Good Morning Everyone,
US Fed Chair, Jerome Powell testified to congress yesterday under the title of “Monetary Policy and The State Of The Economy”. In the hearing he made some very interesting comments specific to “cryptocurrency” that i believe are worth a mention.
I’m paraphrasing here- but he was asked if Russia “could” use cryptocurrencies to “get around” sanctions.
He responded by saying:
“I don’t have any private information on the extent to which that is happening [Russia is using cryptocurrencies to evade sanctions], but that is something you read about and hear about and I just think [that] it underscores the need for congressional action on digital finance including cryptocurrencies.
We have this burgeoning industry which has many many parts to it, and there isn’t in place the kind of regulatory framework that needs to be there. It was probably no different with rail roads, telephones or the internet and ultimately whats needed is a framework and in particular ways to prevent these un-backed cryptocurrencies from serving as a vehicle for terrorist finance and general criminal behaviour - tax avoidance and the like - So i guess that’s what i would say there, I don’t know the extent to which it’s happening although you do hear that and read about it in the paper.”
I find many things about his comments both hilarious and also thought provoking. The first is that the most senior person in the Federal Reserve, of the country managing the worlds reserve currency (for now) is basing his statement off of rhetoric that you “hear about and read in the paper”. You honestly just cannot make this stuff up at this point. He has no data or any kind of evidence of anything, but despite the fact believes they require congressional action to essentially regulate the industry. If you are unclear of whether or not your roof has a leak and there is no evidence like a body of water on the floor of your house, you don’t just automatically decide we should fix the leak. You determine if infact there are any which is normally fairly obvious.
Second is his clear view of the need for a “framework” for the crypto industry. The third point and most interesting to me is around the ability to censor entities financially. This is a deeply philosophical point. It highlights to me how comfortable many people have gotten operating within a system that has these capabilities and the desire exists to maintain this capability. That is to maintain a network that is not neutral. Where some nodes in a network have power over another. Whether it be to surveil transactions, freeze assets or completely remove access from the system.
This is where what bitcoin enables is just so transformational. It’s a complete system level change and it’s interesting to think about because i think a lot of people are going to feel this way, and to some extent very understandably.
I would expect for most people the idea of having a system that can censor and exclude people is with good intentions. An example would be in the case where someone or an entity wishes to inflict harm - which is obvious and completely understandable and reasonable.
We have existed within a system of control like this for our entire lives, so it’s natural that most would be accepting of this type of a system.
What I think is under appreciated about designing or programming a system that is not neutral, are the higher order effects that are created. Often because we are judging the output of the system over a short time horizon, we fail to realise that this lack of neutrality often leads to the failure of the system.
When it comes to money. This is absolutely and verifiably the case. For evidence of this, just look at what is happening around the world in respect to the US dollar. Russia, China, likely India, and others are looking for alternate ways to transact, due to the weaponization of the system. The censorship and the fact that the system does not remain neutral, is this weaponization.
Now it’s tricky, because we don’t want to enable evil people to do evil things. I think most of us would completely agree that we do not want that. The thing is that the measures taken do not stop evil people. They may stop some, but they do not fundamentally solve the issues. And they do so at the expense of every single participant in the network and the viability of the network itself. Because in order to do so, every other participant is essentially stripped of their rights, like their privacy, to enable the non-neutral capabilities and this fundamentally weakens the network and from a monetary point of view is the beginning of the end.
The slippery slope never stops there due to the incentives of a centralized network, and this is especially true when we’re talking about a centralized monetary network. Individuals closest toward the centre are always going to, over time, use these powers for nefarious purposes and for their own self interest. It’s just the unfortunate reality of human nature. This does not mean everyone will. But there will always be someone or a group of people whose internal value system will be corrupted by the power of the incentives. Despite what we would like to believe - this has been well documented time and time again throughout history.
Bitcoin fundamentally changes this, and in order to be a global monetary layer for anyone on the planet this property of neutrality is absolutely fundamental. It is perhaps the most fundamental property of bitcoin.
It does however trigger curiosity in me and to think about how this changes the incentives, compared with the current system that we’re accustomed to, which is a system built upon central banking. If we think specific to the situation with Russia - how does it impact another parties response like the US. The US want to be able to exercise their superior power against Putin and use it as a stick to retaliate and essentially harm him, as they are opposed to his actions. By removing this power would it change the nature of conflict? Would it mean we’re likely to get to a hot war faster than we would have otherwise without the option to resolve through economic means? Does it mean there would be more kinetic conflicts, because the option to resolve the dispute via economic means is negated? Or does it mean countries like the US would stop trying to impose their will on others because it’s simply to expensive to do so? Would it mean the likelyhood of Russia invading in the first place would be removed?
Saifidean does discuss this in ‘The Bitcoin Standard’ and makes the case that central banking and more specifically a lack of sound money have a strong relationship to war characterised by three fundamental reasons.
Here is a brief except from the book, explaining the three reasons:
“As discussed in Chapter 4 on the history of money, it was no coincidence that the era of central bank‐controlled money was inaugurated with the first world war in human history. There are three fundamental reasons that drive the relationship between unsound money and war.
First, unsound money is itself a barrier to trade between countries, because it distorts value between the countries and makes trade flows a political issue, creating animosity and enmity between governments and populations. Second, government having access to a printing press allows it to continue fighting until it completely destroys the value of its currency, and not just until it runs out of money.
With sound money, the government's war effort was limited by the taxes it could collect. With unsound money, it is restrained by how much money it can create before the currency is destroyed, making it able to appropriate wealth far more easily. Third, individuals dealing with sound money develop a lower time preference, allowing them to think more of cooperation rather than conflict, as discussed in Chapter 5.”
Personally i need to let these topics bake a little longer in my subconscious as it’s still not entirely clear to me that sound money alone solves all the problems, and removes the likelihood of humans essentially defaulting to violence to get their way but I acknowledge there is a strong case to be made and it certainly improves the dynamic in a very fundamental way, but i suspect the permissionless protocol of power projection amongst humans is something that never ceases to be an absolutely necessary capability.
The other side to this is the higher order effects of having a sound monetary standard amongst humans globally and the level of innovation this can usher in, and considering the ways in which that can fundamentally alter society for the better. This is something, as far as our academic version of history anyway, would be novel and it seems clear to me that at the absolute minimum it would be an improvement orders of magnitude from where we are currently placed.
I will say that do i have a deep belief that we have the capability to operate in a far more sophisticated way, specifically how we are with one another, and arrive at the obvious conclusion that we’re all on team human, and establish a way of being guided by the highest of human values centered around win-win dynamics and cooperation.
Lots to think about.
No doubt many people may disagree with me and like the fact that these economic sanctions can be placed on Russia. While i obviously do not endorse the invasion into Ukraine, i do not believe financial censorship and more specifically a system that enables it, is the solution to the bigger picture and I believe that we have to work hard to upgrade the way in which we operate with one another and adopt a system that best aligns our collective incentives.
It would seem likely that the US government (and likely others) will be the first to object to the neutrality of the protocol and will struggle to come to terms initially with the fact that there is an entirely different system from what they have become accustomed.
It’s anyones guess what actions they will take as they bump up against the properties of the worlds most sophisticated monetary network. The best thing any government can do in my opinion is to demonstrate a level of psychological flexibility and acknowledge the new information, and change their minds. Owning and controlling the network is the way of the legacy system. Opting in to a truly open-source, decentralized monetary system that no one can own or control, and is “backed” by electrical energy rather than kinetic energy is the way forward.
Hope you all have a great day. I’ll talk to you tomorrow.
AK
