules that need to be followed by all if the system is to flourish?

The truth is, this usually depends on an innate payoff and penalty being built into the system. In religion, the reward for compliance is access to the kingdom of heaven while the penalty is eternity in hell. And not dissimilarly, with the Satoshi system, the reward for compliance is a step up on the social hierarchy of the system, while the penalty is the collapse of the system itself.

Remove such payoffs and penalties, and the incentive to cheat or ignore the protocol becomes too great.

What you end up with instead is a system that depends on constant public scrutiny to deter non-compliance. But this introduces not only an incentive to dodge the inspection of the crowd — opaqueness via off blockchain transactions –but also the corruption of the scrutinising crowd.

Which is why, for us, there is little sense in going from a system in which a single trusted intermediary of known repute (and which knows you) can verify what you are or are not entitled to, to a system in which you can’t partake even in a coffee transaction without the public at large judging that you have the right to the transaction.

That’s without pointing out the obvious: for a publicly distributed ledger to be a fair system you need the participation of the entire population at every transaction level. Yet the public is unlikely to have the time, the resources or the inclination to be bothered to participate to that scale. This leaves the judgment process open to the bias of participating judging agents.

We guess it all comes down to whether you prefer a system that uses a common entity that everyone knows and trusts to judge what you are entitled to, or a faceless crowd of unknown repute, with an unclear agenda.