Hello readers, David Z. Morris here, pleased to be filling in for Michael this Friday.
This week saw the unveiling of the Biden administration’s promised executive order on cryptocurrency regulation. By most accounts, the order appears to be cautious and balanced, largely a call for more research and debate toward a coordinated crypto strategy across U.S. agencies and regulators.
There are a lot of unanswered questions about what a more centralized approach would mean, given that U.S. financial regulators are engaged in a constant internecine cold war for jurisdictional power. But a simple executive demand for clarity feels welcome after nearly a decade during which regulators targeted individual crypto entities for enforcement, without doing much to update or clarify the rules of the road for a radically new technology.
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The order also, optimistically, arrives at a moment when the public perception of crypto is primed for a major shift. Russian President Vladimir Putin’s barbaric invasion of Ukraine has showcased in quite clear terms the positive utility of open finance, in the form of close to $100 million in cryptocurrency donated to Ukrainian defense from around the world. Those tokens arrived much faster than some aid from allied governments and went directly to supplies like bulletproof vests and rations for Ukrainian fighters.
Meanwhile, there has been broad consensus among experts that blockchain networks don’t provide a meaningful way for Putin’s Russia to evade economic sanctions intended to punish Russia for the invasion. That’s partly for reasons of scale – even a midsized economy like Russia’s is too big to entirely run on crypto today – but mostly because of crypto’s inherent traceability.
These real-world events undermine the dark narrative that has shadowed cryptocurrency over the years and that seems to inform many regulators now. Early association with darknet markets like Silk Road, and spectacular instances like its use by North Korean ransomware attackers, created an early default consensus that crypto is useful primarily for bad actors. Some political theorists were also very quick to extrapolate from the libertarian values of its cypherpunk founders to argue that cryptocurrency was inherently antisocial.
But the real impacts of crypto in Ukraine contradict that story. The preponderance of benefits, at least in this moment, seems to be accruing to the good guys and helping bind together a global pro-democracy community in ways that would be impossible if it didn’t exist.
The crypto-skeptic fallacy
Unfortunately, as the development of the Biden crypto framework ramps up, some high-profile U.S. officials still do not seem to be paying attention to this real-world complexity. Instead, they are hanging on ferociously to early interpretations of cryptocurrency as inherently criminal, illicit or anti-democratic. Two notable examples of that are Sen. Elizabeth Warren (D-Mass.) and, at least in one strange bit of recent testimony, Federal Reserve Chairman Jerome Powell.
Warren is a longtime and almost mechanistically predictable opponent of cryptocurrency. Now, in the teeth of Russian aggression and a humanitarian crisis on the ground, Warren’s focus has been proposed legislation to prevent crypto-based sanctions evasion – despite assurances from within Treasury itself that further rules aren’t necessary.
A similar disconnect from reality was visible in recent comments by Powell. Ronald Pol, a banking researcher and reformer, recently highlighted several remarks where Powell called for tighter crypto regulation while acknowledging a lack of evidence of the abuses he wanted to stop.
“Ultimately what's needed is [regulations] to prevent… cryptocurrencies from serving as a vehicle for terrorist finance and just general criminal behavior – tax avoidance and the like,” Powell said during March 2 testimony before the House Financial Services Committee. He also admitted, however, that “I don't really know the extent to which it's happening, although you do hear that and read it in the paper."
Pol described the thrust of the hearing as “unelected elites demand[ing] laws, uncritically accepted by lawmakers, based on mystical incantations and unfounded beliefs.”
Much about this mystical essentialism can be laid at the feet of realpolitik – that is, people saying things they don’t mean in service of other goals. A mandarin like Jerome Powell, for instance, must be thinking of the threat to dollar supremacy posed by any fragmentation of today’s monolithic payments and banking system. That poses a huge risk to U.S. global power in the long term. If hand-waving about theoretical Russian sanctions evasion helps fight off the broader threat, Powell will wave those hands.
Elizabeth Warren’s hostility to crypto, meanwhile, is tied to her long-standing concerns about consumer fraud, which also led her to build the Consumer Financial Protection Bureau (CFPB) after the 2008 financial crisis. Investing fraud and hacking thefts are seemingly the most widespread kinds of crime that involve crypto, and so there’s certainly some meat on that bone.
But I also have a pet theory that hinges on Warren’s midlife conversion from a “diehard conservative” Republican into a left-leaning Democrat starting in the mid-1990s (when Warren was already nearly 50). Her hatred of crypto is performed with the zeal of the convert and affirms her belonging in her adopted tribe, since Democrats are much more likely to support crypto regulation than Republicans. And those are not fact-based positions themselves – one recent literacy survey found that less than 4% of Americans actually have a handle on how crypto works. That would seem a reasonable prerequisite for having an opinion on its social value.
Tribal belonging, realpolitik misdirection and “mystical incantations” are hardly the basis for sound policymaking. Powell and Warren essentially argue that they have crypto’s number, without the need for actual numbers. Despite mounting evidence that crypto is inferior to dollar bills when it comes to even the pettiest of crimes, Warren in particular seems to be convinced that crypto is For Bad Things, period. It is a corrupting force, practically a demon written in code, not dissimilar to the way Renaissance religious authorities regarded “the devil’s chord,” a discordant tritone that was occasionally banned in religious music.
Jerome Powell, meet Jean-Paul
Obviously, a guitar chord can’t actually summon the devil, just as Bitcoin wasn’t built for sanctions evasion. In fact, another group of more technical crypto critics often deride blockchain technology as “a solution in search of a problem” – and you know what, that’s actually correct. More on that shortly.
At the very least, it’s more correct than a quasi-religious certainty that crypto is first and foremost a tool of criminals due for a huge crackdown, despite evidence that legitimate use is growing six times faster than crypto-crime. Such stances reflect a pattern of thought that is not just medieval, but literally ancient – and one whose overthrow has enabled all the social and economic progress of the modern age.
It is convenient, if inevitably reductive, to describe the arc from superstition to reason in terms of two individual thinkers. On the one hand, we have Plato, whose Theory of Forms argued that every actually existing object in the world was just a pale echo of some pure Type that existed far away, in the unseen heavens. That idealism broadly mirrored the prehistoric transition from animistic or shamanistic religions to theistic belief systems like Christianity and Islam, which installed a “higher truth” invisible to lived experience.
It took two millennia for a contrary set of ideas to regain widespread social currency. In opposition to Plato’s belief that the Forms were the highest reality, 20th-century French thinker Jean-Paul Sartre argued that “existence precedes essence.” The gist of the aphorism is that a thing in the world does not have a fundamental nature and that its significance is instead emergent, or discovered through actual events and real-world interactions.
Sartre’s main concern was human nature, which he argued was infinitely flexible, rather than being defined by God or any other outside force. His views were key to the broader movement known as Existentialism. Sartre was borrowing from predecessor Ludwig Wittgenstein, and more broadly from the sweeping revolution of the Enlightenment. Though his relationship with rationality was complicated, Sartre was fundamentally indebted to the Enlightenment’s insistence on evidence and experience, rather than on dogma.
Bitcoin and crypto deserve to be analyzed through a similar lens, though that’s not easy. Bitcoin did, after all, emerge out of a highly politicized “cypherpunk” community, many driven by a strain of digital libertarianism.
But just like a great novel or symphony, the meaning of a revolutionary system isn’t defined in advance by its creators. In fact, the Bitcoin white paper focuses on a strictly limited and purely technical goal that seems universally valuable on its face: enabling digital payments without a third-party intermediary. In the decade since “digital cash” became a reality, the crypto community has been trying to anticipate what that radical innovation actually means.
The emergent nature of crypto is very much baked into its design. A basic proof-of-work token like bitcoin is intended from the start to change over time, both on a daily basis as incentives change the demand for miners and on a longer time scale as a social open-source development process updates the code. That basic template can also be forked or re-engineered for entirely new blockchains and consensus mechanisms.
Much of the collective project of finding ways to leverage blockchain and crypto has been theoretical, but a great deal has been practical – most crypto projects or startups have been effectively laboratories for small-scale testing of ideas that might become bigger in the future. We’re already seeing real uptake of some of the more truly radical use cases, such as non-fungible tokens (NFTs) and decentralized autonomous organizations (DAOs), which have incredible potential to transform realms like art and civil society.
Some of those applications – particularly DAOs – could easily wind up fed into the wood chipper of hasty regulation. It’s a common refrain that overregulation quashes innovation, but it’s acutely true in this case. Crypto will continue to change, and crafting rules based on even accurate beliefs about its current state would be a mistake.
Crafting them based on an idealized, Platonic vision of what a financial system “should” be, and who should control it, would be a disaster.
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