HiveComb

1.3.3. Blockchains and the end of the Western civilization

-100. It is time to revisit the analysis of Davidson, de Filippi and Potts investigating the nature of the innovation brought about by “blockchain technologies” . Their framework comprises three different ways in which technology can impact our societies. The first way is that of “general purpose technologies” contributing to multifactor productivity growth, such as the steam engine or electricity. These are dubbed “Schumpeterian” innovations. The second way is that of technologies that improve the efficiency and scope of markets by disintermediating and lowering transaction costs. Commercial aviation and internet platforms are among these “Coasian” innovations. Finally, they argue that while blockchains can bring both Schumpeterian and Coasian benefits, their potential goes beyond, in that they are an “institutional technology”. Few other innovations can boast such an impact in human history: the printing press, double-entry bookkeeping and joint-stock companies (innovations underpinning our modern “firms”), and the internet itself. In tribute to Douglass C. North, father of the “New Institutional Economics”, I would call those “Northern” innovations.

-101. In the previous chapter we have established that Bitcoin has combined existing technologies to create a system able to support large scale cooperation in a stateless community. Moreover, aware that states had aggressively used the law to destroy similar, yet more candid systems before, he chose a solution providing a medium of exchange in support of a “crypto anarchy”, a type of community able to resist state censorship.

^{source Schumpeter, source Coase and North}

-102. Tim May had foreseen twenty years earlier the need for such a solution and the fact that cryptography will in time make such systems possible. To quote again his Crypto Anarchist Manifesto: “These developments will alter completely the nature of government regulation, the ability to tax and control economic interactions, the ability to keep information secret, and will even alter the nature of trust and reputation. […] The State will of course try to slow or halt the spread of this technology, citing national security concerns, use of the technology by drug dealers and tax evaders, and fears of societal disintegration. Many of these concerns will be valid; crypto anarchy will allow national secrets to be trade freely and will allow illicit and stolen materials to be traded. […] But this will not halt the spread of crypto anarchy. Just as the technology of printing altered and reduced the power of medieval guilds and the social power structure, so too will cryptologic methods fundamentally alter the nature of corporations and of government interference in economic transactions.”

-103. Bitcoin was just the first step. It has cleverly leveraged technology to establish decentralized, “censorship resistant” stateless money, yet it implemented a rather rudimentary crypto-economic model. As a platform for “permissionless innovation”, its blockchain technology has then spawned the “cryptoverse”, a “constellation of linked crypto-currencies and blockchains”, and “a wave of financial innovation”. In its Jun 28th, 2018, issue The Economist observes: “The most elaborate working crypto-economic model, however, is Steemit, an online forum which rewards its 1m or so registered users for posting contributions or rating content.”

-104. I have used the rather hyperbolic title of this section in an article published in 2018 on precisely that blockchain-based online forum, Steemit. In it, I was looking at who was most at threat of disruption from the wave of innovation which Bitcoin and its underlying blockchain technology have unleashed and posited that “those who stand to lose most, the modern equivalent of the small kings defeated and enslaved by the Roman legions, might well be the current authorities, from the local to the state or national level and beyond.”

-105. I illustrated with a hypothetical scenario, selecting Belgian authorities as, according to OECD data, it is Belgium that among the OECD countries has the wider “tax wedge”, heavily taxing labour while not obviously offering in return better public services than more efficient states such as Austria. As states and governments enjoy monopolistic positions, I argue that next to the existing choice of “voting with one’s feet” and leaving the country, “The upcoming blockchain revolution will in the future offer a "virtual escape" - "exiting the system" without the drawback of having to physically uproot oneself.”

-106. Therefore, I argued (hyperbolically), states might have to “shape up, get fit” or else “disintegrate”. In this, I echo an argument made by F. Hayek in “Choice in Currency”: “There could be no more effective check against the abuse of money by the government than if people were free to refuse any money they distrusted and to prefer money in which they had confidence. Nor could there be a stronger inducement to governments to ensure the stability of their money […]”. I ended my reflection thus: “What if the current Western Civilization is the modern-day equivalent of the Western Roman Empire in the 5th century AD? What if Bitcoin and the cryptos are the Visigoths, the Vandals, the Huns, and the other barbaric tribes that descended upon and obliterated the Roman Empire, plunging the Western world into the Dark Ages?” It is likely that such fears, which Tim May had also foreseen, have been present, even if in an unconscious form, in the minds of some of the authorities who have contributed to shaping the MiCA regulation, as the Part 2 will strongly indicate.

Concluding remarks

-107. In Part 1 above I have explained that blockchain technologies and crypto-assets, among which Bitcoin is the archetype, innovate on three levels which I dubbed “Schumpeterian” (increasing productivity), “Coasian” (reducing transaction costs, eliminating intermediaries) and “Northern” (enabling new, cooperation enhancing “institutions”). I have then argued that the political and institutional innovations (“Northern” innovation), and to a certain extent the economic innovations (“Coasian”), rather than the technological ones (“Schumpeterian”) are what sets these technologies and applications apart.

-108. Their promise to help Europe progress toward the goals set in the Treaties lies in their ability to support or foster the creation of viable communities and incentivize predictable, cooperative, value-creating behaviour in social contexts where the government becomes “unnecessary”.

-109. It has been said that decentralized, blockchain-based crypto-assets “lower the cost of trust”, yet I have explained that, compared with centralized IT systems, blockchain systems are redundant and cost-inefficient, although “Schumpeterian” innovation keeps creating ever-less-costly blockchains.

-110. Thus, I would distil the essence of blockchain innovation by saying that blockchains replace hard-to-scale social costs of trust with easier-to-decrease computer costs.

-111. A word of caution is also warranted here: as Lawrence Lessig explains in his landmark article “Code is Law”, the cyber-anarchist vision of rendering government “permanently unnecessary” is only half formed, as “no government” does not, in reality, imply “freedom”. In a cyber-anarchist community, the “regulator” does not disappear. Instead, it is replaced with … computer code. The code of the software which underpins the social and economic interactions of the community becomes the “institution”, setting the rules and imposing constraints. Thus, power is shifted toward those who can influence the code. Such communities can thus be dubbed “computocracies”.

-112. In Part 2, I will be analysing MiCA both from dynamic and static perspectives. By comparing provisions of the initial Commission Proposal from September 2020 to the final version adopted in the plenary of the European Parliament and endorsed by the Council in May 2023 , I will shed an indirect light on the European legislative process. As concerns the final result, I am going to argue that the regulation seems to focus on “Schumpeterian” innovation alone, hampering to a significant extent, or downright preventing both “Coasian” and “Northern” innovation in Europe, while at the same time failing to effectively protect EU consumers.

[78] S. Davidson, P. De Filippi, and J. Potts, op. cit.
[79] T. May, “The Crypto Anarchist Manifesto”,
[80] The Economist, June 2018, op. cit.
[81] S. Cristescu, “Blockchain and the End of the Western Civilization”, https://steemit.com/bitcoin/@sorin.cristescu/blockchain-and-the-end-of-the-western-civilization, 2018
[82] OCDE (2017), Taxing Wages 2017, OCDE Press, Paris, https://doi.org/10.1787/tax_wages-2017-en
[83] A. O. Hirschman, “Exit, Voice and Loyalty: Responses to Decline in Firms, Organizations and State”, Harvard University Press, 1970
[84] S. Cristescu, op. cit.
[85] F. Hayek, “Choice in Currency”, op. cit., p.18
[86] S. Davidson, M. Novak, and J. Potts “The Cost of Trust: A Pilot Study” Available at SSRN: https://ssrn.com/abstract=3218761, 2018
[87] L. Lessig, “Code is Law” in “Code, and Other Laws of Cyberspace”, Basic Books, 1999
[88] Proposal for a Regulation of the European Parliament and of the Council on Markets in Crypto-assets, and amending Directive (EU) 2019/1937, September 2020
[89] Regulation of the European Parliament and of the Council on markets in crypto-assets, and amending Regulations (EU) No 1093/2010 and (EU) No 1095/2010 and Directives 2013/36/EU and (EU) 2019/1937, PE-CONS 54/22, 3 May 2023, https://data.consilium.europa.eu/doc/document/PE-54-2022-INIT/en/pdf