The article of Felix Salmon ”The Bitcoin Bubble and the Future of Currency” triggered me to write a series of posts on Crypto-currency at Red Planet Dust (see part 1).

Others refer to his article as well. From the Economist: Inside the Bitcoin economy and from TechCrunch: Beyond The Bitcoin Bubble

To be honest I think that while Felix’s article sounds nice at first reading and holds some very well written, conceived and thoughtful elements crucial parts of his expose are based on conceptions and assumptions that are in my view, how should I put this mildly…. wrong.

The first misconception is Felix having a very romantic notion of trust. Trust is a pretty complex mechanism for human collaboration. In Part 3 of this series I elaborated on Trust in an Interconnected World as a foundation for this post on the use of trust by Felix.

Felix uses “trust” 22 times in his article and “mistrust” 5 times if I counted correctly. In the end Felix position boils down to:

The root problem with conventional currency is all the trust that’s required to make it work. (Emphasis RPD) The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts.

Investments that are denominated in a given currency include money-market funds, bonds, mortgages, bank deposits, and other instruments. Most of these currency-based investments are thought of as “safe.” In truth they are among the most dangerous of assets.

With other words we are highly dependent on various institutions and on conceptions like currencies. In the end we are always deceived by this trust we have in institutions and in the currencies. He then to my surprise goes on to argue that in designing new digital currencies institutions, which are based on human trust, should be included for they will do well for the sakes of us trusting them (which is a surprising stance being 5 years down the road from a banking crises that has shaken our world on its foundations):

…it turns out that financial-services companies are a very important part of any democracy.
It’s because we place so much trust in banks, after all, that they are forced to take on a great deal of responsibility. Banks and central banks are given an important job to do, are regulated and scrutinized, and can be held responsible for their actions. The population of the entire country, as represented by the government, stands behind bank deposits and promises to honor them even if the bank goes bust.

So even though history has proven again and again, as stated by Felix himself while quoting Warren Buffet, that this trust will be violated severely at a certain moment in time (see banking crises we are living through the last couple of years) Felix argues that we should involve this type of trust in future currency design(s).

He concludes:

Money, in other words, is a key ingredient in the glue which keeps the social compact together.

Felix sees this consequence as THE reason to include human trust as foundation for digital currency.

Yes, I agree with Felix wholeheartedly: MONEY is a key ingredient to human collaboration. Actually it is one of mans most powerful inventions ever and has laid the foundation for the incredibly complex world we live in. Without money we would not have been able to create the incredible level of division of labor for instance which forms the basis of our economies today.

The more efficient the form of money (and payments as the logistics part of money) to our disposal the better we are able to collaborate and create more prosperity for more people.

But where I don’t agree is in the linear consequence he proposes between involving institutions based on human trust and money.

Bitcoin is showing us that new constructions are feasible that will make money less dependent on human trust as to become an even better facilitator of the human ability to collaborate (and to keep the social compact together in the wordings of Felix). Money does not equal the inclusion of human based trust perse.

The design of a currency system based on a technical design that does not need human based trust in its core does not imply mistrust of humans or its institutions (even though it can mitigate for the uncertainty that human based trust involves). There is just less need for intangible human trust.

In the next part of this series I will tackle The nature of money in light of crypto-currencies and “money as a commodity” the second misconception in Felix’s article.

For more on Bitcoin at Red Planet Dust:
The RPD Bitcoin files