One of the most repeated arguments against Bitcoin is, that it is not backed by any country, government or central bank. It’s been used many times in interviews with myself and recently by a British security expert Prof. Alan Woodward in BBC’s report about British merchants accepting Bitcoin. You can read the whole piece where I got to answer a few questions about Bitcoin and Coin Of Sale and watch related video on BBC’s website.

Mr. Woodward as many before him argued, that Bitcoin is unsafe because it is not backed by any institution. Unlike British pound, on behalf of which Bank of England can intervene in case there is a run on it, there is no ramification if Bitcoin looses value. It is particularly interesting to hear this line of reasoning from someone who obviously lived through the famous George Soros’ attack on British Pound. That day in 1992, which has been known since as Black Wednesday, Mr. Soros via his hedge fund singlehandedly caught Bank of England with it’s pants down because he knew the central bank didn’t have enough reserves to maintain value of the currency which he believed was artificially overappraised and hurting asset prices in the country. Sterling’s value as a result fell through the floor and UK government was forced to withdraw from monetary obligations it had made just two years prior.

That episode shows empirically what can be easily explained in theory as well. There is virtually no difference between what holds value of Bitcoin and fiat currencies such as GBP. The value is in the exchange itself. It’s in the expectation, that when one accepts it as a form of payment, he or she can use it later to pay for something else and that it will hold the value in the meantime. One can argue, that Bank of England (and other central banks) holds foreign exchange reserves, which it can use, but those have the same fundamental value as the currency they are supposed to support – the trust in their respective central banks.

The difference between Bitcoin and GBP is, whom do we have to trust. In case of BoE, it’s a few unelected bureaucrats with zero accountability and incentive to help handful of those who are supposed to re-enact them or those whom they expect to work for once their tenure is over. Black Wednesday reminds us, how does it look like when that trust is lost on institutional level. Mr. Soros simply understood, that BoE will not sustain pressure of falling asset prices and when he initiated his attack, other investors didn’t trust, that central bank would meet it’s obligations.

In case of Bitcoin, we have to trust principles of mathematics and cryptography that has been known for decades and a distributed open-source code, which has been checked by thousands and attempted to get cracked by probably more. When crisis occurs, Bitcoin doesn’t have a number to call to stress how critical it is to support the economy and failing banks. Mathematics cannot be persuaded to say two plus two equals five by an implicit promise of a well-paid job few years down the road. Encrypted ledger will not move or block some funds by a decree, but only using a secret key. Once public realizes this, what will make them trust those whom they often don’t know, let alone can reach out to? If black Wednesday shows what one (albeit very wealthy and very smart) individual can do, Argentina, Zimbabwe and Yugoslavia hyper-inflationary episodes have shown us, what happens when general public figures it out in one country. We have yet to experience, how will it look like when this gets recognized globally and even those foreign exchange reserves start loosing value synchronously with currency they are supposed to support and both investors and public will look for hard and uncontrollable assets to run into.

Today, Bank of England holds reserves which are worth less than assets under management of the two largest hedge funds and less than 5% of GBP money supply in an environment of the largest asset and debt bubble the world has ever experienced. Does Mr. Woodward believe BoE will not succumb to requests for massive interventions when that bubble collapses or when economy won’t improve before elections or does he believe 2+2 will remain 5 no matter what?