On Cryptocurrency
Sunday February 13, 2022 — Taipei, Taiwan
I’ll start off this post by making the core of my position abundantly clear: cryptocurrency is largely bad, and the recent uptick in social ostracization of people promoting it, particularly promoting the extremely transparent pyramid scheme of NFTs, is good. I say this because last time I wrote about blockchain land, a handful of NFT and cryptocurrency people said that liked the post and started following me on Twitter, presumably because the message that the whole thing they’re trying to build is so fundamentally broken that it’s completely unsalvageable was too subtle for them. I’m writing this post because I think that what’s going on with cryptocurrency is actually subtle and interesting, but I don’t want my writing to play any part in the false narrative that what we need is “good guys with blockchains.”
With that out of the way, I want to take a look at how we got to where we are today, some of the root causes of the populist rage that led to cryptocurrency going mainstream, and where we might go in to future.
As I’ve discussed previously, Bitcoin came from a fundamentally libertarian school of thought, both economically and politically. While libertarian economic principles are essentially completely detached from reality, their political stances are more interestingly wrong: they come from a correct diagnosis of a fundamental problem — the chipping away of many types of freedom in modern society — but a complete unwillingness to think carefully about the philosophical complexities of what “freedom” means. This is the core of libertarian propaganda: pointing out real losses of freedom that people experience, but only the ones where “make the government do less” might plausibly be a solution. Sure, your boss might have economic power over you that they can dangle over your head to force you to work in unsafe conditions and change your schedule on a whim, but let’s not talk about that, that’s not the kind of “freedom” that’s really important.
Just as the fundamental libertarian philosophy of Bitcoin has been passed on to Ethereum and NFTs and “web3,” so too has its unique brand of propaganda. This is especially effective in the United States, where the acceleration of income inequality since the 1980s has resulted in huge numbers of people rightfully feeling that the economic system has failed them. Structural critique is slow and difficult, though, so cryptocurrency sells a easier solution: we’re smashing the system and rebuilding it, and if you get in right now, you’ll be on top this time around. Cryptocurrency does nothing to address the fundamental problems that led to the stunning wealth inequality in the United States today, but advertises itself as a solution anyways.
Part of this propaganda is pointing out problems with the current payment processing industry, which are abundant: the payment processing industry in the United States is a duopoly, with Visa and Mastercard — two extremely conservative companies — holding 60% and 30% of the market respectively. This is most immediately apparent to sex workers, porn websites, and other things that are deemed “immoral”, but it casts a long shadow over the entire internet — websites and social networks live in fear of being shut out of the payment ecosystem if they allow content that’s sexual or otherwise “immoral,” which results in heavy handed banning of, for instance, all sorts of queer material, which is incorrectly seen as inherently sexual.
It’s a mistake to think that this policing of what material is allowed to exist on the internet is driven entirely by payment processors — advertisers and companies like Apple drive a fair amount of this is well. However, payment processors have recently been gaining power due to a shift in the economic model of creation on the internet: with the rise of Patreon, the default model for creating things on the internet has increasingly moved towards people directly paying for what they enjoy.Things are slightly more complex than this — there’s also been a rise in corporate sponsorships, which are just more deceptive ads with extra steps, but the important shift is that creating things that are funded entirely by people who like those things paying for them is possible on the internet now in a way it wasn’t five or ten years ago. In general, media geared towards younger people will always skew more towards ads, while media for older consumers is much more likely to be funded directly by people who enjoy it, for obvious reasons. This shift is a huge step towards building a economy and society that works better for everyone, but it’s also resulted in the payment processor duopoly having significantly more direct control over what media gets created. This is not a academic problem — Patreon regularly bans people due to pressure from payment processors.
Cryptocurrency is pitched as a solution to these problems, but like all libertarian propaganda that draws on real problems, it does not actually do a good job of solving them. Despite having been around for more than a decade now, cryptocurrency has seen near-zero adoption for actually paying people for goods and services. This is because cryptocurrencies are designed to be speculative assets, and only have the aesthetics of being a tool for payment smeared on top. This is not just a critique of recent cryptocurrency projects — in 2009, Satoshi said “As the number of [Bitcoin] users grows, the value per coin increases. It has the potential for a positive feedback loop; as users increase, the value goes up, which could attract more users to take advantage of the increasing value”. The people creating these projects understand that they are pyramid schemes first and foremost, and technical measures that might make cryptocurrencies actually useful for payments have largely been driven only by those schemes becoming so successful that the technical infrastructure became a bottleneck for bringing in enough new blood to keep the whole scam going.
At this point, it’s worth taking a slight detour to talk about the clever legal engineering involved in making cryptocurrencies work. Stephen Diehl writes about cryptocurrencies as “arbitraging securities regulation,” which is exactly the point. Banking and payment processing is highly regulated in the United States. One of the fundamental powers that the United States Constitution grants to the federal government is the power “To coin Money [and] regulate the Value thereof,” and states issuing currency was such a problem that the constitution prohibited it. Since then, there’s been a steady stream of people trying to make their own currencies, which are ruled illegal as soon as they become large enough to cause problems.There have been some alternative currencies that have not attracted legal trouble, like BerkShares, but the Justice Department maintains that it’s a violation of federal law for private individuals to create currencies, and they could presumably go after things like BerkShares if they wanted to. Company scrip, for instance, was made illegal in the US in 1938. In 2009, Bernard von NotHaus was arrested for creating the “Liberty Dollar,” with a U.S. Attorney calling the act of creating a new currency “domestic terrorism.”
The reason people keep trying to make currencies is pretty obvious — creating currency is widely understood to be incredibly lucrative if you can get away with it. For instance, airlines lose money on flying airplanes and make back their losses on being (unregulated) banks. Acting as a bank without being regulated as one is a tricky line to toe, though. Services like Paypal, Venmo, and even Patreon extremely careful about how they store funds and what features the implement, for fear of being treated as banks rather than less-stringently regulated money transmitters. So how do cryptocurrencies get away with it? Well, the hack is that if a system is “decentralized,” there’s no entity that can be reasonably targeted with regulations about minting currency or creating unregulated securities. Instead, companies like Coinbase are regulated as “money transmitters,” allowing a legal interface to the harder-to-regulate automated and decentralized system that actually mints the currency.
It’s worth noting that even within the cryptocurrency ecosystem, the legal engineering around this has shifted over time — for instance, back in 2017, “Initial Coin Offerings” or ICOs were popular, but only until the SEC started prosecuting ICOs as unregulated securities. NFTs were designed to operate similarly to currency while being more difficult to regulate with securities law — their non-fungability means that regulators will likely need to go after each NFT or set of NFTs one at a time, while the value of NFTs is largely determined by hype around ecosystem as a whole. You can hype up the concept of NFTs in general to drive up the value of the NFTs that you own, with little risk that you’ll actually be one of the few people to get hit by the SEC.
With that history in mind, the idea of using cryptocurrency as a way of stripping power from payment processors seems a lot less exciting — the clear trend in the United States for the entire history of its existence has been that unregulated currencies are shut down as soon as they become large enough to be a threat to existing power structures, while the ability to actually pay for things that matter is fundamentally governed by laws about what “money transmitters” are allowed to do, which are the same regardless of whether you’re using a decentralized cryptocurrency or something like Paypal or Venmo.Maybe this is the time it’ll finally work — it’s quite possible that cryptocurrency is seen as “too big to fail” at this point — but if the government decides that shutting the whole thing down isn’t viable, you can bet that the laws governing money transmitters that deal in cryptocurrency will become way more strict, which is a outcome that’s basically worse for everyone involved.
It’s tempting to think that cryptocurrencies will change the power structures of the financial system, but that misses that the actors with the most structural powerBy “structural power,” I mean power that comes from a source other than just having a lot of money. Having enough money that you can afford to rent it out (“investing”) obviously gives you power, but that’s a separate type of power than the ability to mint, regulate, or transmit money. in the financial system today don’t have that power because they issue currency — they don’t issue currency at all!This isn’t to say that it’s not possible to get power by minting currency, or that the United States government doesn’t have a lot of power in the financial system, it’s just that the actors with huge amounts of power in the financial system today do not have that power as a result of minting currency. The actors with the most power are the ones that control the transmission of currency, and while cryptocurrency pretends to decentralize that, there’s a fundamental problem: cryptocurrency isn’t legal tender. The vast majority of people can’t pay rent or taxes or buy food in cryptocurrency, and until they can, the fact that people can use cryptocurrency to make transactions without a third-party having power over them doesn’t matter much in practice, since they’ll need to interact with the regulated world of legal tender eventually.
Proponents of cryptocurrency would say that the solution here is for cryptocurrency to become widespread enough that people can pay for rent and food with it,Taxes are the larger problem, since taxes get at the core of what currency is — historically, the way that currency was created was by accepting taxes in it, and then paying soldiers and government workers in that currency, in order to force private industry to provide the whatever labor and materials were needed for wars and other government projects. I’m going to gloss over that for now, since it’s a big enough topic to deserve discussion on its own, but it’s worth keeping that in your head while you think about this. but that requires a huge shift in how people use money. If you think that’s possible, it’s worth asking what other solutions are also possible with the same amount of effort or less. One that seems underappreciated is simply building traditional money transmitters and banks that are cooperatively owned. The bank side of things is already here, and has been for centuries: credit unions are excellent, and if one is available to you, you should use it. However, the money transmission side of things is currently lacking. Almost all of the problems caused by the current duopoly of payment processors in the United StatesI say “almost all,” since, for instance, I think that essentially all drugs should be legal for personal use, and I have no problem with people using cryptocurrency to buy drugs, which is a usecase that can’t be solved easily by traditional payment processors. However, this same thing also enables the multibillion dollar ransomware industry, illegal munitions sales, and other such things, making it much more morally complicated. My fundamental take is that people should have a right to privacy for small transactions, but not for large ones, but actually implementing that is obviously somewhat difficult. can be fixed by building payment processors and money transmitters that operate in the same fundamental ways as existing ones, but are cooperatively owned and have progressive values baked in from the start.
There are a lot of problems with the payment processors and the financial system today, and it’s frustrating that it’s nearly impossible to make transactions on the internet without putting money in the pockets of evil people. Cryptocurrency, though, has not and will not solve that. Building a better world is about building better governance, and we have the tools we need for that already — no blockchains needed.