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?
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