Virtual Currencies and the State
M. de Castro Cunha Filho & S. Silbey, What lies behind the apparent trust in cryptocurrencies?

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April 15, 2020

Marcelo de Castro Filho, University of São Paulo
Susan Silbey
, Massachusetts Institute of Technology

At the core of Lev Menand’s and Bill Maurer’s contributions to this roundtable lie one important conclusion: virtual currencies[1] are challenging the long-standing and conventional distributions of power in the production of money. Lev Menand states explicitly that virtual currencies such as the cryptocurrency – or utopian coin – Bitcoin, the corporate coin Libra, and the stablecoin Tether will inevitably affect the way monetary policy is conducted. According to Menand, virtual currencies in general have the potential, if not the probability, to produce multiple monetary harms: to reduce economic control, lose seigniorage, encourage illegal transactions, avoid regulatory arbitrage, and promote financial instability. To address these harms, he suggests government regulation of virtual currencies qua currencies. Bill Maurer supports this view by noting how virtual currencies – whether through Facebook or a Central Bank — can effectively develop authoritarian dystopias. According to Maurer, creators and managers of some types of virtual currencies (i.e. Libra) can control “monetary” policy simply by accessing consumers’ data and funds, while simultaneously taxing the currencies to secure return for themselves.

Worries about the power exercised through currency management are not simply the province of academics and central bankers. Our interviews with Brazilian users of entirely decentralized virtual currencies such as Bitcoin – cryptocurrencies or utopian coins in Menand’s terms – show that concerns about the reliability of a currency and democratic control occupy citizens consumers as well. In making their decisions to use and invest in decentralized virtual currencies, users and enthusiasts have implicitly chosen a new type of money with a different political architecture. Rather than expecting to lose democratic participation in the constitution and reliability of money, these members of the public expect this new type of “currency” to bring a more democratic form of money. This expectation has been the basis of a different type of trust in “money”, which can be partially explained by distrust of money itself and the institutions that have historically sustained it. In this essay, we use the term cryptocurrencies to refer to decentralized virtual currencies only (i.e. Bitcoin) – what Menand calls utopian coins. We suggest that the use of these technologies by the public denotes the existence of strong popular support for democratic regulation of money.

Cryptocurrencies such as Bitcoin, Litecoin, and Monero offer an unprecedented opportunity to rethink the long-lived trust in money – or at least in what is popularly perceived as money. Although cryptocurrencies have been used in recent years more as speculative assets than anything else, the idea that they function as a type of money, or that they will function as such in the future, persists among ordinary, non-speculative actors. The association with money is not occasional, as aspects of cryptocurrency systems routinely perform like money. Unlike standard digital money (e-money, e.g. digital dollar, digital euro), however, cryptocurrencies are designed to work entirely peer-to-peer. They are transferred directly from user to user without at any time going through the internal verification, standardization, commensuration, and review processes of any particular institution. Instead of a third-party intermediary that normally stands behind currencies, cryptocurrencies are transmitted digitally over the internet through a cryptographic protocol that follows preprogrammed mathematical rules.

The disintermediated operation of cryptocurrencies has led enthusiasts to believe that, by virtue of the elimination of the trusted third party (e.g. state, bank or corporation) from the value transfer chain, and the insertion instead of a semiautomated electronically controlled procedure, a type of money emerged that excludes from its governance any and all types of institutional and political interference. Transferring control and management of money from the work of socially and legally organized institutions to the work of a mathematically and electronically controlled process is understood by its advocates and users to insulate money from the domain of institutions, especially the law and its associated politics. This intermediary-free currency was promoted in reaction to the waves of fluctuating – loss and gain – credibility through which the institutions of law and politics often pass. In response to what appears to be declining confidence in legal and international institutions generally, cryptocurrencies have been actively publicized as a new type of money that should inspire confidence that money managed by central authorities cannot seem to sustain.

In particular, internet-enabled social media communities promote the idea that central banks, private financial institutions, and governments manage national currencies – such as the Dollar, the Euro, and the Real – to serve the persons managing these institutions rather than the public at large. These institutions often inflate the currency, deflate, confiscate, or withdraw it from circulation. The same, however, would not apply to cryptocurrencies, since they have had their management delegated to machines incapable of changing the rules or protocols, according to which they are issued and transacted. Maurer refers to these as the mythologies from the left and the right.

The narrative built around cryptocurrencies raises a long-debated theme in the social sciences too often ignored in law, namely the issue of trust formation and the mechanisms that consolidate or break down trust in social institutions. The popular cryptocurrency narrative provides a seductive explanation for how trust can emerge from the negation of law, politics, and historically evolved social institutions, substituting for those by mathematical quantification alone.

For a long time, numbers have been considered trust providers because they claim objectivity. Objectivity can be defined as the absence of personal interests, strict obedience to norms, equal treatment of similar issues, impartiality etc. Numbers are an attractive substitute for the messy ambivalence of language and qualitative judgments because they create and overcome distance, both physical and social. They appear to offer a common language that erases cultural, historical, and geographical variations while simultaneously erecting “a new form of distance because” the discipline of numbers “erases the local, the personal, and the particular” which are always embedded in law and political institutions.

Is it possible for public trust in cryptocurrency to be sustained on the basis of mathematical objectivity and distance alone? Our research suggests that the answer is no. Offering trust in mathematics as a substitute for trust in law cannot provide the exclusive condition for the widespread embrace of cryptocurrencies because the very use of mathematics to manage the technologies does not eliminate the decisions, choices and even arbitrariness built into the algorithms as they were first created. Their technical configuration results from a series of choices made by those who created them as well as those who keep them running (developers, and server managers).

Moreover, the idea that trust may develop from the exclusion of law, institutions, and politics is also suspect because trust is not just about ​​the processes that distinguish these institutions. Trust is intrinsically linked to the idea of ​​overcoming the uncertainty of future outcomes. Generally speaking, trust is a form of expectation that at some future time a person or mechanism behaves in a known way in order to produce a specific event. Reliance on cryptocurrencies as an approximate form of money comes not only from the expectation that the algorithms will work independently of human decisions but also relies on a prediction – an expectation – that that the currencies will enter the social world in its materiality and concreteness to be used as a means of payment, as units of account, and as stores of value. For cryptocurrencies to become a reliable means of payment with such characteristics a number of political, legal and cultural factors must provide the conditions for overcoming uncertainty about the future use of cryptocurrencies. As Menand suggests in his reference to future imaginaries, a future with regulations can play a key role in those imaginaries by assuring the exchange and use value of the currencies (which should nonetheless be free of institutionalized manipulation concerning rates and amounts). In his essay in this symposium, Joseph Sommer suggests that for cryptocurrencies to become money they should garner “faith”, which comes from the user’s identification – communal mystique – with the communities that issue and sustain the corresponding means of payment.

Empirical research conducted in Brazil with the participation of Bitcoin users and enthusiasts has identified just such conditions for overcoming future uncertainty so that cryptocurrencies can garner confidence as a popular representation of and substitution for money. Analyzing interviews with 39 Brazilians – men and women of diverse ages, social classes and educational qualifications – we find that trust in cryptocurrencies is, despite the popular circulating anti-institutional narrative, associated with both formal and informal, familiar and common institutions. Institutions here are understood in the broad sense as the rules of the game capable of directing or accommodating the use of the new technologies in everyday transactions. Together, (1) the law, public regulation and the state; (2) the governance model of cryptocurrencies, and also (3) market institutions provide the practical as well as symbolic conditions for suspending, or silencing, existential uncertainty concerning the use of the technologies in everyday social life.

Despite widespread interpretations as being corrupt and subject to questionable political interests, the law, financial regulations and the State are simultaneously interpreted as essential conditions for the organization of the market and therefore for establishing the circumstances under which cryptocurrencies generate public confidence. Here, one respondent anticipates the coercive and symbolic dimension of state law for Bitcoin to function as a kind of money.

(…) if we want to see characteristics of currency in these cryptoassets (…) I think regulation needs to come forward pushed by the state. Because, I believe, private individuals will not be able to do this on their own (…) Because in the middle of all this, there is human greed (…). In this sense, there must be someone here who (…) is there with eyes turned toward society who takes society into account and not for the business of a few.

Alongside the law, public regulation and official state institutions, the governance model of cryptocurrencies also plays an important role in the process of building trust. Although the actual governance consists of the algorithms governing cryptocurrency systems as well as the labor of miners, users and enthusiasts describe the governance as completely outside human decision making, and therefore as enhancing trust.

I put faith in Bitcoin because it’s independent of the changing president. It’s totally independent of a political situation. There’s a program (software code) there. A moment comes and the system releases more bitcoins. This takes away this influence on monetary policy. This influence on the value (…) this power to increase or lower the value of the currency, or to keep it the same (…). So, I think it takes away a lot of little “tricks” that people end up using to control the currency.

Even when users recognize the role of the miners in sustaining Bitcoin, and acknowledge that deviance from governing norms may arise, they see it as a condition for trust because it requires collective and collaborative participation.

The miners (servers) are there to give you this confidence. That whole thing (…) there are the mining blocks, and the miners need to reach consensus to change anything, and all that (…). This is a guarantee that no one will steal your money or block your account. That’s why I think it (Bitcoin) is safer than leaving my money in the bank.

Last but not least, users and enthusiasts also identify private institutions as an essential foundation for trust in cryptocurrencies. Here, users speak about exchange houses, and the cryptocurrency communities as a whole. Exchange houses are organizations that negotiate among currencies and cryptocurrencies. They connect buyers and sellers and work like marketplaces. The communities, on the other hand, consist of disorganized masses of users and enthusiasts. Some of them get together on virtual platforms to share news and comments about cryptocurrencies. In Brazil, cryptocurrency communities most often use Facebook. According to respondents, both types of private institutions act as trust providers as they help turn cryptocurrencies into practical and safe instruments to trade on the market. As one interviewee said,

They (exchanges) are independent, they are responsible for regulating their way (…) as long as you transact within their system, you have to respect their regulation. So, that ends up generating an “extra trust”. It ends up generating more security for you during your transaction. For example, me. I was negotiating on their platform. I was paying their fee, but I knew I was paying it not to be scammed.

In a similar vein, the communities play an important role in enhancing trust in cryptocurrencies. Since blockchain-based cryptocurrencies are not under direct control of any organization, they lack formal mechanisms to prevent misuse and crime. The communities, however, can provide relevant information about the space of negotiation. The communities can work as watchdogs by reproaching bad behavior and letting users know who is misusing the technologies. By making explicit what is considered bad behavior and by assigning users a sort of reputation rate, the communities contribute toward the isolation of those with bad intentions. Here, users foresee not the formal, legalized regulation by the state but democratic regulation through informal communities: the imaginary of participatory democracy, unconstrained by the dilemmas posed by global scale. The following quotation shows how the Bitcoin community reproached bad behavior in the market and how it generated a safer place for negotiations.

The community ends up purging illicit people (…) Let’s imagine 100,000 people use Bitcoin. They use it in a lawful, good, correct way. If you have one person who misuses it, he will be purged (…). An example is the financial pyramids. The ecosystem itself creates mechanisms (…) an example is the Gap group, (…) an anti-pyramid group, which reproached lots of financial pyramids. In the end, they (the pyramids) fell. This gives more security to use and invest in Bitcoin.

By invoking state authority to regulate cryptocurrencies’ internal governance, the intermediary role of exchange houses, and the role of digital communities, users simultaneously spread popular narratives of trust in cryptocurrencies and distrust in the institution on which they nonetheless hope to rely. By spreading the narrative negation of politics, law and institutions, they simultaneously embrace those very institutions. For users and enthusiasts, trust in cryptocurrencies as a representation of money emerges from the same conditions that render the technologies concrete, practical, and safe. As is the case with traditional currencies, these conditions derive from the organization of institutions responsible for mediating the use of money in daily life. Unlike the case of national currencies, however, these conditions are not provided only by formal state institutions such as statutes, regulations, and certified banks. In the case of cryptocurrencies, trust-generating conditions also emerge from the organization and design of informal institutions such as the governance mechanisms internal to cryptocurrencies, market intermediary organizations, and the community of users and enthusiasts that make the market of cryptocurrencies a solid, trusted “ecosystem” of money.


This piece is sponsored by FAPESP – Fundação de Amparo à Pesquisa do Estado de São Paulo

  1. Virtual currencies are digital representations of value, issued by private developers, and denominated in their own unit of account.