Kelvin Low is professor of law at the National University of Singapore.
In light of the recent cryptocurrency meltdown and the mounting criticism of a technology that has promised much but delivered little, it is useful to revisit Satoshi Nakamoto’s Bitcoin white paper and consider what it gets wrong and why many believe that blockchains cannot work.
In “Bitcoin: A Peer-to-Peer Electronic Cash System,” Nakamoto, the pseudonymous person or persons who developed bitcoin, posited an elegant solution to double-spending, a potential flaw in a digital cash scheme in which the same single digital token can be spent more than once. But the problem was misdiagnosed. Wherein lies the misdiagnosis?
Our trust in banks lies in the debtor-creditor relationship between banker and customer, not in preventing double-spending. Where our accounts are in credit, the relationship entails the customer performing its contractual obligation by extending a loan to the bank before the bank counter-performs, repaying the said loan.
In other words, we trust that when we call upon our banks to perform their side of the bargain, whether by withdrawing cash at an ATM or directing them to make an interbank transfer to a particular payee, they are willing and able to perform. This trust is reversed when the bank extends credit to us since the order of contractual performance is here reversed.
It might come as a surprise to many, but we are not, in principle, concerned with whether or not a financial intermediary permits the double payment of its customers’ money. Today, it is not uncommon for financial intermediaries to encourage customers to make use of their services by way of so-called cashback schemes, in which a small percentage of payments is “refunded” to the customer. Such cashback schemes, in spirit at least, offend the so-called double payment principle.
Because modern monetary theory assumes a flexible money supply, with private banks responsible for creating at least part of this supply,…
