Think Bitcoin™ Issue #8
Regulators sharpen swords; Bitcoin and music; Who makes the rules?
Hey friends, welcome back to Think Bitcoin™. As always, if you’re brand new or relatively new to Bitcoin and looking for some education on the basics, feel free to scroll down to the “For the new and new-ish” section and work your way up.
In this issue:
Content Round-up: 4 articles
Headlines/Insights: Gensler and the SEC turn up the heat, Coinbase drops the Lend product, and what all this means for Bitcoin’s path forward
For the new and new-ish: The rules in Bitcoin
As always, if you find this newsletter interesting or useful, please share it with others who might find it interesting or useful!
Content Round-Up
1. “Bitcoin and Music: A Symphony of Code,” an article by Mark Mulvey in Citadel 21. This is one of the coolest essays on Bitcoin I’ve ever read. Viewing Bitcoin through the metaphor of music, Mulvey is able to highlight the network’s beauty and artistic genius, which doesn’t get talked about enough, in my opinion. As someone with a graduate degree in the humanities, I love seeing someone appreciate Bitcoin from that perspective.
I was hooked from the jump:
“As a former music student and lifelong lover of the arts, it’s become increasingly apparent to me that those most inclined to pursue a life surrounded by music are uniquely suited to appreciate how profound an invention Bitcoin really is.
It’s a symphony of code — the harmony of disparate elements composed into a single work of staggering genius.
It’s not just that Bitcoin is an elegant creation akin to a song: Bitcoin is also the harmonic framework itself. In a single free and open source code base it harmonizes completely separate aspects of culture and society — deeply foundational ones — and leverages our own human nature (especially our flaws) to make the network richer, stronger, and ever more effective.”
2. “Framing Bitcoin For Progressives,” an article by pseudonymous author, The Progressive Case for Bitcoin. As I’ve written about before, I think Bitcoin transcends our very broken current political paradigms in potentially quite transformative and liberating ways. As such, I’m ambivalent about explanations of Bitcoin that cater to one (or any) political faction. Political factions are increasingly unmoored from real-life ideas or values, increasingly beholden to special interests, and over-focused on re-election. Bitcoin, on the other hand, is the instantiation and embodiment of certain values and ideas about economic freedom, transparency, decentralization, and peace. I actually think a risk to Bitcoin in the highly polarized United States is politicization down current Democrat/Republican party lines, since once an idea has been triaged in that way, engagement on the merits is more or less precluded.
All that being said, it’s becoming quite clear that one political faction in particular is struggling mightily to understand why Bitcoin could be useful to anyone. I’m talking of course about the progressives, whose anti-Bitcoin flag-bearer is Senator Elizabeth Warren. Anyone who has spent meaningful time studying Bitcoin understands that it addresses many of the issues progressives purport to care about most, namely increased economic access and the environment. Yet, progressives don’t seem to be interested in spending any meaningful time studying Bitcoin. This article is written by a Bitcoiner who actually supported Warren in the 2020 election and attempts to frame Bitcoin’s value proposition for progressives.
3. “Bitcoin As a Secret Plan B For Your Children,” an article by Erwin Hemme. Hemme, a married father of three, expresses his concern about the economic future awaiting his children. He recounts how much cheaper it was to buy a house when he and his wife bought theirs, and laments how difficult buying a home is likely to be for his children. To fight against the rising cost of everything, as well as the rising levels of uncertainty, he has begun to save bitcoin for each of his children. In his words:
“My goal is to stack one full bitcoin for each of them. I believe that this single bitcoin is, for them, the “way out” of the system and their life, without having to bear the financial and even social burden of where our economy appears to be heading
I think that within 10 years a bitcoin can be a collateral for a mortgage and you can pay off the mortgage with the price action of bitcoin. To be clear, it is not for financial motive that I stack sats for my kids. They don't have to get rich with it. My motive is to give them a chance of a life which they can arrange as they want, and not how to simply “fit in” to the system.”
4. “Bitcoin Net Zero,” a paper published by NYDIG, co-authored by Nic Carter and Ross Stevens. Carter is a General Partner at Castle Island Ventures, and Stevens is the Founder and Executive Chairman of NYDIG. The paper addresses Bitcoin’s energy consumption and contextualizes it by considering its societal importance, the problems it addresses, and the energy consumption of other technological advances. Bitcoin’s energy consumption has been a very hot topic in many mainstream financial outlets and publications. The debate usually focuses on how much of Bitcoin’s consumption is renewable and whether the energy it consumes is worth it. Folks like Senator Elizabeth Warren have openly asserted that Bitcoin’s energy consumption is, in her opinion, entirely worthless because, in her opinion, Bitcoin serves no societal purpose. This paper explains how Bitcoin will actually incentivize and accelerate a green energy transition, and, most importantly, explains why Bitcoin’s value proposition for society is worth its energy consumption.
This is a really long paper. I recommend at least reading the two-page Executive Summary. For a shorter synopsis of the whole paper, check out “NYDIG Report: Bitcoin Provides Value That Far Outweighs Its Energy Costs,” an article by Namcios.
Headlines and Insights
Last week, the tenor of regulatory pushback against cryptocurrencies grew more hostile than ever. There were a handful of related headlines in this vein that I want to mention up front and then discuss.
Coinbase decided to drop its plans to release its “Lend” product. As we discussed in last week’s issue, the SEC threatened to sue the company if they went forward with it.
SEC Chair Gary Gensler did an interview with the Washington Post on the “path forward” for cryptocurrencies, in which he said some ominous things about the space as a whole.
At the Messari Mainnet Conference this past week, a panel speaker was served with a subpoena by the SEC, reportedly just before stepping on stage to speak.
Texas, New Jersey, and Kentucky are going after Celsius for its crypto lending products.
Now, this newsletter is Bitcoin-focused. As such, I don’t want to wade too far afield in addressing issues facing various other crypto projects, but when it comes to the emergent posture of regulators towards the space as a whole, I think it’s relevant and useful to map out some of the battle lines in order to discern the path ahead for Bitcoin.
With that being said, I’ll state what I think is exceedingly obvious. Gary Gensler is coming for crypto, and people/projects are going to get sued. As I said last week, I do not personally believe this is a matter of if enforcement actions, subpoenas, investigations, etc. are coming. I believe it is a matter of when and who will be affected by these proceedings. On Anthony Pompliano’s Better Business Show last week, Brian Armstrong (Coinbase’s CEO) himself acknowledged that he thinks the next year is going to be a “series of enforcement actions,” discussions behind closed doors, creation of legal precedents, etc. In other words, the long-anticipated battle with regulators is here and it appears it will not be delayed any longer.
Why is Gensler so keen to go after crypto? Put very simply, he believes crypto, writ large, is primarily a bunch of unregistered securities being offered by insufficiently regulated centralized exchanges or, worse, being traded on entirely unregulated decentralized exchanges, all of which present great risk to investors.
Now, what do I think this means for crypto and, specifically Bitcoin? As we’ve discussed somewhat voluminously in previous issues of this newsletter, the SEC is concerned about what it sees as unregistered securities being offered in the crypto space. The primary issue at play here is what exactly falls under the definition of a security. The consequences of being legally deemed a security are that you have to register with the SEC or fall under an exemption from registration. Offering unregistered securities that don’t fall within an exemption is illegal. So those are the stakes.
The definition of a “security” resides statutorily in the Securities Act. The definition covers things that are obviously securities like stocks, bonds, notes, etc. But it also includes something called an “investment contract.” The definition of an “investment contract” that the SEC currently uses is taken from a now-famous 1946 Supreme Court case and is called the Howey Test. I’ve explained the Howey Test in-depth in some previous issues, so I don’t want to belabor it here. But, suffice it to say, what is currently happening is Gary Gensler is speaking publicly on an almost weekly basis about how he thinks most cryptocurrencies are investment contracts under the Howey Test.
Personally, I think it’s worth wondering if the question of whether or not something is a security under Howey is the wrong or, more specifically, just a short-sighted question to ask. The Howey Test is from 1946. The SEC now wants to wield this antique framework to neuter a cutting-edge, potentially transformative technology. Perhaps the more forward-looking, more progressive, and more productive question is whether we should have new laws. I’ve seen some folks refer to Howey and the 90-year-old securities laws it interprets as “fiat law,” the implication being that we need a new set of laws, “crypto laws,” we might call them, to more thoughtfully regulate this new industry.
However, as long as the SEC is planning to loose Howey on the crypto ecosystem like a bull in the proverbial china shop, I think we’re in for a potentially rocky ride. Bitcoin is not encompassed by Howey because of its decentralized inception and its leaderless, decentralized network. Moreover, even Gensler has expressed admiration for Bitcoin, specifically. Now, that doesn’t mean he won’t regulate exchanges on which bitcoin is traded, bitcoin derivative products, or bitcoin lending products, but I do not anticipate or expect bitcoin itself to be subjected to the same Howey inquisition that I suspect is coming for many of the other cryptocurrencies, many of which have highly centralized origins and/or governance structures.
It will be worth monitoring how institutional investors, particularly venture capital investors, view the downside regulatory risk. There has been a deluge of VC money poured into the space over the last year. Real Vision’s Ash Bennington, speaking from the SALT Conference two weeks ago, reported that sentiment among the institutional investors present remained positive and focused on the long term.
I understand this all sounds a bit ominous, but I think we need to realize that confrontation with regulators was always an inevitability. It is essential for growing mainstream adoption, which is impossible without some kind of regulatory clarity and certainty. Regulation, remember, is not categorically negative. Smart, thoughtful regulation that simultaneously fosters innovation and growth, while still protecting investors, is a good thing. Increasingly, however, it appears regulators are growing less interested in good-faith engagement and more interested in exerting power (as exemplified by serving subpoenas at crypto events and bullying Coinbase into dropping Lend). It seems clear that the battles to come will undoubtedly get messy, but they are battles that need to be fought. We need legal precedents and we could use some new laws.
So, in sum, I think the SEC is going to continue to come after crypto, particularly stablecoins and DeFi. I expect to see enforcement actions, investigations, and subpoenas. I think all of this will likely fundamentally change the way popular centralized exchanges operate. De-listings of certain tokens seem inevitable. Gensler is now publicly using Senator Warren’s “cop on the beat” language to declare the SEC the cop on the beat for crypto, and I think he intends to act in accordance with that sentiment. If this is, indeed, how the next year or so plays out, there will be likely be some price gyrations and some extended market volatility as the markets digest it all. Remember that crypto is a truly free market, so volatility is allowed to do its thing. There are no bailouts, no circuit breakers, and no stimulus checks.
Long-term perspective and vision are required to weather short-term chaos.
What can we do, as members of the Bitcoin community, to create a better environment for Bitcoin and crypto? I believe it’s incumbent upon anyone who believes in Bitcoin’s value proposition to educate him/herself and to share that education with others. This is why I started this newsletter. We cannot expect politicians and gatekeepers of the status quo to do the work and embrace a technology that threatens the very system from which they derive so many disproportionate benefits. Education fosters interest, which grows adoption. Adoption, as it increases, means a constituency of voters who have a stake in Bitcoin. This will lead to more politicians under the age of 75, better laws, and more thoughtful regulators.
So we have to be agents for the world we want to see and stewards of the technology that can take us there.
China Cracks Down Harder On Crypto
Last Friday, China intensified its anti-crypto stance. Per CoinDesk, “the central bank declared all virtual currency-related activities illegal, including derivative transactions and overseas virtual currency exchanges serving Chinese residents.” Clearly this represents the most serious tone taken to date by the CCP. We should remember that China banned trading between crypto and fiat in 2017 and banished some exchanges in 2017. They also banned bitcoin mining in May/June of this year, which essentially just led to lots of Chinese miners moving elsewhere. There was a temporary drop in hash rate, which has since recovered. And the network has continued to do produce new blocks without interruption.
So yes, this newest mandate is an escalation, and its net is wider, but the move itself is not wholly unexpected. Bitcoin is not tied to one state, one country, or one piece of ground. No one government can kill it, as demonstrated by the difficulty China has experienced in fully extirpating it over the last several years.
The big question is whether the U.S. will do its best China impression, or whether it will instead opt to foster innovation and economic growth. Jeremy Allaire, CEO of Circle, put it well:
Senator Pat Toomey of Pennsylvania pointed out the opportunity that China’s stance presents to the United States:
Obviously it’s much easier for a country like China, a country over which the CCP exercises complete control, to marshal the coordinated power of various agencies to crack down on crypto than it is for the U.S., where the political consequences of cracking down on a popular technology are potentially quite significant. Members of Congress got a firsthand look at how many American citizens feel about crypto when they snuck a last-minute tax provision into the infrastructure bill six weeks ago. The crypto community responded vociferously and en masse. Moreover, the experience has galvanized community organization around political lobbying and coordinated education initiatives. It has also galvanized a number of folks to openly discuss running for office. So the political feasibility of the U.S. taking China-like action against crypto is a major question mark.
Furthermore, let’s not forget the incredible amount of institutional money in the space and the number of investment firms and banks involved. These folks are the donor class in America, meaning they donate to political candidates. And the donor class is in crypto.
In sum, China is able to take swift and draconian action without meaningful pushback because of how the country is politically organized. The political process is different in the U.S., as are the overarching political and cultural values the U.S. purports to hold (i.e. a belief in capitalism, competition, and innovation).
For the new and new-ish
Are there rules in Bitcoin?
Recall that in previous issues we discussed the concept of nodes. In the Bitcoin network, nodes, which can be run by anyone, are what validate new blocks mined by bitcoin miners. Nodes communicate with each other, verify transactions, and enforce the rules.
Bitcoin is a protocol. A protocol is just a set of rules that computers follow. For example, the internet runs on the TCP/IP protocol. In the Bitcoin network, nodes run software that follows the Bitcoin protocol, meaning the Bitcoin set of rules. Both the protocol and Bitcoin software are open-source, meaning anyone can look at and read them. The most common software implementation of the Bitcoin protocol is called Bitcoin Core.
Technically, one is free to run whatever software one wants to run, provided it speaks the Bitcoin protocol. This also means you can try to change the software in such a way that breaks the rules of Bitcoin being enforced by all other nodes. For example, a miner running a node could try to run software that increased the block reward. The result, however, would be that it’s rejected by the other nodes on the network.
Each member of the Bitcoin network chooses what software to run. As discussed above, the most common software is Bitcoin Core. If, however, that software got corrupted or changed in a negative way, users would just implement different software. Because Bitcoin relies on consensus, everyone is incentivized to operate under the same rules. Nodes agree on and enforce these rules.
Changing the rules, as we will discuss in the next issue, is enormously difficult because the distributed network of nodes throughout the world that make up the Bitcoin network must agree to run software reflecting and implementing any changes.
Bonus/Miscellaneous
Putting the China news into perspective, courtesy of Bitcoin Baddie on Instagram:
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 next week,
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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