From crypto wars to financial revolution – Business

While many today view cryptocurrencies such as Bitcoin primarily as a financial asset suitable for speculation, it is crucial to clarify that cryptocurrency transcends being merely a technological innovation or a financial asset.

It embodies a socio-political movement rooted in the ideology of cryptography and safeguards against state overreach. The start of this movement can be traced back several decades before Bitcoin’s emergence, stemming from what is now recognised as the “Crypto Wars.”

Before the onset of the information age in the 1970s, encryption was predominantly utilised by military and intelligence agencies around the world. Within the USA, cryptographic algorithms and software were explicitly categorised in the United States Munitions List. This classification originated in the Cold War when America sought to prevent the USSR and countries in Eastern Europe from acquiring Western technologies.

However, by the 1960s, demand for encryption in international financial transactions, along with the requirement to safeguard sensitive yet unclassified information, prompted the US government to develop general-purpose encryption technology suitable for broader usage.

Numerous attempts were made to create an encryption technique meeting these criteria. For instance, in 1974, IBM crafted a standard known as the Data Encryption Standard (DES). This standard was endorsed by the United States’ National Security Agency, commonly known as the NSA.

It’s no coincidence that Bitcoin emerged shortly after the 2008 financial crisis, which laid bare the vulnerabilities of the global financial system

However, DES faced criticism for perceived vulnerabilities. The academic community rightly harboured suspicions that the NSA had intentionally weakened the algorithm, rendering it decipherable only by them. The primary aim of the US government till then was to restrict public access to encryption methods which could not be decrypted by intelligence agencies like the NSA.

A breakthrough innovation emerged in 1976 when Whitfield Diffie and Martin Hellman recognised the shortcomings of traditional password systems, which relied on central administrators to manage keys. This centralisation made them vulnerable to government requests for access. They proposed a decentralised system where individuals possessed their own keys.

This concept gave rise to public-key cryptography, where each user held both a public and a private key. Anyone could encrypt a message using the recipient’s public key, but decryption required the recipient’s private key. Crucially, unlike previous initiatives, this breakthrough originated entirely outside government circles, marking a giant stride forward.

As personal computers and internet-based communication proliferated, government restrictions on encryption also escalated. The transition of all communication and data storage to digital formats underscored the paramount importance of preserving data privacy. Yet governments around the world sought mechanisms for intervention, especially in criminal investigations.

A group of cryptographers, known today as the “cypherpunks” — where cypher refers to a hidden message — observed this conflict unfolding over the preceding decades. These techno libertarians opposed state control, particularly over the internet, believing that government interventions lead to censorship and a lack of privacy.

Cypherpunks advocated for privacy and resisted government access, emphasising their core belief in privacy as a fundamental human right. Hence, for cypherpunks, cryptography represented the path to freedom and the means to maintain absolute privacy in communications in the age of the internet.

However, over time, the cypherpunks eventually came to a profound realisation that extended beyond the realm of privacy alone. Their awakening occurred after the collapse of the Bretton Woods system in 1971, a pivotal moment when the global economy transitioned from the gold standard to a purely fiat monetary system.

Many among them vehemently opposed the new global monetary framework and firmly believed that a fiat monetary system, which granted central banks unchecked authority to expand the money supply at their discretion, constituted a form of long-term theft from ordinary citizens.

At the heart of their concern lay the pernicious impact of inflation, which disproportionately affected working-class individuals, magnifying the economic disparity between the masses and the privileged elite.

Zimbabwe’s experience is a glaring example of the dire consequences of unrestrained money supply expansion. The nation grappled with a hyperinflation crisis, exacerbated by government mismanagement and rampant corruption, resulting in astronomical price increases and the erosion of citizens’ savings.

Likewise, Venezuela’s descent into economic turmoil, intensified by political corruption and inefficient governance, starkly illustrated the devastating repercussions of unchecked money creation within a fiat system. Inflation spiralled out of control, rendering basic necessities unaffordable for ordinary Venezuelans, while those in power remained insulated from the crisis.

In the eyes of the cypherpunks, the remedy lay in creating an unassailable digital currency that could facilitate a state-independent economy, affording unrestricted freedom within the digital realm. They sought to realise this vision through the potent tools of cryptography.

The conceptual groundwork for cryptocurrencies was laid as far back as 1983 when computer scientist David Chaum first proposed the idea of a digital currency. One of the earliest incarnations of this concept materialised in 1989 under the name DigiCash. However, the initial enthusiasm was short-lived as DigiCash filed for bankruptcy in 1998.

Nonetheless, despite their commercial failures, these pioneering efforts introduced foundational principles such as encryption and cryptography into the public discourse. These principles would later prove instrumental in shaping the cryptocurrencies of today.

Consequently, it’s no coincidence that Bitcoin emerged shortly after the 2008 financial crisis, which laid bare the vulnerabilities of the global financial system. The maximum number of Bitcoins that can ever be mined is capped at 21 million. This means that only a finite quantity of Bitcoins can ever come into existence, a stark contrast to central bank fiat currencies, which can undergo inflationary increases driven by political considerations, impending elections, or the demands of an expanding government apparatus.

Consequently, over the years, Bitcoin and other cryptocurrencies have garnered favour among early tech enthusiasts, libertarians, and proponents of laissez-faire economics, all of whom advocate for minimal government interference in individuals’ economic affairs.

The success or failure of this experiment remains uncertain, and only time will unveil its outcome. Yet, residing in Pakistan today, one can gain a deeper appreciation for the insights of the cypherpunks from decades ago, who foresaw the imperative of anonymous currency and robust data protection when a state prioritises the privileges of its ruling elite over the well-being of its citizens.

The writer is an assistant professor at the Lahore University of Management Sciences

Published in Dawn, The Business and Finance Weekly, October 2nd, 2023