The Breakdown - Crypto's Critics Seem to Be Getting Nervous

Episode Date: August 18, 2024

NLW notes that crypto critics have increased the rate at which their published op-eds -- perhaps a sign of the industry's rapid mainstreaming? Featuring a reading and discussion of: https://www.nytimes.com/2024/08/01/opinion/crypto-trump.html https://www.nytimes.com/2024/08/09/opinion/crypto-2024-election.html https://bettermarkets.org/newsroom/ft-op-ed-kamala-harris-should-not-cave-to-overtures-from-the-crypto-crowd/ Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Sunday, August 18th, and that means it's time for Longreed Sunday. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. All right, friends. Well, for today, long read, I am going to absolutely infuriate you. I am going to read, or rather I'm going to have

AI read, because my brain will explode if I do it myself, three recent essays. All of these are from the last couple of weeks. The first is from Paul Krugman and is called How 2024 became a Crypto Election. Like I said, these are going to infuriate you, but they will give you a picture into how the opponents of this industry are trying to position and frame things, and we're going to talk about why this may be a better sign than you think. So again, we're going to start with Paul Krugman's How 2024 became a Crypto Election from August 1st of this year. I didn't anticipate the political twists and turns of the past few weeks, but then, who did?

One thing I do blame myself for not seeing coming, however, is the extent to which this has become a crypto election. Six years ago, I argued that Bitcoin and other cryptocurrencies served no useful purpose, that their market value rested on nothing but techno-babel and libertarian dirp. I stand by that judgment, which has actually been reinforced by the passage of time, But I didn't foresee how big a deal crypto would nonetheless become, not because it would fulfill its promise of replacing conventional money, which it hasn't and never will, but because it has become a powerful force that is, among other things, warping our politics.

What is crypto? Donald Trump recently said, most people have no idea what the hell it is. Indeed, even now, it's hard to explain exactly what Bitcoin and other crypto assets really are. But maybe this will help. Who guarantees that the money in my bank account belongs to me? Why can't the bank tell me, sorry, we use that money to pay other people? The answer is that doing so would be illegal. What Bitcoin and its emulators try to do is sidestep the need for a legal framework

with a technological fix that doesn't depend on bank's centralized record keeping. You own a Bitcoin if you have access to a code that effectively turns a seemingly meaningless string of ones and zeros into a message that says, in effect, I am a Bitcoin, in much the same way that numerical keys can unlock encrypted communications. These keys are generated by mining. which means using banks of computer servers to solve extremely complex computational problems, a process that is costly and consumes huge amounts of electricity, generating lots of greenhouse gases.

It is, I'm told, a very clever system. But what problem does it solve that can't be handled more easily and cheaply in other ways? I've been in many meetings over the years in which skeptics have asked crypto advocates that question and have never heard a clear answer. And crypto has never shown any signs of supplanting conventional money. In the years since Bitcoin was introduced digital payment systems that skip the hocus pocus like Venmo and Apple Pay have become ubiquitous. But for most of us, crypto assets have few uses other than the purchase of other crypto assets. Notable exceptions are money laundering, extortion, and scams. El Salvador delighted the crypto faithful in 2021 when it made Bitcoin legal tender, but three years later, the cryptocurrency is barely

used in commerce. Still isn't a claim that crypto is basically useless refuted by the fact that crypto assets are now worth more than $2 trillion? No. This wouldn't be the first time, or the hundredth, that fast-talking operators with a good storyline have persuaded investors to pay large sums for ultimately worthless assets. If anything, what's surprising is crypto's durability, the way Bitcoin and its emulators have managed to come back from repeated market crashes and scandals. My guess is that crypto's robustness has a lot to do perversely with its incomprehensibility. It's hard to conclude that someone was misleading you when you never understood what was being said in the first place.

Also, crypto isn't like a company with a well-defined bottom line. Hey, this company is still losing money is easier to understand than, hey, these so-called currencies still aren't being used for everyday transactions. Finally, crypto has been heavily marketed to small investors. Remember those Super Bowl ads? Who normally wouldn't and shouldn't be buying highly speculative assets? But what does this have to do with politics? Support for crypto doesn't break down along purely partisan lines.

Some Democrats still have positive things to say about the technology. But the Biden-Harris administration has in general, advocated regulating crypto assets the same way we regulate other securities like stocks and regulating crypto institutions that are effectively banks the same way we regulate conventional banks. And the crypto industry has reacted in much the same way as fossil fuel industries after Democrats began to take environmental concerns seriously by throwing their support overwhelmingly behind Republicans. They seem to be getting results. As I wrote the other day, the 2024 GOP platform says, Republicans will end Democrats unlawful and un-American crypto crackdown, by which they mean

stop regulators from treating crypto assets and institutions the same way they treat stocks and banks. Trump has promised to turn America into a Bitcoin superpower, which apparently means having the government buy a lot of Bitcoin, all of which raises the disturbing prospect that an industry initially driven, seemingly by libertarian instincts, but which has never delivered on its economic promises, will nonetheless be able to buy itself a huge government bailout. Next up, an essay from August 9th by Eswar Prasad, professor in the Dyson School at Cornell University, called Don't Get Fooled Again by crypto. Crypto appears to be on the verge of mainstream acceptance.

The price of Bitcoin, the original and still most prominent cryptocurrency, hit an all-time high recently, while the Securities and Exchange Commission has loosened rules that make it much easier to invest in crypto. Donald Trump is vowing to make the United States the crypto capital of the planet, and a new Republican-sponsored Senate bill demands that the Fed invest billions in Bitcoin. Even Kamala Harris is reportedly more open than President Biden to crypto's potential. All of this might suggest that the crypto world is finally putting its scandals and unsavory reputation as the playground of crooks and financial charlatans

behind it. Perhaps it will finally sweep aside stodgy banks and put power back in the hands of users, delivering benefits such as easier access to basic financial products and services, more competition, and improved resilience. Or perhaps not, politicians' newfound love of crypto probably has more to do with a cynical bid for young voter support in Silicon Valley cash than a maturing of a financially perilous set of assets. If anything, Crypto Today presents even greater risks to its investors and to our financial institutions than it did before. The fact that the Republican Party is publicly celebrating crypto to American voters could only make matters worse. I'm not a perennial crypto-naysayer. Having written a book about digital currencies, I can tell you that Bitcoin has remarkable creative

concepts and innovative technology behind it. Bitcoin and other such cryptocurrencies are in principle decentralized, which means they are not issued or managed by any institution or agency. Because the digital transactions of records are maintained on a worldwide network of computers, cryptocurrencies are in principle secure, invulnerable to manipulation by a small group, and resilient to failure. As such, they should theoretically displace the need for trusted intermediaries such as commercial banks, which often use their power to limit competition and restrict broad access to financial products and services. Unfortunately, some of these benefits have fallen by the wayside as cryptocurrencies gained in popularity and speculative forces in search of quick profits took hold. One major paradox of crypto is that there is

now enormous centralization in this unregulated ecosystem. Apparently unwilling to put their full faith in a trustless technology, most users rely on cryptocurrency exchanges to hold their crypto assets and to trade them. The fraud perpetrated by Sam Bankman-Fried's FTX, in which its executives treated investor funds like a personal piggy bank, highlights this vulnerability. And the government's charges that Binance, the world's largest cryptocurrency exchange engaged in money laundering and other forms of malfeasance show how the problems of concentrated market power can pervert the noble aims of crypto-visionaries. Despite the problems illustrated by FTX and Binance, regulation is scant, and centralization remains pervasive. The process by which transactions are validated and recorded

on the Bitcoin Digital Ledgers is controlled by a handful of major consortiums that deploy their computing power to enable this process and reap the rewards. And in other parts of the crypto world, true democracy goes only so far. Large stakeholders have been accused of trying to manipulate rules, which are based on majority voting power, in ways that favor their interests over those of smaller players. Moreover, it has become clear that risks could spill over from decentralized finance to traditional finance, as well as the other way around. Consider stablecoins, a highly popular type of cryptocurrency whose value is tied to the U.S. dollar, making them far more useful for payments than other more volatile digital currencies. Stable coins are usually backed up by

easily tradable securities such as U.S. treasury bonds. A huge volume of redemption request could lead a stablecoin issuer to liquidate a sizable volume of such securities, causing problems in those markets. On the flip side, the failure of Silicon Valley Bank last year caused problems for a major stablecoin issuer that had deposits in that bank. Bitcoin, in particular, has essentially become a purely speculative financial asset, whose value seems to hinge solely on its scarcity, rather than any useful purpose it serves. Its volatile value, which is evident in its wild price swings in the last few days, high transaction fees and slow processing times, have rendered it ineffective as a means of payment, which was its original purpose. But thanks to a loosening of restrictions

by the Securities and Exchange Commission, retail investors, even non-professionals with modest savings, can now easily incorporate crypto into their portfolios via products that are offered by mainstream investment management firms. Endorsement by politicians further legitimizes crypto as an asset class. This only exposes such investors to risks they may not fully understand, and that could hurt them financially. That is not to deny progress. Other cryptocurrencies like Ethereum, which are far more energy efficient than Bitcoin and enable the processing of a large volume of transactions quickly and cheaply are becoming more popular. And the blockchain technology at the heart of crypto is already being deployed via smart contracts, which facilitate a broad range of transactions

without intermediaries and just use computer code. Ironically, some of the greatest benefits of the blockchain technology are being reaped by the traditional banks and financial institutions that crypto was intended to replace. Among such institutions, the technology is gaining acceptance for reducing costs and making it easier to offer basic banking products and services through digital channels, even to low-income households that previously were deemed too unprofitable to service. Various consortia of banks are using the technology to settle payments between their members more quickly and efficiently. Even some central banks are incorporating the technology and experiments to issue digital versions of their currencies and also to improve

the efficiency and reduce the cost of cross-border payments. At a minimum, the emergence of decentralized finance has highlighted glaring inefficiencies in traditional finance and shown how technology can help get around some of them. But crypto itself is in danger of becoming mainly an arena for speculation, financial engineering, and outright fraud. While there should be room for such innovations, we need to find a better balance of risks and benefits, with a clear regulatory framework to mitigate the risks to consumers and investors, and limit spillovers to traditional financial markets. For all its ostensible benefits, decentralized finance built around cryptocurrencies has essentially imported the fragilities of traditional finance, but with much less regulation

and with many new risks. While being open to innovations that improve access to an efficiency in financial markets, users, investors, and regulators ought to be aware of false promises and hype, especially if that hype comes from politicians. Hello, friends, before we get back to the rest of the show, I want to implore you to join me at Permissionless. Permissionless is the conference for Cryptonatives by CryptoNatives, and the reason it's so important this year is that despite regulators' best attempts

to push industry founders, devs, and executives out of the U.S., the United States remains the beating heart of crypto. Today, the tide is turning. Policymakers have pivoted from fighting crypto to embracing it. Literally now, we are in a major political party's platform, which will lead ultimately to the creation of new financial products, new applications, and ultimately new adoption. Permissionless is the conference for those using and building on-chain products. It's home to the power users, the devs, and the builders. And perhaps more importantly, I will be there. The location is Salt Lake City. The dates are October 9. to the 11th, and tickets are just $499.99. If you want to get 10% off, use code breakdown 10.

Go to the Blockworks website, blockworks.com. There will be links to register for the conference, and again, you can use code Breakdown 10 to get 10% off. Finally, from August 15th, an op-ed by Dennis Kelleher of Better Markets. Kamala Harris should not cave to overtures from the crypto crowd. After years of crypto kingpins being handcuffed and sent to prison, numerous spectacular bankruptcies, rampant fraud and manipulation, breathtaking volatility and a long list of lost court cases, the crypto industry is nonetheless riding high in the U.S. That's partly because it has a huge cash pile that it is willing to spend on campaigns to buy

the support of politicians who will back its special interest agenda. The crypto industry's big goal is to pick its own regulator and get a veneer of legitimacy, but not be regulated much at all. As the Securities and Exchange Commission is a very powerful and effective cop on the crypto beat, the industry sees this regulator as its mortal enemy. The crypto crowd wants its political allies to put the smallest, least funded, least capable, and most easily capturable financial regulatory agency in charge of crypto, the Commodity Futures Trading Commission.

With crypto, it is clear for many cases that almost all of the tokens traded comfortably fall within the standard definition of securities and should be regulated by the SEC as such. Those that aren't securities comfortably fall within the market. the standard definition of commodities and should be regulated by the CFTC as such. There is really very little dispute about this among people who are not on the payroll of the crypto industry. And that's also why the SEC is winning almost all the legal cases it is bringing against crypto companies, which argue that most, if not all the securities,

commodities, and banking laws that apply to every other financial firm in America don't apply to them. Less than two years after numerous politicians were scrambling to return industry campaign contributions from the fraud-filled FTX, crypto is emboldened to the point it is setting its sights on influencing the Kamala Harris campaign for president. One reported argument is the supposed need to counter Donald Trump's embrace of crypto. The crypto industry appears to be making some headway. Officials from the Biden administration and the Harris campaign recently held a conference call with industry figures.

Harris should reject the overtures. Here's why. First, after years of effort and claims that cryptocurrencies have a real value, there is still no real case to use them for legitimate purposes over existing currencies. They remain the financial product of choice among financial predators, lawbreakers, and criminals worldwide. The least harmful use is wild speculation and gambling, as opposed to its other uses for tax evasion, fraud, ransomware, sanctions evasion, terrorist funding, narcotics trafficking, money laundering, etc. Second, easing crypto regulation is not among the top concerns of the American people. Contrary to industry propaganda, only about 18 million adult Americans even use or own crypto, and that number is declining, according to Federal Reserve Survey data.

it really is a very niche issue. Of the 88% of Americans who have heard about crypto, a Pew Research survey last year, found a supermajority of 75% are not confident or not very confident about the reliability and safety of cryptocurrencies. Importantly, between 61 and 77% of voters in six key swing states have a negative view of crypto, according to the venture capital firm Digital Currency Group and the polling firm Harris Group, unrelated to the vice president. Third, the crypto industry's extensive law-breaking rap sheet is at odds with Harris's long and strong record as a prosecutor who fights for consumer and investor protections and against financial industry lawbreaking. Remember, when she was California's attorney general, she was under enormous

pressure to accept a global subprime mortgage settlement with Wall Street's biggest, most powerful banks. Harris was tough, reportedly even saying no to J.P. Morgan's chief executive Jamie Diamond over a settlement. That's not easy. But she held firm and cut a much better deal for California. Finally, communities of color are disproportionately victims of crypto ripoffs. Yes, these communities are rightly skeptical of the traditional financial system that has excluded, discriminated, and exploited them for so long. Unfortunately, that makes them a target for the crypto industry, which pitches bogus wealth-building opportunities. A 2021 survey by the Social Science Research Institute, Norsey, at the University of Chicago, estimated 44% of crypto traders were

not white. Harris has a lot to do in the lead-up to the U.S. elections. Caving to threats from the crypto industry should not be one of them. All right, so back to non-AI. Me right now. If you're still with me, you have a lot of patience. You should probably go be in the crypto lobby. However, here's what I wanted to point out about all of these things. Sure, we could talk about the arguments and go through point by point and refute them. The new one, of course, is that it's just crypto trying to buy influence. What I think is notable is that these are all very prominent, very loud, very highly positioned op-eds in just the last two weeks.

This quite clearly says to me that the opponents of crypto are worried. that the rumblings behind the scenes, or that whoever wins come November, crypto is going to be better position than it is now. This is totally separate from the fact of how much confidence you should have in any sort of Democrat crypto pivot or anything like that. But I simply do not believe that if lots of people were getting lots of signals from behind the scenes, that a second Harris administration was going to be just like the Biden White House has been when it comes to crypto, that we would be getting all of these op-eds right now.

Doesn't mean I think that anyone should take their foot off the gas when it comes to trying to extract actual concessions and changes, but it is really, really notable to me that there is a sense of a need to have a surge of op-eds about why the Democrats and others shouldn't listen to crypto. So maybe, like I said, it's a little bit better than it appears, but if not, and you're still here, well, then at least you've done some opposition research. That's going to do it for today's breakdown. Until next time, be safe and take care of each other. Peace.