The Only Currency That Matters
TL;DR: Bitcoin Has Been Co-Opted By The Financial System, And The World Needs A Decentralized, Private, Stable Currency
We are all dependant on a global financial system that has no competition, that is morally and politically corrupt, inefficient, and that is universally protected by every major power. For most people in the western world this dependence is not terribly inconvenient, or limiting. It’s just the way things are, everyone gets along, and so we look away. But we should be very concerned as the guiding lights of democracy and freedom have begun to degenerate into absurdity, oligopoly, injustice and fraud usually associated with the term “Late Stage Capitalism”. Government meddling in the free market, artificially benefitting some at the expense of others, is a disruptive force on the delicate balance of supply and demand, and fiscal policy is the usual remedy to cover up the blunders that inevitably result.
Since the 2008 crash we have normalized the idea of massive bailouts and government stimulus to the extent that the $4 trillion printed this year (with several trillion to follow), was hardly even scrutinized. The fact that the stock market is reaching new record highs even though GDP fell 39% and millions of people lost their jobs is a mere detail of this absurdity, and there is no end in sight. When, in the last century, have governments ever reversed their spending habits, after all? The damage to the real economy, and to the regular consumer will be felt when inflation starts to run rampant, or markets finally do crash as they should.
When the Bitcoin blockchain was launched in early 2009, its genesis block was inscribed with the January 3rd Times headline: “Chancellor on brink of second bailout for banks”. This served as a reminder for what Satoshi Nakamoto had in mind for Bitcoin: a decentralized system of money, that could escape censure, irresponsible fiscal policy, and government control. Now, 11 years later, Bitcoin has been largely consumed by the very financial system it originally opposed.
One of the things that corporate capitalism does best is co-opt revolutions. Before the rebels even know it, they are being sponsored by Goldman Sachs, and buying “disruptive” public offerings underwritten by the very people Bitcoin was meant to oppose. As soon as blockchains started gaining value and people took notice, innovators, investors, and speculators flocked to the new thing and made it their own, leaving a trail of terrible ideas, questionable experiments, and fraud in their wake.
“No enemies had ever taken Ankh-Morpork. Well technically they had, quite often; the city welcomed free-spending barbarian invaders, but somehow the puzzled raiders found, after a few days, that they didn’t own their horses any more, and within a couple of months they were just another minority group with its own graffiti and food shops.” — Terry Pratchett, Eric
As Bitcoin grew bigger and bigger, the financial world started to pay attention. Here was a new way to make money: selling people the idea of a whole new paradigm of innovation and finance. However, Bitcoin was too strongly associated with crime: money laundering and dark markets, as well as large exchange hacks tared the public image of the cryptocurrency. No serious investor would look twice, so a solution had to be found. Enter the world of KYC/AML, analytics and forensics companies, as well as custodians.
Because of Bitcoin’s public ledger model, the currency is not actually as private and anonymous as we would like to think. Companies like Chainalysis and Cipher Trace started offering investigative and analytical insight into the Bitcoin network. First they helped the FBI and CIA solve large money laundering and terrorist financing cases (occasionally imprisoning people for the crimes of others), but soon found that the real money could be made on the institutional side. Every major exchange and cryptocurrency-company now uses their services, meaning that there is less and less actual privacy. Bitcoin has become “safe”, corporate-approved, and censorable.
If your Bitcoin happened to have touched the dark markets, you are likely to get flagged and blacklisted, and your coins will be frozen on exchanges asking for ridiculous amounts of documents, proofs of legitimacy and personal information. Even the proposed counter-measures, like coinjoin operations, mixers and other obfuscation tactics are being shut down. Binance infamously freezes out anyone who engages in these exercises.
Governments have taken note, of course. More and more they plan on getting rid of cash, which is too messy and anonymous. Restrictions on withdrawals, and devaluation of larger denominations are a common theme. On November 8th 2016, India wiped out 86% of its circulating currency overnight by devaluing the 500 and 1000 Rupee notes (1000 Rupees is just $12.00), ostensibly to restrict terrorist financing and money laundering. Some governments have started issuing their own cryptocurrencies for one simple reason: total control over your financial history and freedom.
Ironically, the original mission of Bitcoin to reduce government and institutional power over the individual has backfired, leading to the rise of state cryptocurrencies. Under the guise of safety, convenience, and better financial services, the leviathan has snuck into the crypto-space like a wolf in sheep’s clothing, while everyone was distracted fantasising about Lambos.
Covid-19 and Financial Insanity
Just like the 2008 financial crisis spawned Bitcoin, and an entirely new type of technology and finance, 2020 should really do the same. Without a doubt, this is the most insane time in stock market and financial history. The toxic housing market of the previous decade is peanuts to what is happening now. Covid-19, or more accurately the world’s response to Covid-19, was projected to wipe out approximately 39% productivity and output in terms of real GDP, and yet, stock markets are soaring to record highs because of massive government bailouts.
According to the Institute of International Finance (IIF), global debt has increased by over $15 trillion since last year, hitting a new record of $272 trillion. They project a further increase to $277 trillion by the end of the year. That is 365% of Global GDP. In the US alone, the Federal reserve has printed over $4 trillion over the last few months, and stock markets surged after Biden’s presidential election victory over Trump. This victory has paved the way for an additional $3.2 trillion bailout proposed by Democrats, instead of the $1.8 trillion Republican package. Most of this money, of course, will be lining the pockets of wealthy investors, instead of helping the poor and disenfranchised.
None of this insanity can go on forever. A walk through the downtown area of any major city proves as much. Every second coffee shop or retailer is boarded up or going out of business; even Guitar Center had to file for bankruptcy. At some point in the near future, the inflated stock market bubble will burst and trillions of dollars of wealth will be wiped out, leaving the world economy in shambles, and every major government in massive debt. As public unrest grows, central banks will have no choice but to keep printing more money, as various governments will start nationalizing industries, fueling the destructive cycle of government intervention in the free market, crony capitalism, corruption, and political upheaval.
The Only Currency that Matters
Bitcoin is a contradiction onto itself. Lauded as a currency when it is more of a commodity, hailed as an investment when it is backed largely by speculation and irresponsible gambling riled up by headline-seeking pundits. It is not worthless, of course, but its value based solely on utility should probably be closer to $200, than $20,000. It is only a matter of time until the boom and bust cycle repeats, and we will be inundated with articles and experts declaring the end of Bitcoin.
As I write this, the digital commodity is trading at $19,000 and the bulls are running rampant. We get the usual cocktail of outlandish speculative optimism, utopian predictions of the future, completely unfounded value propositions, and nonsensical use-cases. The fact is, the stock market is reaching all-time highs because there is too much free money sloshing around, and investors (especially more sophisticated ones), are desperate to put their money somewhere other than inflated equities, or debt that is likely to get wiped out as soon as interest rates rise again. For the same reason, real estate prices are going up like crazy. Maybe the recent Halving has something to do with the current bull-run, but that remains to be seen.
Utility value is neither here nor there, of course, and ultimately the value of a thing is what someone else is willing to pay for it, but the fact remains: Bitcoin, and large parts of the Bitcoin community have lost their way. We must restore our commitment to privacy, or perish as an opposing financial force to the soul-draining swamp of banking.
The low-hanging fruit here, is a network-layer, mandatory coinjoin similar to Mimblewimble. If everyone is part of the anonymity set, exchanges and governments would not be able to exert control. However, this would mean an overhaul of the entire Bitcoin network. Given how slowly our digital gold has evolved in the past, it is unlikely we will see this fundamental change happen in the next decade. Litecoin, in an uncharacteristic stint of actual usefulness, is experimenting with such an implementation, and we will gain valuable insight from those efforts, to possibly be replicated on the real network.
But privacy and anonymity are not the only concerns. Bitcoin does not behave much like a currency at all. It is too unstable, and unpredictable. Even though some businesses have adopted it as an alternative payment or remittance currency, goods and services will never be denominated in Bitcoin, because it is fundamentally unviable to do so. If the value of Bitcoin can change by 30% in a few days, then any business having to pay bills in US Dollars or any other fiat currency will quickly fall into bankruptcy due to liquidity issues.
PayPal recently announced that they would be integrating Bitcoin into their platform, and although this may increase the reach of Bitcoin, it does nothing to solve the underlying problem. Ultimately, all PayPal transactions are still denominated in fiat currency, and the payment company is simply a convenient middle-man, taking a cut from every transaction. This cut may be largely invisible as they make money off the spread, but PayPal is not doing anything fundamentally different than any other Bitcoin payment provider in the past. In addition, PayPal adds an entire new layer of KYC/AML and takes away your Bitcoin, as they store it on their own wallets. In other words, PayPal’s integration with Bitcoin might be good for the speculators, but it does very little in the way of transforming it into a real currency. If anything, people will be less willing to use Bitcoin for payments, as they become bullish on the speculative value of their crypto-assets.
Some maximalists have argued that everything would work out if businesses simply payed all their bills and employees in Bitcoin as well, eliminating relative purchasing power swings, but it is nearly impossible to ever reach such a utopian state of affairs if all necessary steps to get there are inherently implausible. It is like suggesting that a world government could prevent all warfare, without taking into consideration that a world government is unlikely to ever materialize while several nations hold nuclear weapons. The pathway to utopia is fraught with insurmountable peril; each step is too difficult to take on the stairway to heaven, even if it does theoretically exist.
Private, Anonymous, Decentralized Stablecoin
The only currency that really matters is a government-independent, internationally decentralized, stable, private, anonymous coin. It is the only thing that can, instead of being co-opted by the broken and corrupt financial system, act as a counterweight against censorship and expansionist state power, and the dangers of totalitarian control; a universal human currency that does not care where you spend, or which political party you belong to. It does not care if the international community happens to disapprove of your country’s behaviour, or whether a handful of central bankers happen to decide the fate of nations based on economic theory requiring a degree in mathematics and ancient Greek to comprehend.
Those who regularly engage in international wire transfers understand that the current system to which we are enslaved is a ridiculous mess of unnecessary complexity, middlemen and regulatory burden, to which there is no alternative. Yes, there are many different banks, but they all use the same infrastructure, and they are all “compliant”, which is another word for saying that the US government, and World Bank allow them to exist. There is truly no alternative. Is there any wonder why such a system is fraught with inefficiencies, bloat, and terrible service? Is there a good reason why we can send an email around the world in a millisecond, but have to wait five business days for a wire transfer to Dubai, while paying $75 in fees? Assuming the various banks along the way don’t flag the transaction, that is.
But what about child pornography, I hear you cry? Clearly, we need an incredibly inefficient, corrupt and controlling global financial system to stop a handful of degenerates from touching children, which they are doing despite this system already existing. Invoking the protection of some group or another (like children), or reciting general concerns relating to national security are of course favourite arguments in the defense of any terrible idea worth discussing. The fact is that the enslavement of all peoples to the ‘money-changers’ cannot possibly be of greater utility or moral value than virtually any alternative. Therefore, these vapid concerns should be dismissed.
Theory and Practice
Calling for a decentralized, private Stablecoin is easier said than done. There are number of technological challenges that need to be overcome, and perhaps more importantly, there are some practical, legal, and political roadblocks as well. Any currency trying to compete with the current system will be decried as a fraud, a tool for money laundering and illegal activity, just as Bitcoin was originally decried, until it was co-opted of course. Jamie Diamond once called it a fraud, but now JP Morgan is releasing its own coin, and telling investors that Bitcoin prices could easily triple soon.
There is no natural route for funding such a project, as Venture Capital would be too concerned with the legal implications of its success, and de-motivated by the fact that there may not be any money in it to begin with. This could not be a traditional investment, though it does require resources and talent. Government research grants are equally disqualified here for similar reasons, and a grassroots effort is likely a pipe-dream. One look at other grassroots efforts in the crypto-space should show why. Grin is a good example, with two or three part-time devs working on the project for three years, without any traction or significant progress, even though the Mimblewimble protocol was universally hyped and praised in the blockchain community.
A project such as this requires extensive financial and structural support, and so the only realistic option is to turn to those who would actually benefit from such a system: heavily sanctioned governments, and wealthy individuals involved in illicit trade. Iran, Syria, North Korea, Russia, and even China could stand to benefit from a competing financial system that allows circumvention of the US dollar, and its accompanying economic restrictions. But these infamous regimes are not the only potential underwriters, and are indeed unlikely to agree to the development of a system they neither control or whose implications they may not fully understand. Minor trade blocs, like Mercosur, COMESA, or the more or less common market of the Central African Franc which includes six independent nations could come to the rescue.
The point is that this innovation is unlikely to come from the western world, because there is simply no pressing need for it. Banking for the regular consumer, thanks to credit cards, instant lines of credit, Google-Pay, PayPal, Cash-app, and E-transfers, is sufficiently convenient to drown out more systemic issues, and cross-border inefficiencies. But to a businessman in Iran, who just wants to export pistachios, hire software developers in Ukraine, or buy a Tesla, the sanctions imposed on his country are severe and costly. If it is at all a moral virtue to minimize the differences of opportunities based on the coincidence of birth, then we must support free trade and open markets, and oppose government control and manipulation of them (looking at you, China). The most useful tool of free trade is a borderless, private currency.