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Human society, says historian Niall Ferguson, oscillates between the dynamics of a metaphorical “tower” and that of the “square”. Sometimes institutions or rulers control social groups in a hierarchical fashion, just as church spiers eclipsed medieval European towns.
At other times, horizontal networks shape the events, functioning like crowds in the squares of ancient cities. The “square” worked best in small, face-to-face groups, but digitization now allows peer-to-peer systems to operate at scale.
We thus live in a world of institutional “towers” and large networks of “distributed trust”, to quote Rachel Botsman, professor of commerce at the University of Oxford, and they clash. This matters if you want to make sense of the $ 1.5 billion crypto world. One way to explain the crazy price swings this week is that there is an ongoing showdown between the ‘square’ and the ‘tower’.
Until now, the “square” has defined crypto. Bitcoin was created with an explicitly libertarian ethic that challenges government control over money. Trust in the system relies on a distributed ledger managed by a crowd, not a central bank.
Still, the crypto world has no shortage of social structure. The network is defined by distinctive creation rituals, symbols and myths, shaped by dominant actors such as Elon Musk.
Indeed, there are several “distinct subcultures within the cryptocurrency space” grouped around different assets, as Grace Rachmany, crypto expert notes. “Bitcoiners”, “ethereans”, “monetizers”, “DAOists” and “holonauts” are not the same, either in technological or social terms, although they can easily appear to outsiders as an anarchic mass.
The key problem, however, is that “belonging” – and trust – is voluntary. Musk wields influence, not power. This makes the signage devices that define this social network important because they can shape the prices.
“The value systems and rituals of the Bitcoin community. . . helped establish it as money [whose price is shaped] by community, beliefs and a sense of belonging, ”observes Mick Marocci, an anthropologist working in crypto. You cannot dismiss “memes” as irrelevant anecdotes because they can generate values in this horizontal trust system.
Now, however, a “turn” dynamic comes into play. On Wednesday, the Bank for International Settlements (the bank of central bankers which, in a delightful irony, occupies a veritable dark tower in Basel) released a startling report that lashed out “instead.”
“Innovations such as cryptocurrencies, stablecoins, and large-tech walled garden ecosystems all tend to work against the element of public good that underlies the payment system,” a- he declared. “Bitcoin in particular has few redemptive public interest attributes.”
Critics of the report are not surprising. People in the “towers” rarely accept the challenges of the crowd. More importantly, the BIS has explicitly supported, for the first time, the creation of digital central bank currencies to “digitally deliver the unique advantages of central bank money: settlement purpose, liquidity and integrity”. Clearly, the tower wants to beat the place at its own game.
Don’t bet this is coming soon. In places like Singapore, monetary authorities are well organized and unified enough to trigger rapid and effective digital experiments. This is not the case in the United States or in Europe.
Critical questions regarding CBDCs remain unresolved. Hyun Shin of BIS says “data governance is going to be the key issue.” However, no one knows how central banks might handle this. It is also not clear whether a CBDC can exist without disintermediating and undermining private sector banking networks.
But even before any public debate on these issues begins, governments are cracking down. Just look at China’s crackdown on bitcoin mining or regulatory threats from the United States Securities and Exchange Commission.
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The private sector financial institution also exercises its muscles in a potentially hierarchical manner. Last year, JPMorgan Chase launched its own digital asset and blockchain system called Onyx, using an approach roughly similar to the ethereum asset.
This week it emerged that Goldman Sachs had tested this with a repo transaction. I am told that other institutions, particularly in Asia, are also doing it. This could be seen as a fledgling effort to create institutional crypto train tracks that could allow JPMorgan, for example, to act as a future agent of the CBDCs. The “tower” is about to retaliate.
Where does that leave the crypto “square”? In China, I suspect it will be gradually crushed. Beijing seems determined to use the CBDCs to centralize power. In Europe, the “square” can be held back by bureaucracy.
But the really interesting question is what will happen in the United States, a country that revere free market ideas and network-driven innovation. “American cultural values - from supporting the underdog to adulation of the border explorer – seem to be the precipitating source of how crypto is changing our concept of money,” notes anthropologist Sara Ceraldi. Don’t count the crowds.
Either way, the point is, no one can explain the prices of crypto or other assets even with money economics or portfolio theory. The power and culture of “squares” and “towers” matter. Rarely has finance been so fascinating or so difficult to model with mathematics.
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