Think Bitcoin™ Issue #10
Regulation as negotiation; Bitcoin and Black America; Bitcoin vs. "crypto"; Bitcoin in Latin America
Hey friends, welcome back to Think Bitcoin™. Last week was a busy week in Bitcoin world, particularly in regard to the specter of regulation, so we have a lot to cover. As always, any questions or comments, feel free to reach out!
ANNOUNCEMENT: I’ll be taking next week off from the newsletter to go on a short vacation with my wife to celebrate our anniversary.
In this issue:
Headlines/Insights: Seeing the debate over regulation as a negotiation, different perspectives on risk, and where we might go from here (plus Senator Lummis buys some bitcoin)
Content Round-Up: 3 articles, 2 podcasts
As always, if you find this newsletter interesting or useful, please share it with others who might find it interesting or useful!
Headlines and Insights
The conflict between the crypto space and regulators/lawmakers continues to escalate. I want to highlight some relevant headlines on this point and then discuss the state of play:
SEC Chair Gary Gensler testified in front of the House Financial Services Committee last Tuesday. He continues to telegraph that he’s looking hard at crypto exchanges and stablecoins.
In this hearing, Congressman Patrick McHenry introduced a bill called the Clarity of Digital Tokens Act of 2021, which would create a safe harbor for digital assets, while still providing investor protections.
Also in this hearing, Congressman Tom Emmer called for his Securities Clarity Act, a bipartisan bill that would clarify the definition of a “security,” particularly as it relates to digital assets, to be taken up.
Gary Gensler affirmatively stated that the SEC has no plans to “ban” crypto, a la China, and that any such action would be squarely within the purview of Congress.
Venture capital firm, a16z, submitted a proposal for legislation and regulation of digital assets.
The White House is reportedly considering an executive order on crypto.
Raoul Pal, CEO and Co-Founder of Real Vision and Global Macro Investor, has described the posturing of the SEC as a “negotiation tactic.” Pal views the back-and-forth between regulators and the crypto space as a negotiation that will ultimately lead to a “grand compromise.” I tend to agree, and I think it’s worth fleshing the analogy out a little more.
In a negotiation, the negotiating parties each want something. Bargaining power is informed in significant part by a party’s best alternative to a negotiated agreement (known as a party’s “BATNA”). So let’s think about the situation in this framework. What does each side want?
The regulators, as well as a faction of lawmakers led by Senator Elizabeth Warren, want stability and control. The Great Financial Crisis of 2008 (the “GFC”) and also, to a lesser extent, the dot-com bubble in 2001, are still fresh in the minds of regulators and lawmakers like Warren, who was elected to the Senate a few years after the GFC on a platform of going after big banks and Wall Street for the reckless behavior that led to the GFC and the absence of meaningful consequences they incurred in its aftermath.
The GFC wrecked a lot of retirements and shattered many lives. The government has made it pretty clear that they will do whatever it takes to keep the markets from imploding or even significantly correcting ever again. This is why we’ve had so much quantitative easing (“QE”) in the last 13 years. It’s why the Fed’s balance sheet has gone from less than $1 trillion in November of 2008 to about $8 trillion now. As an aside, it’s interesting and important to note that the expansion of the Fed balance sheet corresponds perfectly to the rise of the S&P 500 over that time.
Anyway, regulators and politicians like Senator Warren are aware that a record number of Americans are using the stock market as their savings accounts and, of course, their retirement accounts. Consequently, they don’t ever want the stock market to go down. Unfortunately, many of the interventions required to backstop the market end up debasing the currency and causing a rise in inflation, both of which effectively tax the very people regulators are seeking to protect. But that’s a topic for another day.
The point is that Gensler and Warren are focused on stability at all costs. This is why Warren is always talking about the “systemic risks” she thinks exist with respect to crypto. Gensler echoed these sentiments in his testimony: “I think if we don’t get these exchanges, these lending platforms inside of the public policy framework, a lot of people are going to be hurt. I think it’s clear that many of these projects are within the securities laws. We’re going to use our authorities to try to get more of these projects and companies to register and be within the investor protection framework.”
In addition to stability at all costs, regulators and lawmakers like Warren also want control, and as much of it as can possibly be wrested away from the market. Senator Warren is of the belief that we can fix most of society’s ills if we expand the government, put the right people in charge, and centrally plan more of the economy to direct it toward our desired end. Cryptocurrency, much of which exists, at the moment, outside of current regulatory frameworks, is an affront to this impulse to control.
What does the crypto space want? It wants the space and flexibility to innovate. Innovation has always been a driver of improved standards of living and an expansion of the economic pie. Stamping out innovation before it can flower into its potential, just because it doesn’t fit into 90-year-old securities law regimes, seems like a net loss for humanity. Ryan Selkis put this best:
The crypto space wants regulation that’s thoughtful but not draconian, regulation that protects investors but still allows space for innovation. This is why you see proposals like Congressman McHenry’s bill to allow crypto projects to have a safe harbor from SEC registration for a specified period while they develop and grow into “mature” networks, provided of course that investor protection is simultaneously looked after. This safe harbor idea was first proposed by SEC Commissioner Hester Peirce. The same rationale is behind Congressman Emmer’s bill and a16z’s proposal.
Another way of looking at the positions staked out by the regulators and the crypto space, respectively, is through divergent conceptions of risk and the role/function of risk in an ostensibly capitalist society. The investor protection regime exists, in theory, to protect investors from fraud and from taking excessive risk without appropriate education. This is all very noble. In practice, however, the result is that the best investment opportunities are reserved for accredited investors, i.e. the already-wealthy.
As the “protective” impulse grows increasingly heavy-handed, to the point where it seems like we’re trying to outlaw risk altogether, it’s increasingly important to remind ourselves that risk is an inherent part of capitalism. We take risks with our capital in the hopes of being rewarded for that risk. You take a risk when you start a business. That business might fail. You take a risk when you make an investment. If it’s a bad investment, it might fail. But if it’s a good investment, your risk will be rewarded. Determining what’s a good investment and what’s a bad investment and how much of your capital you should invest is the whole game. Capitalism rewards AND punishes risk.
The crypto space sees risk a bit differently from folks like Gensler and Warren. Of course investors should be protected from fraud, provided with important disclosures, and given the necessary information with which to make proper investment decisions. However, over-protecting investors such that retail investors are essentially barred from taking risk with their capital, regardless of how informed they may be about that risk, reserves the best investment opportunities for professional investors, which exacerbates wealth inequality. It deprives retail investors of opportunities in the name of protection. It’s a bit strange that we allow people to gamble in Las Vegas, loan money to friends or family members who may never pay them back, buy lottery tickets, and bet on sporting events, but regulators now balk at cryptocurrency, which, broadly speaking, has been the best-performing asset class of the last decade. Are there plenty of scams in crypto that we should go after and punish accordingly? Yes. Does that mean we should fence off the entire space? Absolutely not.
So we know what each side wants, generally, and we’ve explored some of the differences in perspective. The regulators want stability and control. The crypto industry wants thoughtful regulation that still allows for innovation. And the two sides tend to view risk differently. Let’s talk about each side’s BATNA, because this is an important factor in determining who has leverage, and it’s where things get interesting.
For regulators and lawmakers, the best alternative to reaching some kind of compromise with the crypto space is they go ahead and shut down many exchanges, deem most cryptos to be unregistered securities, bring a dizzying amount of enforcement actions, and tax the shit out of the whole industry without endangering the market stability they prize so highly. The odds of things unfolding in this way are, in my opinion, zero.
Why? Several reasons. First, to put it colloquially, the cat is out of the bag. Bitcoin alone is a $1 trillion asset at the time of this writing. The crypto space as a whole is a $2 trillion asset class. Money is pouring into the space from banks, insurance companies, venture capital firms, corporate treasuries, family offices, and, of course, retail investors globally. What happens if regulators get too aggressive? Prices likely plummet, massive losses likely ensue in the short-term, contagion probably spreads to traditional markets, and the sacrosanct idea of stability gets a punch in the mouth.
Second, with respect specifically to Bitcoin, killing it is not actually practically possible. As we’ve seen with China, bans on Bitcoin are ineffective because the network just moves and remains uninterrupted. In other places that have attempted to crack down, like Nigeria, peer-to-peer exchange and use has skyrocketed. Unlike many of the other coins and protocols, Bitcoin is totally decentralized, which means there are no leaders or governing bodies to go after.
Third, coming down too hard on the space is no longer politically feasible, in my opinion. For most of Bitcoin’s history I think it was politically feasible to suppress it, or at least attempt to, but this is no longer the case. Again, the proverbial cat is out of the proverbial bag. There are simply too many users, a growing number of which are increasingly politically engaged and determined to advocate relentlessly for Bitcoin. As I’ve written before, I think Bitcoin is perhaps the best hope and the best opportunity we have to transcend the broken, ossified political paradigm under which we’ve lived for the last 50 years.
So, in sum, the BATNA for the regulators is not great. It’s either find some middle ground with the crypto space or incur the vociferous (and activist) angst of a large body of passionate users, not to mention that of the donor class, all of whom are voters. This angst will (and, in fact, already has) lead to meaningful challenges in the political realm, as “crypto candidates” will emerge, backed by the groundswell of fervent users, many of whom skew younger and are extremely tired of having their economic lives dictated by a geriatric ruling class.
Now let’s look at the BATNA for the crypto space. The best alternative to reaching some kind of compromise with regulators is that crypto is essentially allowed to continue doing what it’s been doing without being regulated. This is obviously not going to happen, because regulators and lawmakers are clearly determined to bring the space within a a regulatory framework. Another alternative to a compromise with regulators is a process in which the crypto space forfeits its seat at the table for discussions about regulation and consequently becomes subject to an oppressive set of laws and rules written without their input. This would be a highly negative outcome, and it should be avoided. Lastly, lack of regulatory clarity discourages broader adoption.
As we can see, both sides have incentives to reach some kind of compromise on how to regulate the space. That being said, I think it’s going to involve a lot of push and pull, and there will almost certainly be missteps along the way. It remains to be seen whether the current hard-line posturing by Gensler is more of an opening position/offer in a quasi-negotiation from which discussions can begin, but it would certainly make sense if this was, at least in part, the case.
On Friday, it was reported that the Biden administration is considering issuing an executive order for federal agencies that would require them to study the crypto space and submit recommendations for how it could effectively be regulated. Allegedly, the administration is thinking about both the risks and the opportunities of the space, though I think we should all remain skeptical of their intentions.
You might be wondering, what does this all mean for Bitcoin, specifically? As I’ve said before, I think Bitcoin will remain comparatively unscathed, simply because of its decentralization and its origins, which make it very clearly not a security and therefore not under the purview of the SEC. Similarly, its decentralization means any legislation that attempts to kill it will ultimately be ineffective and may actually do more harm to the United States than good.
In light of China’s recent ban, there’s a lot to be gained for the United States by affirmatively embracing Bitcoin, but this is a topic for a future issue.
A sitting U.S. Senator buys bitcoin
Yes. You read that correctly. Senator Cynthia Lummis of Wyoming, who first purchased bitcoin back when it was about $320 per coin, bought between $50,000 and $100,000 of bitcoin in August of this year, per financial disclosures filed last week.
Content Round-Up
1. “Is the Crypto Revolution Failing?” This article, written by Alex Gladstein, is a kind of state-of-the-union of Bitcoin and crypto, generally. It makes the important distinction between Bitcoin and “crypto,” the latter referring to the thousands of other coins and protocols. Gladstein argues that while crypto is, in many ways, enriching a cadre of insiders and wealthy investors, Bitcoin continues to serve the increasingly revolutionary function of non-state money for a global (and rapidly growing) user-base. In other words, while crypto has become venture capital investing in real time, frequently subsequent to or concurrent with formal venture capital raises, Bitcoin is serving the masses a non-state money.
This really boils down to a difference of purpose. While myriad crypto projects aspire to myriad use cases, Bitcoin’s singular “aim is not just to process a certain number of transactions per second, but rather, to be digital cash for the world, with value secured not by national fiat, but by a peaceful, non-coercive algorithmic alternative to central banking. Its goal is to be the open and neutral money that our discriminatory world desperately needs.” Deluged by the ever-expanding number of interesting crypto projects, we tend to forget the revolutionary, world-shaping promise of Bitcoin.
Gladstein also criticizes the centralization of many allegedly decentralized protocols, contrasting them with the inimitable and undisputed decentralization of the Bitcoin network.
The answer to the question in the title of the piece, for Gladstein, is yes. The “crypto” revolution, he argues, is not fulfilling its promise. But Bitcoin, on the other hand, remains steadfastly revolutionary. In Gladstein’s words:
“Bitcoin is the biggest peaceful protest the world has ever seen. With more than a hundred million users quietly opting out of the current financial system into a new one — based not on war and oil but on non-violence and math — we are at the beginning of radical change.”
2. “A Once-In-a-Species Discovery,” an episode of the Blue Collar Bitcoin Podcast with Croesus_BTC, a pseudonymous Bitcoin content creator. Croesus is perhaps best known for his article, “Why the Yuppie Elite Dismiss Bitcoin,” which is excellent. In this podcast he covers a lot of ground. First, he discusses how and why Bitcoin is the best savings technology ever created because it’s actually designed to get more scarce every four years.
He then walks through his valuation framework for Bitcoin, which begins with examining how much wealth in the world is looking for a store of value. The answer is $400 trillion, which includes approximately $18 trillion in negative-yielding bonds and another approximately $230 trillion in low-yielding bonds. Croesus projects and predicts that some of this money will flow from these inferior store-of-value assets into Bitcoin over time.
Croesus also walks through his framework for assessing where we are in the new technology adoption curve.
He concludes that we are still very, very early, based on user adoption numbers, but those numbers are growing more rapidly than any technology in history.
The analogy Croesus uses to describe where we are in the adoption cycle is the American West. This discussion begins at approximately the one-hour mark of the show and is really interesting.
3. “The Black Case For Bitcoin,” an article by Ian Gaines, media director of Black Bitcoin Billionaires. Gaines discusses the importance of a money that is divorced from the state and uncontrolled by centralized intermediaries, which historically have discriminated against and exploited the black community. In his words:
“For the first time in history, Black Americans have direct access to generational wealth without needing to rely on the permission of an incumbent authority. Bitcoin and Black America are writing parallel stories, fated to complete the hero’s journey on its highest difficulty level.”
Gaines emphasizes the opportunity to “peacefully opt-out of a suboptimal, predatory legacy system” and highlights how black entrepreneurs, scholars, artists, and athletes are propelling cultural adoption.
I would recommend also checking out the Black Bitcoin Billionaires group on Clubhouse, which is a font of educational information. I also highly recommend reading Bitcoin and Black America, Isaiah Jackson’s seminal book, which has rightfully become a classic in the Bitcoin community.
Lastly, Gaines hosts a series of conversations on YouTube entitled “The Nature of Sovereignty,” which I’m working my way through. Definitely check those out, as well.
4. “Bitcoin in Latin America and Rootstock,” an episode of the Anita Posch Podcast with Diego Gutiérrez Zaldívar. Zaldívar talks about some of the problems people in Argentina and, more broadly, Latin America experience and why Bitcoin can be a solution to some of those problems. He explains how both Argentina and Latin America have suffered from “financial systems that are completely unreliable,” and goes on to say “we have suffered corruption, as well as manipulation of the monetary system, constant manipulation of the monetary system.” He describes local currencies as “not a way to protect your wealth” because “the rules are being changed all the time.”
He describes the financial crisis in Argentina from 1998 to 2002, particularly a policy implemented in December of 2001 called the Corralito, which essentially froze Argentine bank accounts for twelve months. After the Corralito, the Argentine peso was devalued against the dollar and people found that their bank accounts were now worth one fourth of their original values. Readers interested in examples of banks freezing accounts should also check out the Cyprus bail-in of 2013.
“You don’t need to explain why Bitcoin is relevant to people in Latin America. They know exactly what a store of value is and why it’s needed,” Zaldívar says. “That’s why Bitcoin is so relevant. Because it gives freedom to people in extreme conditions and a store of value to people who have no access to other stores of value.”
5. “Closing the Wealth Gap: Black America and Bitcoin Adoption,” an article by Dawdu M. Amantanah. Amantanah highlights the social implications of Bitcoin’s decentralization: “the lack of centrality removes the fundamental flaw of bias. Bitcoin does not care what you look like, what culture you come from, your gender or your religious background.”
For the new and new-ish
Last week’s summation of the first nine issues’ worth of “for the new and new-ish” sections is, I think, a good place to stop, at least for now. We’ve broadly covered how the technology works and built a solid, foundational understanding of many fundamental concepts. From here, I think you’re fully prepared and empowered to dive down any technical rabbit holes you find interesting or want to learn more about. I won’t stop providing educational content for those who are new to the space, but I’ll start doing so by pointing you directly to those resources. Many of the fundamental economic concepts relevant to Bitcoin are increasingly woven into the “Headlines and Insights” section, which is something I intend to lean into more in subsequent issues.
Bonus/Miscellaneous
Amidst the escalating inflation we’re seeing in everything, it’s important to remember how everything is actually getting cheaper when it’s measured in bitcoin. In other words, when we use a unit of account that can’t be inflated, i.e. bitcoin, things actually get cheaper. Purchasing power increases.
Here’s college tuition priced in bitcoin, courtesy of @PricedinBTC:
Jamie Dimon, CEO of JPMorgan, recently called Bitcoin “a little bit of fool’s gold.” Here’s JPMorgan’s stock, priced in bitcoin, again courtesy of @PricedinBTC:
Here’s the U.S. Monetary Base, priced in bitcoin, courtesy of @PricedinBTC:
As always, thanks for reading! If you enjoyed it or found it useful, share this newsletter widely and freely!
“Civilization is in a race between education and catastrophe. Let us learn the truth and spread it as far and wide as our circumstances allow. For the truth is the greatest weapon we have.” -H.G. Wells
See you in two weeks,
Logan
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DISCLAIMER: I am not investment advisor and this is not investment advice. This is not, nor is it intended to be, a recommendation to buy or sell any security or digital asset. This newsletter exists for educational and informational purposes. Do your own research before making any investment decisions.
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