Monday, December 18, 2017

The Blockchain and National Power

Bitcoin has jumped in price from $600 to $13,000 (at time of writing) and shows no sign of slowing down. MI estimates that Bitcoin (฿) and Ether, a sister cryprocurrency will continue their rise for the foreseeable future. its rise will not be linear as those who don’t understand it jump in and out, but its long-term trendlinsa will remain positive unless and until either the infrastructure can’t keep up or an as yet unknown flaw in the blockchain is discovered. corrections wil happen and eventually a floor will be established, but there is still a long way to go before the world arrives at that point. This assessment will explain how cryptocurrencies and more importantly, the blockchain technology underpinning them, have the potential to upend global finance and thus the architecture of economic and social relations.
The blockchain is a global open ledger. every single transaction is resolved across the entire distribution system simultaneously. Each transaction has a digital fingerprint and time/date stamp. The fingerprint is independantly verified per transaction by third party ‘accountants’. As more transactions occur, the fingerprint grows ao that every single transaction is recorded through time and space against the item being transacted. The item can be anything. The system started with ฿ but the item being tracked could be physical (like a car or a house deed) or intangible (like a cyber currency).
Tthis admittedly simple sounding system will revolutionalize the global order. First, it removes the middleman in any transaction. In currency, a bank is a middleman, so too are governments. Banks facilitate and reconcile the trade of $1 from Jane to Mary. Governments provide a legal frasmework wihtin which Jane and Mary conduct their transaction, and in most cases take a slice (taxes). The blockchain connects Jane to Mary directly, their transaction is not conducted by a bank or approved by a government. Their transaction is between them, the specifics are not visible to anyone but Jane and Mary. The existance of the transaction is verified not by Jane or Mary but by thrid partiesm the ‘accountants’. The verification takes place across all the platforms in the system at the same time. It is not mediated by a central pointm like a bank.
Guess who is worried about the blockchain? That’s right! Banks and governments! Global exchange of value, of any value, has shifted from a hierarchy beset with choke points to a distributed network. This changes everything! Banks and governments can no longer control finance or any other form of exchange in human relations. In fact, the blockchain renders banks irrelevant. We no longer need them to verify a transaction has taken place, nor do er need them to store the thing of value being traded or exchanged.  When a transaction takes place in the blockchain, everyone in the system is informed of the transaction by the change in the ledger, which is available to all, not held by a bank or a government.
What is the incentive for 3rd party ‘accountants’ to do the verification of a transaction? Simple, they are paid for that work. In cryptocurrency terms, these accountants are called ‘miners’ which MI thinks is a misnomer. They are not really digging ฿ out of the ground, they are in fact anonymously verifying,  cross referencing, and updating the ledger in exchange for a fracitonal payment drawn from each transaction. ฿ ‘farms’ or ‘mines’ can be built by anyone, and consist of special computer lashed up together to maximise the processing power required to verify transactions. The more machines, the faster they run, the more payment for providing this service. Note this service can be preovided by anyone, not approved actors in the system – which is what banks are in global finance.The system of verification is not just open to anyone with the right equipment (basically a souped up PC), it is also a global distributed network, and more importantly, it is self-regulating.
Imagine a world without banks to process transactions and store value? How wil governments surveil, regulate, and tax people and businesses in their territories and beyond? Blockchain eliminates the need for offshore banking and all that comes with it – shell company structures, lawyers and accountants, both in the home jurisdiction and in the offshore jurisdiction. Once tax havens twig to the fact that a ฿ wallet is a personalized offshore tax haven that you can carry in your pocket, and that requires no administration, a lot of island paradises will have to rely on tourism alone.
The ‘Panama Papers’ and the more recent ‘Paradise Papers’ revealled the tax cheats of the super rich. Perhaps ‘tax hack’ is a better term because much of offshore banking is legal. When faced with a $14 billion tax bill in Ireland, Apple simply moved its operations to Jersey, an island tax haven between Ireland and the UK. The 2017 tax reform debate was marketed at least in part as a way to encourage corporations to onshore their cash back into the US (although that does not guarantee they will automatically invest the trillions of dollars languishing offshore. They could equally just languish in US holdings).   Blockchain and cryptocurriencies remove the requirement for all the cat and mouse with the IRS.
A key feature of ฿ and the hundreds of other cryptocurrencies springing up everywhere is they rest in a digital wallet. The identity behind that wallet is anonymous. So too is its location. As the name should imply, a cryptocurrency is a digital code that represents a certain value. That’s it. It is either in a ballet or it is not. No one knows who owns the wallet r the jurisdiction in which it exists at any point in time. A wallet is highly mobile. It can be on a cell phone, laptop, thumb drive, or in cyberspace. Lose the chip where the data is stored and you lose your millions. That does not mean someine else will get access to it – they wills till ened the password. [Thus the importance of password gatekeepers that create uncrackable passwords. Their weak spot is the password to access the gatekeeper. Still, nothing is perfect, and the best way in remains human engineering (social manipulation)].
The US long ago got rid of the $1000 bill and the EI recently eliminated the 500 (euro) note to make it harder for criminals to move bulk cash. ฿ makes it possible to move unlimited amounts on a thumb drive – or in cyberspace. This completely bypasses state controls on borders and in global finance – where banks communicate via the SWIFT system and via both the Reserve bank in the countries party to a transaction but often also a major international bank which acts as a commercial clearing house. All of that is bypassed by ฿. Stopped at the border with more than $10,000 in cash? That’s a federal crime. With a ฿ wallet you can walk past that nice CBP officer wiht $10M on your flash drive attached to your key fob.
So guess who is flooding the zone of cryptocurrencies (CC)? Banks! Morgan Stanley, Chase, and a who’s who of American and international banking are all getting in on the act. They know better than anyone else that if they don’t, they cease to have a reason to exist. Talk about panic! THis is one of the motivations behind all the new cryptocurrencies flooding the market. Each is looking to enhance the drawbacks of ฿ but much more importantly, to insert some form of control into this new financial space. All of this misses the point that anonymity and privacy are the most prized feature of CC. This also partly refelects the fact that a lot of people are still struggling with comprehending  what the blockchain represents and how influential it will turn out to be. Is it a stock? Is it a currency? Is it an inventory control system? Is it a clearing house for property transactions? The answer is yes. ots confusing to people because blockchaings revolutionize all of these vital elements of economic interaction in the US and around the world.
Of course, none of this matters if businesses do not accept payment in ฿ (etc). A key reason why the value of ฿ shot through the roof in 2017 was its adoption by major movers in retail. Its adoption by second tier corporations was a useful indicator, but MI along with the rest of the world, or so it seems, was waiting to see if the silverbacks of global retail would permit payments in ฿ on their platforms. As soon as Amazon and Walmart moved, ฿ would take off. They both started accepting ฿ in their websites in early 2017 and ฿ value has been surging ever since.
its seemingly astronomic value will keep surging as the rest if the retail and banking world bandwagons. Hedge funds are now rushing into the zone. The general public, wondering what this strange button is on their Amazon pages, or hearing about massive price spikes, are treating ฿ like a stock and also rushing in – why use it to buy a tv when its price might double by next week. When it first started out an early adopter decided to convince his local pizza delivery company to accept ฿10,000 for a pepperoni pie. He advertised the transaction on social media and the value of ฿ doubled to a few cents. At the time of writing, ฿ was $13,000. That was some pizza! J
฿ has been volatile. Savvy investors know, where volatility exists, so does risk, but also incredible profit. Aside from the herd rushing in and out on the occasional scare, the big boys keep coming in – hard. That’s the key metric. They are not taking on that much risk as yet, but nor has ฿ reached anything like a plateau. The most serious risks involve a failure of the blockchain software(there have been legitimate scares and corrections in this domain and its governance remains opaque, by design, but possibly not sustainable in the long term), or a failure in supporting infrastructure.
Coinbase is instructive in this regard. It is currently one of the top CC exchanges in the US at the time of writing. The USG has been trying to force Coinbase to give up the identities of its customers. It got ugly pretty quickly. So far Coinbase has refused to hand over all its files but but has agreed to disclose its top 3% of CC holders.  What the USG is missing in its overzealous pursuit  of ฿ traders is they don’t have to use US exchanges. They will force buyers and sellers of CC off shore where they will be that much harder to surveil and control. For an Administration that is supposed to be about eliminating regulations and being pro-small business, this attack on Coinbase seems to be poorly thought out and slapdash  in implementation. It will likely be futile. The smell of panic behind that action may indicate that Treasury does not have much faith in its joint partnerships with other CC purveyors who are marketing CCs wiht tracking features (which of course defeats the point of CCs). Still, there is a long way to go and this is just a first shot across the bow by a worried government. They should be worried, they have a lot to lose (see below).
  MI’s guess is that most ‘mom and pop’ users of CCs will see them as an investment not a currency and treat them accordingly. They will buy them via their 401ks in their own names etc. Those that are offshoring today will be CCing tomorrow and they will be very hard to control as things currently stand. The USG needs to sit back and take a long perspective on this challenge and be smart about it. Panic will only hasten the thing they fear the most.
What is this fear? The blockchain blinds the Leviathan. The domestic and international financial power of the United States will be profoundly impacted by the blockchain. Without the ability to observe financial transactions, the US loses control. it’s that simple. This will have prosaic and profound implications. Financial intelligence is a huge industry but it is also a crucial element of national intellegence that it little understood outside if financial circles. Iran came to the negotiation table because of targeted sanctions (and unlike the DPRKm its economy was more advanced and thus vulnerable to economic pressure).  America’s power to manipulate global finances has dramatically escalated in the wake of 9/11 where Congress weaponized finance as a counter terrorism tool.Such weapons can manipulate a whole economy or be applied just against a dictator and his cronies – which in turn may promot that dictator to try and meddle in a US election as payback... just sayin’.
But the dangers to the USG are more profound than its ability to directly control the system of clobal finance and trade. It should fear its loss of indict control and indeed influence on the system. In other words, the primacy of the US dollar ($) as the global reserve currency. During the 2008 crisis, there was talk of the Euro superceeding the $ as capital flight to stability assessed Europe as the best bet. At that point , so the reasoning went, Brussels and not DC would call the shots, creditors and debtors would flee into the Euro and the valus of the US$ would plummet as teh mask protecting massive US debt, trade imbalances and all the rest, was ripped away by the force if the crisis. When the world depended on the US$ all of these pressures could be ignored, take away that dependance and things would change overnight.
There is an intersting anecdote in David E. Sanger’s Confront and Conceal that discusses a Chinese delegation that came to the US during the crisis. They had no interest in discussing macro or micro economic policies and plans, all they asked about was how was the US$ going to be stabilized so the debt they were owed would not simply disappear. America’s banker had come to town and they wanted to be sure they would be paid back. Indeed, it was they who floated the threat to shift to the Euro but that was always more rhetorical than real given the crippling effect it would have had on their debtor’s ability to pay them back.
Should the ฿ supplant the US$ and the global reserve currency, the US would lose its direct and indirect control over global finance overnight. A generation of irresponsible governance that blythely allowed cheap gimmick tax cuts in the face of two endless wars, and at the expense of much needed investments in infrastructure, people and services upon which a modern economy depend, has run up an unimaginable tab that will one day have to be paid. Such a day of reckoning would dwarf the 2008 crash because the entire system would implode, not just one important sector (housing finance).
If America sneezes and the world catches a cold, then it follows that if America has a massive brain hemmorhage, the world as we know it could end. The one possibility to avert total disaster may be in the seeds of its potential destruction. The blockchain. If it is introducedm adoptedm and settled into dominance through careful planning and implementation, there may be ways for the economists to avoid catastrophe. Thankfully, Washington is well known for long range, well thought out, deliberate planning. Where other countries think in 24 hour news cycles or 2 year election cycles, Washington thinks in terms of generations and is willing to sacrifice its acute need for immediate gratification in order ot position itself for gain in the medium to long term. (That’s MI sarcasm, dear reader.)

In every great crisis, a leader for the times seems to emerge. Who will be the blockchain Lincoln?

No comments:

Post a Comment

The Real Coup Plot Is Trump’s

MI has not posted other content before. However, the essay linked below explains what MI refers to as 'American Self-Propagandizing'...