ON FEB. 18, 1522, a secondhand clothing merchant named Geronimo Bambarara in the crowded Rialto district of Venice came up with a new way of clearing out stock.
Instead of selling his goods directly for money, he decided to enter customers in a draw. In exchange for a 1 lira ticket, they might win more than 1,000 times that amount in cash or take-home prizes of carpets, cloth of gold, fabric, amber, or animals. The promotion was a success. Within a week, the numbers chancing their odds resembled the crowds at the Ascension Day religious festival, according to one contemporary diarist: “At present, in this Rialto district, nothing is done except put money on the lottery.”
It didn’t last. Just 10 days after the game began, alarmed Venetian authorities banned private lotteries. Their next move was equally predictable. Having eliminated a lucrative private business, the city turned it into a public one, and started issuing tickets to raise state revenue.
That’s a lesson for how cryptocurrencies may develop over the years ahead, as more widespread usage magnifies the potential for negative public consequences.
Falling and rising by double-digit amounts in a matter of hours, Bitcoin has largely given up any pretense that it can offer a challenge to the greenback as a form of currency. Even the hyperinflating Venezuelan bolivar and Zimbabwean dollar exhibit less price volatility. As the $1.7 trillion invested in digital currencies attests, though, crypto remains immensely popular as a speculative investment, just as Bambarara’s lottery tickets were five centuries earlier.
If Bitcoin and its ilk are to survive an era when their downsides are becoming ever more apparent — from carbon emissions to ransomware attacks — they will need to find a way to betray their libertarian roots and cut their own deals with the state.
Gambling and the financial state are intimately bound up together. It’s little accident that the first modern lotteries originated in Venice, the city that issued the first sovereign bonds. Much of the Venetian economy turned on speculation about the fortunes of shipping ventures. A key plot point of Shakespeare’s play The Merchant of Venice occurs when one of the titular trader’s ships is “wrecked on the narrow seas,” causing him to default on a loan.
The gambling craze spread through Europe as incomes rose, often deprecated by religious authorities but tolerated or co-opted by governments. When the world’s first casino opened at the Ridotto in Venice in 1638, it was sanctioned by the governing Great Council as an attempt to regulate and oversee the numerous private card clubs that had sprung up. So many great fortunes were won and lost at the gaming tables that the inventor of basset, the poker-style game played at the Ridotto, is said to have been exiled to Corsica as punishment.
None of that deterred players. The Italian artist Caravaggio, Flemish Theodoor Rombouts, and French Georges de la Tour all painted celebrated scenes of card playing, often emphasizing the amount of cheating that went on. There was clearly a ready market for such scenes, as both art and gambling were popular pastimes for the rich in 17th century Europe. That situation, too, has parallels in the current craze for NFT art.
The same pattern played out in northern Europe. Before it was funded by issuing sovereign bonds, Britain’s national debt was paid for in the late 17th century via the proceeds of lotteries and tontines. An early attempt to consolidate those borrowings and pay them off via proceeds from the slave trade resulted in the creation of the South Sea Company, leading to one of the first great speculative financial bubbles.
The lesson of all this is that the modern state can be remarkably tolerant of people winning and losing fortunes, so long as it gets some benefit. That can come in the form of a cut of the takings; a measure of control over otherwise chaotic risk-taking; or even the capital allocation functions provided by financial markets. Where those benefits are absent, however, governments grow impatient with the turmoil of unrestricted speculation, and crack down hard.
What’s unique about cryptocurrencies is the way their resistance to the nexus of traditional political and financial power is inscribed in their code. Bitcoin is “very attractive to the libertarian viewpoint,” its pseudonymous creator Satoshi Nakamoto wrote in a 2008 post. Anonymous and divorced from the state-sanctioned banking system, crypto got one of its early boosts as an untraceable way to buy illegal drugs on the internet. To this day its most useful function, outside of a simple gamble on its price, is as a currency for illicit activities.
That allergy to government control makes it fundamentally different than the many other speculative activities that have been tolerated over the centuries, as they showered riches on a lucky few and bankrupted others. For digital libertarians, that’s long seemed like a key feature of the technology. As the social and economic costs of tolerating crypto mount up, though, it may look more and more like a bug.
The moment governments decide the nuisance and destabilization caused by digital currencies is too great, they will ban financial institutions from exchanging them for fiat currencies as vigorously as the US enforces sanctions on its geopolitical enemies. That possibility, once remote, seems more and more likely in an era when America’s fuel supplies can be held hostage for $5 million in crypto.
By establishing a relatively efficient payments system for illicit activity, digital currencies have drastically reduced the cost of crime. That’s not the sort of challenge that the modern state can be expected to take lying down. If crypto doesn’t find a way to make its peace with the governments it was set up to circumvent, it will eventually find itself crushed.
BLOOMBERG OPINION
