Bitcoin from the capital’s mint

Bitcoin from the capital’s mint

The Berlin State Mint is minting Bitcoin coins – but not out of passion for the cryptocurrency, but to take the Bitcoin scene for a ride. Besides a successful joke, the message of the “coin” also contains a tangible economic criticism of Bitcoin as a currency and money – which we do not share, however.

Bitcoin from the capital's mintActually, one expects state institutions to be beer-serious, dry as dust and humorless. The Berlin State Mint, the institution that mints one-fifth of the euro coins in circulation in Germany, refutes this clich̩. By minting Bitcoins, it is not only jumping on a trend Рbut also, and above all, pulling the Bitcoin scene through the mud. Many people consider BTC only as a way of payment for illegal activities or gambling which is far from the truth.

You could say the coin is trolling, joining the tradition of so-called “buttcoiners” who criticize Bitcoin with sarcasm and cynicism. It’s all the funnier because it’s unexpected and so out of character for a government mint.

So, in the institution’s online store you can buy bitcoin coins for some time now. These are metal coins with a gold alloy that show the Bitcoin logo on one side and either a QR code or IT pioneers such as Konrad Zuse, Heinz Nixdorf or Ada Lovelace on the other, depending on the model. It gets funny when you take a closer look at the page. To the left of the Bitcoin B it says “Knete ist Knorke”, to the right it says “in ECB we trust”, which translates as “We trust in the European Central Bank” – meaning exactly the opposite of what many Bitcoiners think.

It gets no less trollish in the coins’ description. “Bitcoin from the capital’s mint,” the title promises. After that, the Mint invites its customers to “get a unique experience” with the mint’s Bitcoins. “With this Bitcoin, you can do everything except shop. The Berlin Mint’s bitcoins are not money and thus have almost as few payment functions as digital bitcoins.” In exchange, the coins from the Mint are “more environmentally friendly than the digital version,” which is followed by a note about how much electricity Bitcoin uses in a year. In addition, the institution advertises that its coins have a longer lifespan than real Bitcoins. “Coins easily reach an age of several thousand years. The Internet is not even 50 years old.”

Away from the dryly funny trolling of the coin, there is also a message behind it. The shopping page for the Bitcoins links to a PDF in which Carl-Ludwig Thiele and Martin Thiel, both of the Deutsche Bundesbank, criticize Bitcoin. I was not able to test it, but would not be surprised if the QR code on one of the bitcoin coins points to this very article. The document is dated November 23, 2017, and it could be interesting to see how solid the criticism of the two Bundesbankers is.

Only central bank money can be stable

First of all, the bankers define a currency as “the constitution and order of the monetary system of a state, in a narrower sense also the respective monetary unit. ” By this definition, of course, Bitcon is not a currency, which is arguable, since Bitcoin immediately spins out the whole idea of private, non-state currencies. For central bankers, there can be no currency without a state.

What is possible, however, is a money without a state. Money is defined “by the fulfillment of three functions: It serves as a means of payment, a store of value and a unit of account.” Bitcoin does not fulfill these properties, which is why it cannot be money.

At least the two Bundesbankers concede Satoshi has created a “modern cash-like payment instrument for the digital age” that excludes third parties from transactions and provides “intermediation-free transfers of value” that “are otherwise only possible with cash in the near term.” The technology seems to impress central bankers. So do the economic incentives in Bitcoin. They find “a pragmatic solution” that miners receive bitcoins as remuneration for verifying transactions, i.e., that the “distribution of seignioirage (profit from money creation) is linked to the operational costs in running the system.”

However, money is not to be defined technically, but economically. An important aspect, he said, is the stability of the exchange value. “The value of money is determined by supply and demand. Since, in simplified terms, the demand of money can change due to real economic growth and changing velocity of circulation, the supply must also be adjusted so that the value of money remains stable.” A rigid money supply, or, as with Bitcoin, “an algorithmically predetermined development of the same,” did not meet this requirement. This, he said, is shown by the experience with the gold standard, which did not achieve stability in the value of money relative to a basket of goods.

The only solution the Bundesbankers can imagine is what we have today: A central bank that acts to control the money supply while being the issuer of money, its anchor of value, because each euro represents a claim on the central bank. To this end, the central bank would have to be independent of the government, would not be allowed to engage in direct government financing and would have to be committed to a stability-oriented monetary policy. “It is our firm belief that compliance with these three conditions is essential for a currency to remain stable over the long term.”

Bitcoin, bankers said, has no intrinsic value, only exchange value. There is no other use for the digital coins, and no issuer to redeem them. The government of cryptocurrencies (governance) is opaque, the constant emergence of new currencies a kind of inflation that destabilizes the value of money. All these are reasons for the volatile fluctuations in value. Bitcoin is not money, but a speculative object, he said.

Which is an experiment: gold money or fiat money?

The whole argument is a bit circular: Bitcoin is not a currency because currency is defined as the monetary system of a state; Bitcoin cannot have a stable monetary value because it is assumed that a stable money needs an institution like the European Central Bank. The result does not follow the argument, but the argument follows the result.

Of course, Bitcoin’s volatility is problematic. But whether it comes from the fact that there is no regulating central bank or from the fact that Bitcoin is simply not yet widely enough used as a means of payment is speculation. After all, the experience with the gold standard shows that it was entirely possible to have a stable money by tying it to a scarce resource.

The gold standard was a roughly 50-year epoch between about 1870 and 1920 in which the value of paper money was pegged to gold. It led to unprecedented globalization of the world economy, rapid industrialization, flourishing in art, architecture, culture, and science, and the accumulation of large, private, entrepreneurial fortunes. It would be absurd to claim that the gold standard was a flop, even though monetary stability may not have met the standards that modern central bankers set.

gold money or fiat moneyIn the early 20th century, the gold standard was gradually suspended. The reason was that it made it difficult for countries to use monetary policy to respond to economic crises – and to finance rising military spending, especially after the outbreak of the First World War. After World War II, the Bretton Woods Agreement reestablished a kind of gold standard, linking the value of many currencies to the dollar and its value to gold. This was followed by an economic boom in the West and a massive technological and socio-political development push. Again, it is probably absurd to say that gold backing was a flop.

Likewise, it should be doubtful whether the ECB model is really a success. Since the suspension of Bretton Woods, economic growth in the West has slowed. The many economic and financial crises that have plagued us since the 1990s also do not speak for the success of the system of free exchange rates of unbacked currencies, and the difficulty of countries such as Greece, but also Italy and Spain, to reconcile their economic policies with the stability objectives of the ECB results in the fact that these countries have great problems to recover from the last financial crisis. The unification of the various economies in the euro also turned the financial crisis into a currency crisis.

Looking a little further historically, those periods when there was a gold-backed currency tended to be prosperous times, while attempts to create an unbacked fiat money ended in decay with a high degree of reliability. The idea of stabilizing a currency by relying on the independence and competence of a central bank is rather new, and far from having proven itself for as long as a currency backed by precious metals. When the Berlin State Mint therefore writes that the Internet is only 50 years old, while coins last thousands of years, this also goes against the very message that the two Bundesbankers want to send out: Currencies backed by precious metals would remain stable for hundreds or thousands of years, while ECB money has been around for less than 20 years.

Therefore, the question arises as to what the experiment is: a novel currency design that causes major economic problems after only 20 years – or a hard money system that has proven itself over millennia, as Bitcoin represents?