British institutions exert impressive amounts of soft power for a tiny island nation. One can think of the country as playing the role of an Italian city-state in the fourteenth century: it capitalizes on historic cultural prestige, educates the children of elites from its former empire, and serves as a playground for wealth and status games while not really producing anything of hard value.

The overall trajectory becomes obvious when you look at outcomes in productivity, investment, capacity, research and development, growth, quality of life, GDP per capita, wealth distribution, and real wage growth measured by unit labor cost. All are either falling or stagnant. Reporting from the Financial Times has claimed that at current levels, the UK will be poorer than Poland in a decade, and will have a lower median real income than Slovenia by 2024. Many provincial areas already have lower GDPs than Eastern Europe.

While all of Europe is getting poorer and weaker as the twenty-first century progresses, the UK is unique in its relative incapacity and unwillingness to find solutions in comparison to peer nations like Germany and France. This is a process that has been gathering pace for centuries, stretching back to trends that began in the 1700s even as its empire was still expanding.

In essence, the distinctively innovative and moralistic culture that distinguished England from Europe, most fully expressed in Puritanism and Cromwellian republicanism, flowed into America’s east coast elites even as it was crushed by the aristocracy at home. Britain’s version of the modernizing class—represented elsewhere by Washington, Napoleon, Garibaldi, Bismarck, the Meiji Emperor, Lenin, Mao, and Nasser—even arose far earlier, during the English Civil War and Glorious Revolution. It died a premature death, unable to provide the refounding moment for Britain that occurred in 1776 in America, 1789 in France, 1868 in Japan, and 1949 in China.

Because of its status as an initially advantaged first mover, the UK now has a fortified elite content to live on the rents of bygone ages. Its social order is constituted by the cultural legacy of the old aristocracy, underwritten by London financial brokers, and serviced by a shrinking middle class. Its administrative and political classes developed a culture of amateurism, uninterested in either the business of classically informed generalism or that of deep technical specialism. The modern result is a system that incentivizes speculative, consultative, and financial service work over manufacturing, research, and production.

To the extent that the UK is governed by a partnership between the aristocracy and the bourgeoisie, it is an aristocracy that is not aristocratic and a bourgeoisie that is not productive. The old administrative upper class no longer wields power through land or patronage. The commercial middle class produces little of innovative value, its most prestigious sector being the servicing of other states’ surplus funds through family offices and merchant banks in London.

Despite being the hegemon of the industrial age, Britain never developed the mechanisms that allowed the U.S. and Germany to overtake it in the late nineteenth century in chemistry, transportation, labor productivity, and organizational methods. London’s first-mover benefits turned into profound disadvantages. It is not that Britain is sick, so much as that British elites are like aged pensioners: overly successful in their heyday, they are now drawing down their last investments and savings while letting the country house crumble.

Many in the British government knew about the possibility of immense decline as far back as 1902, and yet made no attempt to change course that might risk the political order itself. It may take another hundred years, and the total breakup of the United Kingdom itself, for the country to feel the full effects of elite dissolution.

A Stalled Revival

Despite the public silence, these problems have been quietly talked about in the ante-rooms of Downing Street for over a century. During the zenith of empire at the tail-end of the 1800s, a number of individuals began to realize that a lag in industrial and scientific development had led to the UK having relatively slower GDP growth rates than Germany and America. By 1902, systematic attempts began to identify the causes of British decline and chart an exit path before a correction became impossible. Early attempts by the colonialist Cecil Rhodes and the statesman Lord Milner to reform a generalist imperial administrative class did not yield results.

The Fabian socialist couple Sidney and Beatrice Webb organized one of the most prominent attempts at reform in a dining club called the Coefficients. It brought together a cross-section of Edwardian elites from Conservative paternalism, Liberal imperialism, and Fabian socialism. The group included the early geopolitician Halford John Mackinder, the philosopher Bertrand Russell, the science fiction author H.G Wells, and Lord Milner, as well as several businessmen, military officers, scientists, and MPs. In the end, this cross-section merely replicated the standoffs that were paralyzing the broader British elite: unable to unite on the question of the empire, the Coefficients dissolved in 1909. Wells would later reflect on the fundamental problem they all recognized in his biography:

Gradually the belief in the possible leadership of England had been deflated, by the economic development of America and the boldness of Germany. The reign of Victoria, so prosperous, had produced habits of indolence. As a people we had got out of training…our universities had not kept pace with the new time; our ruling class, protected in its advantages …was easy-going and profoundly lazy…”Efficiency” was felt to be rather priggish.

The pressures of the following two world wars forced the British state to retain a high level of capacity and an ability to mobilize effectively. As a result, it was not state capacity, but economic and scientific productivity that most instantiated a broader decline. The scientific luminary Sir Henry Tizard, who was connected to the political sphere through his friendship with Churchill’s scientific advisor Frederick Lindemann, told the British Association for the Advancement of Science in 1948 that:

It cannot be argued that in quality and quantity of scientific and industrial research [the Americans] excel us. But they possess a higher average standard of technology than we do, and a much higher proportion of men of high scientific education in the executive control of industry…[an] expansion in research [will] not produce the hoped-for result unless there [is] a simultaneous expansion in technological education.

Tizard led the short-lived Defence Research Policy Committee (DRPC), a group that directed the scientific strategy of the British military into the Cold War. The Committee ran from 1947 until 1963. However, its advice proved to have little effect on decisions of state. Tizard, within years of the DRPC’s foundation, faced pressure to move funding from long-term research to short-term military questions. In 1951, Tizard angrily lamented that “no item on the present [DRPC] program is a new application of science. Nothing at all. We have no surprises to offer.”

As a result, the problems outlined by Tizard had grown worse by the 1960s. In response, Labour Prime Minister Harold Wilson made several limited attempts to revive British productivity under the 1963 “White Heat of Technology” program and the creation of the Industrial Reorganisation Corporation (IRC). Led by the head of the textiles firm Courtaulds, Sir Frank Kearton, the IRC acted as a state “merchant bank” with a long-term industrial planning remit to force mergers between medium-sized manufacturing industries with comparative export advantages. The idea was to force British industry to pursue economies of scale, creating a mass consumer and high-technology manufacturing base.

While the IRC showed some promise, briefly raising GDP growth, it was soon overtaken by both spending cuts and an international marketplace characterized by high inflation, energy scarcity, the abolition of the Bretton Woods system, and London’s entry into the European Community. Britain’s diminished hold on energy resources across the world, brought on by the end of formal and informal empire, also helped constrain social-democratic fixes whose funding required large surpluses to draw on.

On the 27th of October, 1970, the new Conservative chancellor Anthony Barber announced the IRC’s closure. In response, the Labour MP, electrical engineer, and oil executive Raymond Carter spoke in defense of the IRC in the House of Commons:

Every American worker is backed up by twice the amount of capital that is behind the British worker…the amount of capital backing a German worker is 50 percent more. It is the critical problem of capital investment that bedevils our nation…The truth is that we needed the IRC 30 years ago.

Carter’s analysis that the UK’s last chance to reverse course was in 1940—then 30 years ago—rings true. The Second World War, and its subsequent increase in debt and decolonization, proved to be an irreversible moment that British elites and institutions could not overcome. In effect, postwar technocratic fixes like the DRPC and the IRC were doomed operations. What fatally constrained them was not just short-term budget cuts, but a fundamentally changed world.

The hope that the UK might still escape its geopolitical chains and reverse its decline persists. When former Vote Leave director Dominic Cummings became Boris Johnson’s new Chief of Staff, he was frustrated by the same problems these acronymed organizations had tried to address. In response, he put together a blog post in 2020 calling for “data scientists, project managers, policy experts [and] assorted weirdos.” Cummings’s idea was to create a corrective to the legacy of “confident public school bluffers” in the administrative class by recruiting “true wild cards, artists, [and] people who never went to university.”

Cummings believed that deep technical specialism should replace a system where “people are shuffled such that they do not acquire expertise.” While his critique of the British administrative world was comparatively strong, his assumption that the British political system would provide enough consistency to allow for long-termism was flawed. Factional infighting led to multiple changes in government in only a few short years.

Despite branding himself as a clear-eyed realist, Cummings also critically underestimated the geopolitical and economic constraints that any radically reformed civil service would work under. Having tried to reform the system from the inside, he was spat back out by it. In a telling turn of the screw, Cummings suggested a larger idea months before his departure: a state-run “Crown Consultancy” to replace the £2.6 billion pounds of outsourced spending going to PwC, McKinsey, and others—including hiring consultants to consult on hiring fewer consultants. Within weeks of his departure, the idea was scaled back to a remit of “advising on consultancy spending” rather than primary work.

In the end, every technocratic policy fix has been recuperated into managed decline. Buoyed up by soft power and high-paying financial services, even the UK’s would-be reformers drastically underestimate the human capital problem that affects every layer of society. Despite comparing itself to the U.S. and the European Union, it lacks their productive power and highly skilled populations. Without London’s financial clout, the economic shrinking now predicted by the IMF would doubtless be far worse. After a multi-generational failure by the British state to assess its hard constraints and build up a materially productive social order, its elites appear to have fundamentally lost interest in governance.

The Sociology of a Synthetic Elite

Britain’s culture of governance expresses the culture and priorities of its political and administrative elite. Questions about that culture are ultimately questions of elite sociology. Entrance into the British elite has slowly become more meritocratic over the generations in a formal sense, with the imperial Chinese exam system influencing the Northcote-Trevelyan Report of 1854. This in turn led to the removal of informal patronage structures. But an informal system of social selection persisted long into the twentieth century, minimizing the potential costs to institutional memory and group social engineering. British institutions continued to prioritize a humanist and professional elite in running a vast industrial, scientific, and commercial empire.

What differentiated the British elite of this time from most of Europe was the embrace of capitalist production by much of its aristocracy. Despite disputes on protectionism, the emergent middle class never experienced the same level of conflict with the nobility as their French or American counterparts. Compare, for instance, the backgrounds of two elite class premiers: George W. Bush and David Cameron. Bush’s patrilineal great-grandfather Samuel P. Bush established the family’s political dominance through technical education and the management of a firm that manufactured steel railway parts.

In contrast, Cameron’s father, paternal grandfather, and great-grandfather were all Oxford-educated partners in the stockbroker’s firm Panmure Gordon & Co, while another Sir Ewen Cameron was chairman of HSBC. His maternal grandfather came from a family of minor titled gentry and military officers. The differentiating factor between the two major factions of the British elite was whether they derived rents from aristocratic land holdings or professional-class financial speculation. Neither built their fortunes on the industrial basis that enriched the Bush family and many of their American peers.

The British analogs of the Bush clan—manufacturing and infrastructure-owning families—were often nonconformist protestants excluded from the Church of England and thus from educational routes into administration and politics. Instead, they either collaborated with the state at a distance or sought to join it by phasing out manufacturing and using the profits to buy land and professional education. It was not until the late nineteenth century, by which time the UK was falling behind the U.S. and Germany, that non-elite merchants like the Liberal MP, Unitarian, and screw manufacturer Joseph Chamberlain found a way into political office.

The resulting British state was over-geared towards non-productive economic rent-seeking. In effect, Britain didn’t have an incentive to chase development for survival, because it was the dominant power of early industrialization. Consequently, it never produced an elite whose primary base of power and wealth was industrial production, and which thus had a strong stake in developing and maintaining an industrial society.

Religious and social exclusion from Oxford and Cambridge meant that the middle classes did not share the generalist education of most British elites. The avenue into power for this synthetic class had for much of the nineteenth and twentieth centuries been the Oxford literae humaniores course in classical Greek and Latin, often supplemented by study for civil service exams focused on British constitutional history. These exams, both old and new, have produced a generalist administrative class with institutional and humanistic knowledge but little technical skill. Even after such restrictions were lifted, however, tensions kept rising between the old preference for general education and the bourgeois need for technical expertise.

In 1920, Oxford launched its Politics, Philosophy, and Economics (PPE) course to create a syncretic technocratic-generalist pathway into the civil service. Herbert James Paton, a contemporary university administrator and philosopher, criticized PPE as “an ineffective modern version of literae humaniores…for the softer man.”

The PPE course remains dominant in British public life. I spoke to Matthias Brinkmann, a German political philosopher who was a PPE tutor at Merton College, Oxford between 2012 and 2017. “The whole place still exudes a miasma that it is the training ground of the British elite,” he told me. “Germany has nothing remotely comparable. There is no social consensus about which the best universities are…it’s a very flat hierarchy.”

I wondered if the course itself offered anything of value to those taking it. “I think people vastly overestimate the content of the course,” Brinkmann said. “Before PPE, you had classics. Part of me thinks the content could be anything. To a large degree, it’s a coordination game. If the British elite were recruited from biochemistry, then that would be the course we’d be talking about.” The dream of PPE was a half-hearted attempt to mimic the tight technocratic funnel system of French grand ecoles and German civil service. But it wasn’t backed up with the political will to reform the elite cultivation structure itself or by any outside influence from reformist cadres and leaders. Beneath the modernistic façade lay the same cultivation structures active in the last half of the nineteenth century.

While teaching PPE, Brinkmann saw changing incentives when it came to careers in public service: “What has shifted, at least since the financial crisis of 2008, is that people no longer want to go into politics. Instead, it’s finance and consultancy companies. You get a very small minority of students who want to go into the civil service…The civil service has lost its social status.” If brilliant Oxford and Cambridge figures like J.M. Keynes and Isaiah Berlin found themselves in the twenty-first century, it is unclear why they would still opt for government work instead of leveraging their intellects in the private sector. It’s usually difficult to narrow down just what incentives or elements of education motivate those who still dedicate themselves to public service. I decided that the best way to find out was to start talking to those who did.

“People from my background 30 years ago did go into the city,” I was told by Arthur Snell, a former diplomat who went on to work at an intelligence firm founded by Christopher Steele, the former Russia desk man at MI6. “But many joined the army and foreign office. Those professions were seen as part of the cultural norm…The British—or more narrowly English—elite, I think have largely given up on the idea of public service, with the possible exception of one or two bits of the army that are still posh.”

Jame Kane, a former civil servant in the Cabinet Office trade secretariat who now works on trade policy, told me that global competition and the influx of money into financial services weakened incentives towards civil service: “[They] have inflated the cost of living to a point that it would be politically impossible to raise public sector wages to a level required to fund an expected upper-middle-class lifestyle…You are not competing to recruit the same kind of people who would go into industry.” The various lists of civil service honors that were meant to offer prestige to public servants—the reward of becoming a “Sir,” “Dame,” or “Commander”—no longer make up for the opportunity cost of lost income at a London bank.

The exact purpose of elite education was, I discovered, a topic of surprising disagreement. James Schneider, once Director of Strategic Communications for former Labour leader Jeremy Corbyn, believed that the British state faces exogenous forces outside its control. Because of this, educational reforms cannot make it more effective. “If you wanted a better Covid response…how many people study Classics, or not, might change outcomes by 2 percent or 3 percent.”

Others disagreed: Kane, for example, thought that education patterns were likely responsible for the broader decline. “There is a real question as to why Germany has this persistent 20 percent lead over Britain and France,” he said. “[I attribute this] to stronger investment in skills over the long-term. German education is much less elite-focused than the British and French, so you have a much more skilled industrial workforce. The competence of individual workers and their ability to self-direct impacted productivity.”

To Sir Martin Donnelly, the former Permanent Secretary of the Department for International Trade and president of Boeing Europe, it seemed that such gaps in hard technical competence have existed for decades: “When I worked in the French Civil Service, I shared a room with three people at my stage, each of them had designed a bit of a bridge. I hadn’t.” These particular advantages generated by Germany and France’s administrative cultures have given them minor relative margins of success in comparison to the UK. However, both countries are also struggling to adapt their governance traditions to a new geopolitical and economic epoch—one characterized by high inflation and commodities competition—that is exacerbating a broader absolute decline in Europe.

What almost every former public servant I talked to did agree on was that there was an absolute decline in state capacity. Robin Butler, Baron Butler of Brockwell and former Cabinet Secretary from 1988 to 1998, was one of the few to disagree. “Our traditional industries have been in decline. But some industries, for example, financial services, have always been in dramatic growth,” he told me. “We’re competing with much lower-wage economies, particularly China. We’ve got endemic weaknesses, but there are always weaknesses. I think that it’d be very unsafe to say that we are in a permanent course of decline.”

Schneider, however, summed up the more common view:

The British state is not very effective. It’s been actively dismantled to a greater degree than comparative European states…There is a debt mountain that is based on the idea that we will have strong growth going forward, which doesn’t seem to be the case. We have incredibly fragile supply chains that are pushing up the price of production. The parties don’t have the first clue about how to deal with what’s coming.

Kane placed similarly little weight on the technocratic apparatus of the Civil Service: “The big problem of the civil service, I would say, is that as a technocracy it’s not even effective. It fails on metrics which are classics of bureaucracy going back to ancient Babylon.” He pointed to basic record-keeping ability as an example. “[The] information management system collapsed with digitization. In the mid-2000s, we went digital and saw that as an opportunity to eliminate any kind of information management. Digitization was seen as a wonderful opportunity to economize. Unfortunately, the consequence of this is that you have masses of unorganized data.”

The consequences of this basic loss of efficacy and organization lurked behind some of the worst modern failures of the British state. Snell pointed to foreign policy in particular, remarking that “going to Helmand was driven solely by the desire to demonstrate military capability…A lot of it is self-delusion. I’ve spent hours in briefing rooms with the British military, where they will tell you that because of the Mau Mau, Malaya, and Northern Ireland insurgencies, we are the global leader in counterinsurgency. And yet the counterinsurgencies of the twenty-first century were both failures.”

Philip Rycroft, former Permanent Secretary at the Department for Exiting the European Union, believed that the same failures were placing the very existence of the United Kingdom itself at risk. Rycroft saw the realization of this incapacity firsthand during the Scottish Independence Referendum in 2014:

When I was working in the business department, we had an opportunity to have a morning with what was then called the “Top 200,” all the permanent secretaries and director generals. I found Whitehall complacent…There is a neglect of the periphery within the UK…because the center was historically worrying about empire. The background radiation is still there. When I was in Whitehall, sitting around the permanent secretaries table, I would talk about Scotland. Could I get them to emotionally engage? It was at the end [of the campaign], when a poll showed independence ahead, that I could see the knuckles whitening around the table. Folks in Defence, the Foreign Office, and the spooks [were] thinking “how do we deal with this?”

The ultimate impact of this negligence and incompetency is a breakdown among colleagues of the basic trust in each other to get things done. While Cummings hoped to re-center consulting within the British state itself, I was told that the primary driver of government work for private consultants is the desire to escape one’s own public service colleagues. “If you go into McKinsey,” remarked Donnelly, “You get lots of government work because ministers have stopped trusting their officials.” When you don’t even really perceive yourselves to be allies, there is little reason to cooperate, even where the most important affairs of state are concerned.

It is ultimately this full-scale breakdown in trust, competency, and common goals that paralyzes the British state. The intergenerational failure of its elites to adapt to the post-industrial landscape of power only intensifies the structural problems. The inability to judge its own industrial, manufacturing, scientific, and state capacity has led the UK to systematically overreach. A move towards increased technocracy, even if it could survive the austerity impulse of successive British governments, cannot undo the constraints—forged over centuries—that the UK operates under. Having met a critical threshold, the cumulative effects of decline are now blatant, yet there is still widespread denial among those who govern.

Just where the tipping point between gradual decline and sudden crisis ultimately falls is unclear. As long as London remains relatively prosperous, the British elite may continue to manage the UK’s decline for decades, even another century. There is a long curve of failure from successful re-foundation to state collapse. Britain’s governing classes saw the precipice in 1902, but instead allowed the soft power of their institutions to prevent course correction. They were content to utilize earlier successes and respected institutions for rent-seeking purposes. In the process, they lost everything.

The lesson of Britain is that the long-expected crisis that will act as a moment of reset never arrives. The decline is usually far bigger and more structurally locked-in than the more temporary moments of crisis reflect. Things go well enough for the people that matter and there are plenty of distractions for those who don’t. And eventually, you find yourself just another vassal state in a cold, grey ocean.

The internet is going to make it very difficult to collect taxes on services of all kinds…[And] is going to be one of the major sources for reducing the role of government. The one thing that is missing, but that will soon be developed, is a reliable e-cash…the tendency to make it harder to collect taxes will be the most important positive effect of the internet.

Friedman came from a very different perspective and generation than cyber-anarchists like John Perry Barlow and Eric Hughes, who were then promoting early forms of digital cryptography and declaring “the independence of cyberspace” in manifestos. However, both sides argued that the internet would dislodge economic life from the state. For a while, their predictions seemed to come true. In the wake of the 2008 banking crash and of the Iraq and Afghanistan wars, self-styled dissident movements like the Arab Spring, Anonymous, Occupy Wall Street, and Wikileaks tried and failed to challenge governments and financial institutions. Some had complex intersections with U.S. state backing to begin with, while others just didn’t have effective staying power. Of the many projects that arose in this period, one stands out as having endured into the 2020s: Bitcoin.

By virtue of its survival, Bitcoin exists in an internet far different from the one for which it was made. China has launched a digital renminbi that seeks to replace the dollar as a global reserve currency. Middle Eastern regimes once threatened by digital activism now utilize social media “armies” to quell dissent. In the West, states discipline populations through data monitoring, censorship, discourse control, and financial sanctions via tech companies. State actors, not individuals, are the ones attaining digital autonomy. The internet turned out to have a powerful centralizing logic.

Historically, new technologies are a threat to the state at first. But after widespread adoption, political bodies are good at utilizing successful technologies for their benefit. The printing press, which sparked the Reformation and the German Peasants’ War of 1524, soon became a key building block of the nation-state. Print culture homogenized and nationalized disparate linguistic and geographic communities, such as Occitan-speaking peasants in the south of France or Gaelic Scots in Britain. This process went on through the seventeenth, eighteenth, and nineteenth centuries. This was achieved, as Benedict Anderson argued in his 1983 work Imagined Communities, through linguistically exclusive media such as newspapers and propaganda. These forms of media built political communities by centralizing public consciousness into a single printed discourse.

Today, we see the development of digital silos defined by political territory. These take the form of “national internets” and central bank-backed digital currencies. As the centralizing tendencies of digital media become clear, their use by states increasingly mirrors that of print media by early nationalist elites.

While power tends to discipline and direct new technologies, they still play a part in challenging states. But instead of impeding centralization permanently, they become important bases of power that go on to converge with the state when the dust settles. During the failed Irish Easter Rising of 1916 and the Russian October Revolution of 1917, small bands of revolutionaries prioritized the capture of their nation’s telephone and telegraph exchanges before other targets, knowing they would be important tools for revolutionary governments. Even when new technologies are captured for dissident ends, they never escape the state itself.

A closer look at cryptocurrencies reveals that they are no exception to this tendency. In practice, many of its most prominent use cases have little to do with liberating individuals from the power of states. From El Salvador to Russia and Afghanistan, power centers use cryptocurrencies to circumvent sanctions imposed by adversaries, hedge against internal inflation, and more closely monitor their populations.

The history of technology is a human story—at least for now. There are few examples of our tools developing ends outside of that other human artifice: the state. The political philosopher John Gray notes in his 2013 essay Bitcoin’s Freedom Promise that the failed premise of liberatory cryptocurrency lies in putting faith in an “incorruptible formula.” In reality, its ability to escape familiar constraints has been vastly overstated:

The trouble is that cyberspace is all too clearly a human artifact. A site of unceasing warfare…needing scarce resources and energy to operate.

Advancing State Power in El Salvador

El Salvador stands out among state actors that have adopted cryptocurrencies. It has played into a particular “futuristic” aesthetic popular with bullish crypto adopters while also using Bitcoin for traditionally political ends. Salvadoran President Nayib Bukele calls himself the “CEO of El Salvador” on Twitter, posts crypto memes, and preaches the decentralizing virtues of Bitcoin across the global marketplace. His rhetoric is a mixture of technocracy and populism, transforming the idea of liberated individual economic actors no longer dependent on banks into a national concept. In action, he combines this cutting-edge brand with moves more familiar to El Salvador’s traditionally authoritarian political culture: ordering shows of force in the legislature by the police and army, amending the constitution to serve another term, and limiting judicial independence.

Much like individual Bitcoin holders, Bukele presents El Salvador as a country that can use Bitcoin to become independent of global institutions like the IMF and World Bank that restrict its action. There has been political resentment against outside economic control in El Salvador for decades. This is partly the result of President Francisco Flores adopting the U.S dollar as legal tender in 2001 in an attempt to stabilize the country’s monetary policies. El Salvador has also been reliant on IMF support, holding $287.2 million of reserves in Special Drawing Rights (SDRs), more than half its allotted $435.18 million. SDRs are foreign-reserve exchange assets that are pegged in value to a basket of major currencies including the dollar, euro, and renminbi. Bukele constantly attacks the IMF on Twitter: using language concerned with innovation to supplement older protectionist, dirigiste, and developmental ideas about national economic independence.

El Salvador moved to adopt Bitcoin as a currency in September 2021. In November, Bukele announced that his country would issue a Bitcoin-denominated sovereign development bond that would aim to fund Bitcoin mining infrastructure and a high-tech charter-city through geothermal energy gained from a nearby volcano. Most importantly, and least noted, is that the bond aims to raise $1 billion in Bitcoin: only half of which will go towards development. The other $500 million will be used to buy Bitcoin and withdraw it from circulation: increasing scarcity and thus the price of coins, and serving as a state investment asset.

Government control of Salvadoran digital Chivo Wallets has not impacted the popularity of the president’s monetary policies. The Salvadoran government has instructed all digital wallets holding cryptocurrency to “allow the Central Bank real-time access to all information related to the operations carried out, as well as the information requested by clients.” The professional services firm PricewaterhouseCoopers (PwC) has said in a research document that Chivo will operate as a custodial wallet, with users not having full control over their funds. In September 2021, Decrypt claimed that the jury was still out on exactly how much control the government of El Salvador had over the supposedly private keys.

Bukele currently holds an approval rating somewhere around 84%. There have been few protests against the implementation of Bitcoin and those that have taken place have focused on Bukele’s “authoritarian” impulses, such as his judicial policies, efforts to privatize water services, and an amendment to serve a second consecutive term. Protests claiming a desire to see the ideals of cryptocurrency properly implemented have been absent. Where Bitcoin has been a feature in protests, the focus is “financial irresponsibility” rather than privacy concerns.

The Salvadoran government has been open in their intention to trace transactions made through Bitcoin within their territory—committing to “means of identification” and “customer information” in recently issued Central Bank documents. All digital wallets and exchanges in the country will need to be authorized by the Central Bank.

Additionally, the Central Bank sets out that all crypto operations must contain “mechanisms of identification, subscription and registration of customer information to the services…mechanisms for sending the history of the customer operations.” All operations must “guarantee the linking of a digital record to a single person natural or legal.”

The wording of the central bank document suggests that El Salvador is moving beyond the two competing models of financial privacy offered by Bitcoin and traditional banking. Instead, both transaction data and individual identifying data will be visible to the government. As of October 2021, more Salvadorans had a Chivo wallet than a traditional bank account: this hands the Salvadoran state a potentially massive amount of power. However, this does not seem to concern the majority of Bitcoin users in El Salvador.

The mass popularity of Bukele’s policies among the Salvadoran population does not seem to come from a commitment to libertarian principles. Instead, Bitcoin’s popularity is found in its promise of independence from punitive developmental loans from the IMF and the U.S. Another benefit is the ability to retain value, lost through currency exchange commissions and banking charges, from remittance income flows from a migrant labor force that sends money back from North America. The success of Bitcoin and its adoption by nation-states opposed to the current global-order of debt financing signals that it might be governments, rather than individuals, that gain autonomy on the blockchain. El Salvador’s motivations and its success in achieving them have moved the logic of Bitcoin a long way from the decentralized vision set out by Satoshi Nakamoto in 2008.

Many operating within the sphere of crypto-anarchism, the scene that Bitcoin grew out of, are skeptical of Bukele’s rhetoric. They argue against the case for El Salvador as a libertarian technologically-accelerated paradise. I spoke with Pavol Luptak, a member of the Institute of Cryptoanarchy and co-founder of Paralelni Polis, to get a sense of the response in these circles. The group describes itself as “an island of liberty, technology, decentralization, and cryptocurrencies,” and is based in Slovakia. “I am afraid of a central element contained within governments, especially in the case of decentralized cryptocurrencies,” Luptak told me. “This is the case in El Salvador—its government is buying Bitcoin and their citizens do not own private keys in their government-approved apps (which are exclusively owned by the state). Another problem is that El Salvador is trying to enforce Bitcoin involuntarily.”

Others voiced similar concerns. “Bitcoin is being adopted by El Salvador as a fiat currency,” Rachel-Rose O’Leary, a coder at Dark Renaissance Technologies and lead writer for Coindesk between 2017 and 2018, told me. “The government is the sole custodian of the wallet keys. That means that Bukele has direct access to the entire society’s wealth. The history of cryptocurrency teaches that self-custody is the only way to ensure that your funds are protected. Having the entire society’s wealth in a single wallet that the government has access to creates a huge systemic risk for the Salvadoran people.” O’Leary believed that these problems are being obscured by the hype of crypto-advocates themselves. “Bitcoiners today are too drunk off a long bull market to realize that El Salvador is not evidence of [a decentralization] process: it’s simply the fiat paradigm taking on Bitcoin form.”

Many institutional economists in El Salvador are, ironically, on the same page as Bukele’s crypto-anarchist critics. I spoke with Carlos Acevedo, a former president of Banco Central and IMF representative in El Salvador. “I fully agree with those critics,” Acevedo told me. “Some crypto promoters have begun to notice it…Bukele’s heavy-handed government efforts are clashing with Bitcoin’s self-sovereign and community-focused ethos…it is the denial of Bitcoin’s philosophy on many aspects.”

Acevedo argued that El Salvador’s adoption of Bitcoin as a legal tender has not increased transparency and has effectively centralized control of financial decisions within the person of Bukele. “The handling of the private keys to El Salvador’s 1,801 Bitcoins has been completely opaque. Financial details of the trades have not been disclosed.” He also voiced suspicions about how the Salvadoran government was handling the logistics of its Bitcoin initiative: “The government has kept confidential how they’ve spent money from the $150 million dollar trust fund [that was] approved to implement the Bitcoin Law. Bukele’s announcements on his Twitter account suggest that he conducts the transactions himself using a smartphone.”

Acevedo also claimed that many in El Salvador have reported that “Chivo Wallets have been drained by transactions that they never authorized.” This echoes complaints reported by international media about disappearing funds, stolen identity data used to create accounts, incomplete transfers going through temporary Chivo wallets, and scam accounts masquerading as Chivo support.

Given this strange convergence in criticism of Bukele, I began to wonder who exactly made up his domestic support base for a national Bitcoin policy. I spoke with the owner of a small-to-medium (SME) size business, crypto investor, and native Salvadoran involved in crypto markets. Fernando, as we’ll call him, told me that his interests in Bitcoin were not ideological: “I’m not much into the anarchist point of view [regarding decentralization].” He added that rhetoric around blockchain replacing state governance rings false for crypto users in El Salvador. “For normal people in El Salvador, who are just making the day to day, grand ideas about eliminating countries are not things we think about—[we are] making enough money to pay for our kid’s school, buy food, pay rent.”

Fernando saw his motivations as “financial,” adding that “even though it’s been forced on us from the top down, I believe it’s actually for the best.” He saw the influx of expat money as particularly valuable. “We are already starting to see all these tech people coming into the country…investing in the country. I see, especially when I go to the beach areas, all these tech people popping up. Eventually, that’s going to lead to more people moving into the country, more ideas, and more innovation. I am very bullish [about Bitcoin] in that sense.”

Fernando had originally started to invest in crypto to preserve his savings from inflation. I asked what he thought El Salvador’s long-term interest in Bitcoin might be. Fernando replied that he saw Bitcoin as legal tender as part of a wider developmental project in El Salvador both domestically and on the world stage. “Somewhere around 80% of people don’t have bank accounts. So this can be a way for people, normal regular people, to have savings. Because people, outside the cities, in the rural areas, don’t have access to bank accounts. They just manage cash.”

Fernando also saw Bukele’s control over El Salvador’s crypto infrastructure as part of a broader reformist law-and-order project to attack corruption. “[Bukele is] also doing stuff locally—to make things right within El Salvador’s history, he’s going after past presidents and past rulers who’ve embezzled a lot and committed crimes…maybe not in the best of ways, and not in the most legal of ways. But since he controls everything, and he controls the narrative, he’s pretty much in charge.”

Although Fernando saw Bukele as an “authoritarian” president, he argued that this was irrelevant to the logic of his Bitcoin policies. “[This is] still the right move for the country. I see the benefit of it all. For a country that has been suffering for so long—with a bad reputation, violence, and gang warfare—to change the country’s appearance as he has—it’s unprecedented.” This, Fernando told me, has allowed Bukele to project himself as a competent reformer on the domestic stage while also playing the populist rebel internationally, centralizing control at home while rejecting institutions abroad. “He’s developed this persona of being an irreverent, rebellious leader—that’s a typical Salvadoran mentality…I think Bukele has taken that into his persona—because he’s rebelling against the U.S., he’s rebelling against the World Bank, he’s rebelling against the IMF…people just eat it up.”

Russia’s “Transparent Blockchain”

El Salvador’s adoption of Bitcoin as a state-backed currency may have set off a domino effect with countries competing to benefit from a first-mover advantage. In February 2022, both Ukraine and Russia moved to bring cryptocurrencies out of the “grey zone” and into the regulated sphere. While Ukraine has signaled that cryptocurrencies will be recognized as “digital assets” rather than money, Russia is moving towards a far more integrated model of state control similar to that of El Salvador with the possibility of declaring cryptocurrencies as “analogous currencies” that will be equivalent to legal tender.

Enthusiasm in Russia for cryptocurrency goes back to the mid-2010s. Tatarstan, a republic within the Russian Federation, was already experimenting with blockchain technology in 2017, using the ledger to streamline elements of its bureaucracy. The republic’s Investment Development Agency even held a conference in 2017 titled “Blockchain: New Russian Oil” to highlight the geopolitical benefits of the technology. The Kremlin has also indirectly been developing its crypto-mining sector through public-private initiatives. For instance, Gazpromneft, a Russian state-controlled monopolistic subsidiary of Gazprom, is using excess carbon-dioxide emissions and surplus gas supply to build crypto mining capacity.

On the federal level, the Russian finance ministry and the Russian central bank have clashed on cryptocurrency. The Russian central bank proposed banning cryptocurrencies in January, citing concerns over price fluctuations. Putin then warned that any central bank ban would have to be considered against the potential geopolitical “competitive advantage” that might be gained by Russia through crypto mining using the nation’s surplus energy supplies. In response, the Russian finance minister Anton Siluanov claimed that “banning crypto” would be equivalent to “banning the internet.” Siluanov’s ministry is now proposing the recognition of cryptocurrencies as “analogue currencies” which will be under the control, supervision, and taxation of the Russian state.

The finance ministry released draft legislation under the title Concept for Legislative Regulation of Digital Currency Circulation Mechanisms, which was approved on February 8th. The legislation details a strict set of criteria for legal cryptocurrency activity within Russia. To “monitor” transactions, all individuals must use a digital service called “Transparent Blockchain” available from the state financial intelligence wing Rosfinmonitoring.

This legislation will also require crypto users to be registered with the nation’s banking system and declare any transactions over $8,016. Russia’s “Transparent Blockchain” will: “determine the parameters of “normal”, suspicious and high-risk transactions; trace the chains of movement of digital financial assets; create a database of cryptocurrency wallets…create mechanisms for monitoring the behavior of participants [in the] cryptocurrency market for the purpose of their identification, profiling participants, and assessing their role in economic activity.”

There are currently more than 12 million cryptocurrency wallets in Russia with about two trillion rubles in holdings according to the above draft legislation. Much like El Salvador, the Russian government appears to have recognized that it can utilize its citizens’ nascent crypto-economy for its ends by bringing cryptocurrencies into the regulated white market. Russia’s “Transparent Blockchain” seems to achieve the same levels of surveillance as China’s “permissioned blockchain” without banning cryptocurrencies.

It remains to be seen whether the government can actually enforce measures like forcing users to only transact via licensed operators. Holders of cryptocurrency in both countries might try to escape government monitoring by using alternative wallets. However, if the punishments are punitive enough and the incentives large enough, many regular users who mainly use cryptocurrency for small-time investing will have little incentive to seek operations outside regulation.

However, it need not be the state itself that pushes its citizens towards government-controlled wallets and e-currencies. External geopolitical forces like sanctions have already forced 25,000 Russians off of Coinbase, an American cryptocurrency exchange. The Ukrainian Deputy Prime Minister Mykhailo Fedorov is calling for the entire Russian population to be banned from global wallets. This could create a financial funnel that pushes millions of people into using government-run custodial wallets and central bank e-currencies. Consequently, if El Salvador and Russia’s model of acceptance and subsequent control works, it might become more widespread than draconian bans that are hard to enforce. Although, it is important to note that government-controlled wallets and blockchains are a nascent dynamic and we don’t yet know how enforceable or widespread these measures will become.

Wanting the crypto-anarchist perspective, I asked Luptak what he saw as the chances that states would abandon the strategy of using legal tender status to regulate cryptocurrencies and opt for Central Bank Digital Currencies (CBDCs) instead. “The more likely scenario is that governments will launch their own centralized digital currencies,” he replied. “And then through the law, they will enforce the use of coins for all publically offered products and services.” The Russian central bank’s opposition to the finance ministry’s moves to recognize cryptocurrencies have been because of its ambition to launch a digital ruble with built-in spending controls programmable by the government to limit, channel, and monitor spending. The digital ruble, according to Russian financial analyst Vladimir Sagalaev, might also be configured to sidestep the international SWIFT system as Russia faces sanctions over the Ukraine conflict.

Regardless of whether cryptocurrency as legal tender or central bank-issued tokens become the dominant tool for government control, states increasingly perceive that blockchain technology can be used to not only sidestep domestic currency failures, but also to push users towards legal, visible markets using a state-controlled means of exchange. Consequently, an unintended consequence of Bitcoin’s lack of reliance on global financial systems, such as SWIFT, could be that governments utilize blockchain technology to create novel forms of financial autarky.

Trading in the Taliban’s New Afghanistan

If El Salvador and Russia provide examples of proactive and top-down adoptions of cryptocurrency then Afghanistan presents a reactive, bottom-up approach to the uses of blockchain technology.

The new Taliban regime in Afghanistan has not yet formally adopted a cryptocurrency, but reporting from the country has revealed that established institutional mechanisms—such as Hawalas, traditional Islamic brokerages based on personal trust—have largely shut down. Meanwhile, Bitcoin exchanges kept running during the chaotic U.S. withdrawal from the country. This has resulted in exponential growth of the use of cryptocurrencies in the country. Now, as large sections of the population starve under a complex cocktail of U.S sanctions, withdrawn aid packages, frozen national assets, and vanished central infrastructure, many younger Afghans are urging the Taliban to use cryptocurrency to sidestep the sanctions regime.

Since the retreat of American forces and the collapse of the old government in August, the country has become the twentieth most active cryptocurrency adopter in the world by exchange trading activity. Afghanistan could manage to evade the U.S. sanctions regime using Bitcoin. However, any adoption of Bitcoin by the Taliban will have the same dynamics surrounding government retrenchment that have arisen in El Salvador. It would also create the strange synthesis of a centralized theocratic state utilizing technology invented by libertarians halfway across the world. Much like in El Salvador, many in the Afghan crypto space see cryptocurrencies as a tool for increasing national and individual sovereignty: gaining independence from what are perceived to be hostile international institutions, debt financing, and sanction regimes.

“People have started to turn to crypto to get money from abroad,” Farhan Hotak, a blogger writing about cryptocurrency from within Afghanistan, told me. “Many local money exchanges like Herat’s Khorasan Market or Kabul’s Sirafi Market have become hotspots for buying and selling Bitcoin and Tether. The Taliban have not strictly regulated it and people have started trading it…it’s been spreading around the country like wildfire…pre-Taliban, people were afraid to come forward.”

Hotak wanted to see widespread adoption of cryptocurrencies through decentralized market developments. However, he “hope[d] that the Taliban [would] recognize the digital currency as a valid means of transaction. With time, the appropriate accommodations can be made to make the digital currency more user-intuitive.” He saw this as a solution that might level the financial playing field. “For third-world countries, the only solution to their long-term economic issues is to adopt a digital currency system. This will allow the country to become stabilized and avoid hyperinflation.”

Paradoxically, it is often countries that have been seen by Western states as “underdeveloped” economically that are rapidly adopting cutting-edge financial products. Nasrat Khalid, the founder of ASEEL App, a project to provide humanitarian aid to Afghanistan through cryptocurrency fundraising, argued that “Afghanistan had missed the train on traditional financial sector development.” Khalid put this down to banks not having “enough support to scale their operations throughout Afghanistan in the last 20 years and traditional mobile wallet systems such as M-Pesa fail[ing] in Afghanistan.” 

For Khalid, it has become evident that “the only way [forward] in Afghanistan is an…approach that can leapfrog the whole financial industry while not relying on the usual centrally and institutionally developed platforms. Cryptocurrencies then are a pretty great fit for the situation in Afghanistan.” However, Khalid argued that a combination of crypto use and integration into world financial institutions will be inevitable. “I think for a country to be able to fully become part of the global financial ecosystem, they will still need to rely on dialogue with the global community such as the IMF, World Bank, OFAC, different treasury departments, and so on.” 

The sudden collapse of the U.S.-backed Islamic Republic in 2021 and the domestic military success of the Taliban’s Islamic Emirate has been a catalyst for these longer-term financial trends. “As the Taliban took over Kabul, the economic conditions in Afghanistan were dire,” said Abdul Wakeel, an Islamic finance student and active participant in Afghan crypto spaces. Wakeel pointed out that the current U.S. sanctions regime has unexpectedly pushed ordinary Afghans into crypto adoption as a way to secure basic goods. “The Afghan economy is mostly based on the dollar and the U.S. has frozen Afghan assets. Consequently, the value of Afghan [currency] was decreasing, day by day, and people were worrying about how to save their assets from decreasing value.” Wakeel even saw an uptick in participation. “Now, some people have even started mining.”

There have been attempts by collectives of younger Afghans to persuade the Taliban to either adopt Bitcoin as a legal tender or utilize cryptocurrencies as an auxiliary tool able to work around U.S. sanctions. So far, Taliban officials appear to have heard these groups out but have not acted decisively. There are differing opinions among those in the Afghan crypto space about whether the government should adopt a top-down approach or if cryptocurrencies should be allowed to grow into an independent but regulated market.

“I have talked with government officials,” said Wakeel. “Some of them were not aware of it, some of them have a negative opinion, and some of them have a positive opinion and are saying that it will be the best way to tackle the economic situation.” He added that those in the Taliban who are against cryptocurrency adoption have argued that “there is nothing which has physical existence [behind cryptocurrency] and [this] is not allowed in Islam…Secondly, they were thinking that people will start buying cryptocurrency in dollar denominations [leading] to the dollar leaking out of the country.”   

Wakeel saw cryptocurrency adoption as a way to gain sovereignty for Afghanistan from the international system “To me, it’s right that those countries which are adopting cryptocurrency will have more power, they will not depend on US aid, they will not depend on loans from the IMF or the World Bank.”

What is Profitable and Legible Will Be Regulated

While central financial institutions once saw regulation of cryptocurrencies as an unwelcome legitimation, they now seek to bring cryptocurrencies within legal norms such as KYC (Know Your Customer) and AML (Anti-Money Laundering Legislation). For instance, in 2014 Janet Yellen, the Federal Reserve chair claimed the Federal Reserve currently had “no authority to regulate Bitcoin.” In 2021, the Bank Of England called for “urgent” crypto legislation and regulation. I followed up on the topic with former Coindesk writer Rachel-Rose O’Leary. She believed that the possibility of state integration of crypto “is being conjured by many participants within the crypto space, presumably because it will be hugely lucrative for them. This, she said, is “a bet on the emergence of what we call RegFi. RegFi is a defanged version of crypto. All transactions are surveilled, undergo KYC checks and everyone pays tax.”

Once Bitcoin’s adoption is widespread, the centralizing aspects of its structure will become increasingly clear. In the first instance, the state sits waiting to harvest data and monitor transactions across digital currencies for its own ends. Blockchain smart contracts, if governments continue permitting their normalization, will likely find their place in “techno-leviathan.” At the same time, as sources of wealth and decision-making get further away from the public sphere, there might be efforts to re-assert the sovereignty of fiat and ultimately reign in borderless cryptocurrencies as a potential capital flight risk.

Consequently, as cryptocurrency finds its place in the state it will begin to share the same problems, and perhaps the same destiny, as twenty-first-century governments. Technology cannot escape history. While commonly understood as a base material force driving change, technologies such as Bitcoin also act as levers in a positive feedback loop. The political and cultural forces technology helps develop will always constrain and direct its capacity for disparate ends. The permanent record and public legibility of blockchain technologies give states a powerful incentive to promote and take advantage of their controlled use. While countries like Afghanistan may use them to evade sanctions, Russia and El Salvador may present far more compelling models for states motivated by making their citizens’ financial activity visible and open to regulation.

What was once imagined as a tool poised to achieve a stateless global arena of contractual individualism is now in the hands of those who wish to free the state from the web of twentieth-century liberal internationalism and its institutions. Amidst our current crises, the era of techno-realpolitik is struggling to be born. But increasingly, it’s evident that a centralizing genetic code was always present—if temporarily dormant—in the digital technologies that promised us liberation.