Dragons are mythological creatures which almost any person on earth knows and is able to recognise. There have been depictions and descriptions of dragons in almost every human culture for at least centuries, possibly longer. This is remarkable, because dragons are not real, but only exist in our collective imagination.
All kinds of stories, concepts, and rumours can become collective knowledge through verbal communication, but what makes a concept like a dragon remarkable is the level of detail in which people can describe it, and how that level of detail has persisted for long periods of time. We would probably describe a dragon today in much the same words as our ancestors did a thousand years ago. The reason for this level of detail and its persistence lies in the fact that there are drawings and written descriptions of dragons. Drawing and writing are ways to record observations, but the same method of recording can also be used to record products of our imagination. The recording itself does not reveal whether the described object is real or fictitious.
The historical developments of drawing, writing, and bookkeeping are all closely related, because they are all ways to record observations and ideas. The difference between an observation and an idea is that an observation is a reflection of the real world, while an idea is a reflection of the imagination. The fact that the same method of recording can be used for both fact and fiction was embraced early on, and we have become perfectly comfortable with reading books, or looking at images which may be accurate documentaries or creative works of art. It is only recently, however, that the same dichotomy has emerged in the domain of bookkeeping.
Usually, we expect bookkeeping to be strictly factual. It is difficult to see what utility accounts would have unless they are accurate records of things of value. Bookkeeping is closely related to safekeeping, so that goods stored in a warehouse are kept account of using an inventory, and assets stored in a bank are kept account of using a ledger. Accounts are also commonly kept of claims, commitments, and debts between two or more people.
Fictitious bookkeeping would imply keeping accounts of things that are not real and do not actually exist. There are cases of such practices throughout history. A well-known example is so-called Ponzi schemes. In a Ponzi scheme, a bookkeeper collects investments from individuals and promises financial returns. Both the principal and the returns are recorded as debts using traditional bookkeeping methods. But in a Ponzi scheme, the bookkeeper doesn't actually generate any returns. Instead, the principal is consumed, and the book entries end up being meaningless. Ponzi schemes are, of course, fraudulent activities, and always fail in the end. Bhattacharya (Reference Bhattacharya2003) has analysed Ponzi schemes and their economic features.
The last ten years has seen the emergence of a new type of fictitious bookkeeping. So-called cryptocurrencies are open bookkeeping systems which use peer-to-peer computer software to keep account of non-existent assets. This means that a ledger is maintained, but the ledger entries have no real-world reference, and do not give rise to any kinds of claims. Leinonen (Reference Leinonen and Górka2016) has analysed the distinction between virtual and actual currencies as a settlement asset and distributed ledgers as a settlement system.
The principle of open source peer-to-peer software makes it possible for anyone, anywhere to take part in this activity, in the role of either a bookkeeper or a depositor, or both (see e.g., Dwyer, Reference Dwyer2015). Since anyone is free to join and leave at will, and because the system has no owner, and because its creator is unknown, the system is not considered fraudulent in the same way as a Ponzi scheme. While the economic principle is similar to a Ponzi scheme, there is no one who could be held liable. Why would anyone invest in either a Ponzi scheme or a cryptocurrency? As Tennant (Reference Tennant2011) notes, there will always be a demand for offers that are too good to be true.
Cryptocurrencies have become the dragons of the financial industry. They are widely known, can be described in detail, and influence the behaviour of millions of people. A study by Rauchs et al. (Reference Rauchs, Blandin, Klein, Pieters, Recanatini and Zhang2018) sheds light on their global user base and the industry that has sprang up to serve it. There is marked variety in how people describe cryptocurrencies, what they can do, where they come from, how they can be useful, and what their future may look like. Some people are passionate about them and believe they can change the world. Others, if not most, are simply taking advantage of their popularity in order to financially profit (see e.g., FCA, 2019; or Yelowitz & Wilson, Reference Yelowitz and Wilson2015). Whatever one thinks of cryptocurrencies, however, the fact remains that cryptocurrencies are fictitious assets; they are a product of our imagination. The account book may be full of entries, but the warehouse is empty.
The cryptocurrency industry is not very large, at least when compared to traditional financial markets, but cryptocurrencies have significance in a broader social and technological context. It is useful to separate three levels of the concept: the software, the asset, and the phenomenon. As an asset, cryptocurrencies promise no returns and bestow no financial claim. This is not to say they are not desired, held, and traded, but it is done as a collectible or as a speculative investment (see e.g., Baur, Hong, & Lee, Reference Baur, Hong and Lee2018). As a social phenomenon, they have brought together global communities of libertarians, anarchists, but also less ideological hobbyists (Yelowitz & Wilson, Reference Yelowitz and Wilson2015). These communities are diverse and plentiful, and do not always share the same ideas.
On a technological level, cryptocurrencies have breathed new life into the idea of peer-to-peer software, which became widely known over a decade earlier with the emergence of file-sharing applications. Böhme, Christin, Edelman, and Moore (Reference Böhme, Christin, Edelman and Moore2015) provide a detailed description of the architecture of a typical cryptocurrency network. Peer-to-peer software means software which runs simultaneously on multiple computers that are connected to each other. No particular computer is required for the software to perform its purpose, but on the other hand the utility of the software derives from the fact that it is operated as a network. The main benefit of using peer-to-peer architecture in a computer network is that it doesn't require anyone in particular to maintain it. The downside is that it is difficult to incentivise anyone to run the software. Usually the incentive is mutual benefit. In the case of file-sharing applications, every user gets access to each other's files, thereby everyone has more files at their disposal than they would alone. In the case of cryptocurrencies, the incentive structure is far more complicated. The participants in the network need to be specifically incentivised, because they are not sharing files or deriving any other comparable direct benefit from each other. As a result, despite the original idea of grass-root level sharing of computing resources, cryptocurrency networks have become highly industrialised commercial enterprises (Rauchs et al., Reference Rauchs, Blandin, Klein, Pieters, Recanatini and Zhang2018).
Cryptocurrencies have also brought encryption techniques and distributed computing closer to mainstream thinking. While open peer-to-peer networks are one specific configuration of a computer network, other less decentralized configurations of shared ledgers are also being trialled. These so called blockchain applications are used for carrying out specific tasks in the financial industry, such as synchronizing data between parties in a transaction, or at least that is the goal once they go into production. So far only very few have (Burg, Murphy, & Pétraud, Reference Burg, Murphy and Pétraud2018). It may turn out that the benefits of a peer-to-peer architecture in a cryptocurrency context do not carry over into task-specific applications in closed networks.
On a rhetorical level, cryptocurrencies have been a disruptive force more vocal than their economic scale would suggest they should. In advanced economies, where financial markets, payment infrastructures, and regulatory oversight are well established and reliable, cryptocurrencies have remained on the fringes of the investment industry and are only flirting with the idea of becoming a serious asset class. Their technological components have some merit, especially the innovative use of encryption techniques, and the idea of building special-purpose transaction networks, but they will only have a chance to truly disrupt those parts of the incumbent industry where technological progress in general has been lagging behind. For emerging markets, the outlook may be different, as cryptocurrencies have proven to be a segment, albeit a minor one, of the financial industry in their own right. The concentration of server farms and trading venues in countries where there is lively financial innovation activity in general is therefore no surprise.
In both advanced and emerging markets, however, the greatest impact of cryptocurrencies has been on reimagining how the financial industry could work differently, and on catalysing the public debate on privacy, financial literacy, cyber security, and monetary stability. It has created a new generation of thinkers and pundits, who are coming from outside the traditional financial industry, and clashed together some of the core concepts of computer science and economics. Whether the way we pay, invest, save, and transact are moving towards a grass-roots level, networked system of small actors, or whether the financial world is continuing on its path of being dominated by regulated institutional actors, remains to be seen, but for the purpose of innovation and creating new possibilities, the broader base of ideas that this new technology has opened up is likely to be highly advantageous. Like the dragons in our tales and sagas, sources of inspiration do not need be real to have an impact.
