The Empire Strikes Back
Some years ago, when I first began telling people about crypto, a friend pushed back and said that the government would never allow Bitcoin to succeed. “Money is power” he said, “and no self-respecting government is going to give that power up.” I told him that I agreed, but that Bitcoin was still too small for governments to take seriously. By the time it became big enough to register as a threat, it would be too late.
Then came the 2017 bubble, and a ten-fold jump in value in a matter of months. But that rally happened too fast for anyone to react, and collapsed just as quickly, alleviating any concern that cryptocurrencies might someday contend for significance in broader society. There was a regulatory crackdown around initial coin offerings, but it had more to do with securities violations than the threat of a new kind of money.
The current rally feels different. Both blockchain and crypto have had almost three years to prove their utility and seep into the cultural zeitgeist, and digitally native solutions that are not controlled by any corporation or government seem more appealing in a continuously fracturing post-Trump and post-Brexit environment. The pandemic is bound to change everything, so why not money? The current rally is also driven by institutions, so it has staying power. Paul Tudor Jones and MassMutual are more likely to stay with Bitcoin for the long haul than that YouTuber who used to shill XRP.
The slowly unfolding governmental crackdown on this domain feels different, too. Everything from the actions against Bitmex to the latest French KYC requirements to the rumors about onerous new guidelines coming from the US Treasury smacks of anti-crypto bias. Western governments that supposedly value private innovation and civil liberties are increasingly acting like their Chinese counterparts, inventing crimes out of thin air just to have an excuse to punish someone.
For example, the same US Justice Department that has always avoided criminal prosecution of Wall Street execs for potential involvement with money laundering actually arrested the chief technology officer of a foreign crypto exchange. More Bitmex executives were criminally prosecuted for what may have happened with crypto than Goldman execs for their proven involvement with 1MDB. The takeaway? Look the other way while minor crypto money laundering takes place and the Feds come knocking. Participate actively in one of the largest theft, bribery and money laundering schemes in history and you get a slap on the wrist.
To be fair, cryptocurrencies do exist in certain legal gray zones, and some closing of the regulatory gap was always inevitable, and healthy. Regulations can introduce standards and help build trust around a financial system. They also pave the way for institutional adoption. Unlike some of the more radical elements of the crypto community, the money managers and corporations who have the firepower to really drive prices prefer their markets regulated. It also goes without saying that fraud, money laundering and terrorism financing are serious crimes that need to be prosecuted whenever and however they happen.
But what is most disturbing about the current crackdown are the ways in which it would make the crypto economy even more regulated than traditional financial services. We can attribute some of the more ridiculous proposals to ignorance, but tellingly, whatever regulators and lawmakers don’t understand about this world always leads to more onerous requirements, not less. Put together, the rules coming out of places like the US and Western Europe turn the crypto-economy into a retired Stasi agent’s dream come true, one where every financial transaction is traced and monitored, and every one participating is presumed to be doing something nefarious.
To wit: forcing crypto exchanges to only allow withdrawals to KYC’ed wallets (as some have proposed) is sort of like forcing ATM machines to only allow cash withdrawals after clients disclose how they plan on spending each $20 bill. Regulating stablecoins like securities is akin to forcing consumers to report every debit card swipe to the IRS. If the requirements stated in the pending STABLE ACT were applied to all payment companies, not just blockchain-based ones, then PayPal and Square would be forced to shut down tomorrow. There are many so-called “alternative” assets where tax reporting is left up to the investor, including the ten trillion dollar real-estate market or the multi-trillion dollar private securities market. But the IRS doesn’t ask you to disclose whether you own any of those assets at the top of the form 1040 the way it now does for crypto assets.
The officials pushing these draconian measures cite the usual concerns about terrorists and drug dealers, but seldom offer credible data. If you didn’t know any better, and only listened to their grandstanding, then you’d assume that ISIS accounts for a substantial portion of Bitcoin mining and El Chapo is a top contributor to the Sushiswap USDT/DAI liquidity pool. So let it be said once and for all that the vast majority of crypto users, well over 99%, are not doing anything illegal. You know this to be true because you know who these people are. They are your friends, schoolmates and family members. They are Naval Ravikant, Ricardo Salinas Pliego and Spencer Dinwidddy.
Yes, the pseudonymity of crypto makes it somewhat appealing to certain criminals. But no, the underworld is not about to switch to a kind of money where every single transaction is recorded on a public ledger. Yes, Silk Road used Bitcoin, but no, the world’s meth addicts aren’t loading up on Ledger Nanos. I’ll go out on a limb and state that more drug deals get committed using cash in a single week than has ever been committed with crypto (the annual drug trade, measured in dollars, is bigger than the total market cap of all 7000 cryptocoins, combined). Crypto can also help solve crimes, because unlike duffel bags full of $100 bills, coins have a memory.
Financial fraud is a fact of life, regardless of the money used or payment method in question. There is close to $30b worth of credit card fraud committed every year, and California just paid out $2bn in fraudulent unemployment claims. You know what wouldn’t make sense? Using these stats to argue that most people who use a credit card or apply for government benefits are doing something wrong.
The spurious “crypto is for criminals’’ narrative predates Bitcoin. It was also used by government authorities to try to prevent public access to strong cryptography in the early days of digital communication. There was even a time when the US government tried to get domestic hardware manufacturers to install a NSA-designed encryption chip with a built-in back door for government snooping. That proposal, which was eventually abandoned, would have done little to stop the real crooks. They would have just adopted stronger encryption. But it would have made all telecommunication less secure and more likely to be compromised by hackers or North Korea. It would have also killed the American tech sector.
Trying to keep strong security tools out of the hands of the general public because criminals might also use them is like barring homeowners from installing door locks because doing so might make it a little harder for the cops to raid a drug den. The drug dealers would install the locks anyway, while the rest of us would be less safe. Remember the crippling WannaCry ransomware attack that was sensationalized because the hackers asked to be paid in cryptocurrency? It was built using a Windows exploit developed by the NSA. Had the Feds reported the vulnerability to Microsoft as soon as they discovered it then the attack may have never happened. But the government decided that keeping the entire digital domain less secure to preserve their own back door was more important, with predictable results.
The risk of criminal use is not the primary motivator behind the current crackdown on cryptocurrency. The real reason the Empire is Striking Back is because my friend was right. The most important soft-power on earth is the power to control money, with a close second being control of the banking system. The governmental monopoly on both is now being threatened. Not by a corporation that can be co-opted or by a foreign government that can be coerced, but by an idea.
An idea that money should be a tool of the people, not a weapon of the state. An idea that saving in the currency of your choice and earning a positive rate of interest is a universal right. An idea that cheap and efficient financial services belong to the poor and unbanked as much as they do the privileged and over-entitled. Bitcoin, DeFi and Dai represent a form of money and an approach to financial services that belongs to the people. That’s why our monetary overlords and the private actors who asymmetrically benefit from their existence are starting to worry.
If that sounds hyperbolic to you, consider the following: government mandated know-your-client and sanctions requirements, as enforced through the legacy banking system, make it literally illegal for banks to take on hundreds of millions of impoverished or undocumented people as their clients. A disproportionate percentage of those people are minorities. Being locked out of banking forces them to rely on expensive prepaid debit cards or exorbitant remittance services to survive. Stablecoins (such as the proposed Libra/Diem) solve this problem, because anyone with a smartphone can now access digital dollars and transmit them for mere pennies. And yet, no lesser champions of the poor and minorities as congresswomen Rashida Tlaib and Maxine Waters are leading the charge against “dollars on the blockchain.” Their proposed regulations and speeches make it obvious they don’t really understand the technology they want to curtail, but once again, those in power default to doing more, not less. Why? Because they feel threatened.
The timing of the current crypto rally is rather unfortunate for the powers that be. It would be a lot easier for the Federal Reserve to argue that printing money to directly subsidize Apple’s share buyback program is the best way to help the unemployed, or for the European Central Bank to argue that monetizing the majority of the continent’s debt won’t end badly, or for banking regulators to demand even greater surveillance and control over our financial lives if there wasn’t an alternative. Don’t like what’s happening with the Dollar or the Euro? Prefer a financial system that doesn’t lock out poor people? Think your favorite restaurant deserves more of your money than Visa? Concerned about the financial surveillance state? Tired of being treated like a criminal when you’ve done nothing wrong? Well, now there’s a blockchain for that.
If the stewards of the old guard had any confidence in their increasingly radical monetary and banking schemes, they would welcome the competition. Why care about Bitcoin or DeFi if you were certain that negative interest rates — a condition that has never existed in the 10,000 year history of money — can cure a virus. That the Treasury officials and central bankers of the world do care shows that deep down inside, they know they are on thin ice. Even the most obtuse bureaucrat must recognize by now that decades of money madness has failed to produce anything other than wealth inequality and populist uprisings. But they’ve painted themselves in a corner, because thanks to their artificially low interest rates and endless bailouts there is more debt than ever, and the mega-corporations and billionaires who governments care most about can’t withstand any kind of reset. So the money madness must continue, and will soon take on a new form.
As with digital communication, a technology that cannot be corrupted by those in power will soon be co-opted by them. Enter central bank digital currencies, or CBDCs. The same central bankers who saw nothing interesting about blockchain a few years ago are now looking into using it to digitize their own currencies. They talk a big game about the need to upgrade money, curtail transaction fees or increase financial inclusion, but the real reason institutions like the ECB are on a crash course with digital euros is because of the additional tools CBDCs enable. Economists are already unhappy about the fact that physical money gives ordinary people a way to opt out of insane policies like negative interest rates. CBDCs will eliminate that option, and by virtue of switching society unto digital cash, introduce centralized control levers that would make Stalin’s economic planners drool with envy. No longer will central bankers have to fiddle with interest rates or the bond market to add stimulus or create inflation. The next time there’s a financial crisis, global pandemic or alien invasion (all things economists believe can be fixed with inflation) then the bureaucrats will just program all of our digital tokens to magically grow! Parisians who go to bed with 100 digital euros in their smartphone wallet will wake up to find 102, and Voilà, instant inflation. Baguette prices will rise, the oceans will recede and there will finally be peace for our time.
CBDCs will enable monetary control to an extent that has never existed before. If inflation proves not to be a cure all, then governments can try even more radical solutions. How about programming money that sits in people’s wallets for too long to shrink? Or paying digital benefits that must be spent within a week before they disappear? (and further programming those benefits to only be spendable at certain businesses, the executives of which just happen to have close ties to those in power). CBDCs will also make life easier for overly-aggressive cops with little respect for your constitutional rights. They’ll no longer have to bother getting a warrant to get past the legal department of your commercial bank. They’ll just call up the tech department of your central bank.
But as far as stopping the crypto juggernaut is concerned, co-option won’t work either. CBDCs will only increase the appeal of decentralized money, in the same way that the US government’s proposed surveillance chip accelerated the development of better private encryption tools such as PGP, or how Edward Snowden’s revelations of NSA snooping led to end-to-end encryption being deployed by most commercial chat apps. The drive towards central bank digital currencies is extremely bullish for the likes of Bitcoin and Ether. They add credibility to the underlying blockchain infrastructure while exposing the farce that fiat currency has become. They also normalize technical elements like private keys and digital wallets, making the transition from centralized money to the decentralized variety easier than ever.
Government attempts at restricting this migration will only backfire. Bitcoin is already being upgraded to improve user privacy, and privacy coins like Monero are starting to rally. The more the Emperor tries to stop us from wearing whatever we want, the more obvious it becomes that he’s buck naked.
None of this inevitable, and governments the world over still have all the power they need to prevent the coming monetary migration. They can always stop the printing presses, stop enslaving our children with record amounts of debt, stop using the commercial banking system as a foreign policy tool and stop excluding tens of millions of poor and underprivileged people from financial services because a few might do something illegal. But then the stock market would fall a little bit, Trump would tweet a lot and “politically independent” Fed officials might be forced to have their first original thought in thirty years.
In other words, it ain’t gonna happen. The Empire will continue to strike back, with predictable results. Plan accordingly.