The Breakdown - Does Bitcoin Institutionalization Threaten Cypherpunk Values?

Episode Date: October 17, 2019

Chainalysis recently helped law enforcement take down a child porn ring by tracking btc addresses. This kicked off a huge conversation about how essential is it to the value proposition of bitcoin for it to be able to used for things that are against the rules - whether we like them or not. The firestorm of debate it kicked up really came down to one key question: how will institutionalization impact bitcoin? Can institutionally safe and friendly bitcoin co-exist with anti-establishment, rule breaking bitcoin? 

Welcome back to another crypto daily three at three. What's going on, guys? It is Thursday, October 17th. And today we're going to be doing, instead of the normal three at three, we're going to be deep diving on one particular conversation. Tomorrow we will be back with kind of a more traditional news round up to end out the week. But there's been a really interesting debate going on for the last, I don't know, whatever, coming up on 24 hours, basically, on Bitcoin, Twitter in particular, but kind of crypto at Twitter,

or more broadly about a couple things. One, the nature of institutionalization and what it does to Bitcoin, two, the relative importance of different attributes of Bitcoin, basically whether the idea of trust minimization, censorship resistance is more or less important than sound money principles. And it all stems from kind of this piece of news that happened yesterday. So I think it's really interesting. I think it's a nice moment to reflect on some fundamentals instead of just get totally caught up in the day-to-day. So let's dive in. So I'll kick it off with this tweet from Nick Sable yesterday. Multitudes and charlatans have entered the cryptocurrency in smart contract spaces who not only lacks cypherpunk sensibilities, but hate cypherpunk values,

including the values such as trust minimization that give cryptocurrencies like Bitcoin their market values. So that's kind of a nice setting of the tone of the debate. But let's go back to last night or I guess yesterday when Jonathan Levin from Chainalysis posted this. He says, today is my proudest day at Chainalysis. We enabled the U.S., UK, Germany, and South Korea to take down one of the largest child abuse material sites. Law enforcement in 38 countries made 330 plus arrests of alleged pedophiles and rescued 23 children. from abuse. So obviously this is a, you know, a really interesting story around law enforcement taking advantage of the traceability of Bitcoin to bust up a child sex ring. And so this generated

a lot of discussion. You know, for on the one hand, no one, I think it wants to be in bed with child predators. On the other hand, it brings up these questions of the nature of traceability of Bitcoin. How important is it to Bitcoin's value proposition that it can be used for things which are deemed illegal? Are there, in fact, different types of illegal based on the context and setting? So last night, the first kind of salvo in this after this news story broke was Joe Weizanthal, who you'll see will be at kind of the center of this conversation today from Bloomberg. he wrote, every time there's a big criminal bust involving Bitcoin and people's identities are revealed, the hodlers come out and say, we never said it was anonymous, the blockchain

is public, everyone can see it, we just claim it's permissionless, sorry, but that's garbage, here's why. And he goes into a bunch of different things about digital gold and yad-a-y-yatta, but I think the real key quote is here. In my opinion, the theoretical value that Bitcoin stores is the freedom to transact. If you're deep platform from the banks because your views are unpopular, odious, or illegal, nobody in the Bitcoin ecosystem can provide. prevent you from transacting. So if Bitcoin can't offer anonymity to its users when they do at times have to transact, then it's useless because if you can be identified by the government, then you can be punished and therefore de facto censored. So this created its own little mini firestorm.

Some people hated this take. Other people were affirming of it. But I think that this, you know, one thing to note here is this idea of the danger of words, particularly in the context of Twitter, there was a huge amount that was about this idea of useless, right? Like, this wasn't a debate about relative prioritization of value propositions of Bitcoin. It was the idea that if you didn't have the ability to transact anonymously, it was useless, right? And people took umbrage with useless. However, so some folks, like Nick Carter here, he says, this is a good take. People celebrating Bitcoin's traceability are drinking a poison chalice. However, we don't have a good privacy enhancement that doesn't compromise audibility yet.

And he says, you capture one of the key tensions and paradoxes in Bitcoin. People don't like to think about that stuff. So that was kind of yesterday, right? So plenty of people were jumping down Joe's throat already, but it wasn't a full-fledged, full-on kind of scream fest yet in classic Bitcoin Twitter fashion. Then this morning, Joe published this. So he says, in today's markets newsletter, I wrote about how the point of Bitcoin is

to do the transaction that the, in all caps, the man. doesn't want you to do, including illegal transactions. And the allowance of a Bitcoin ETF would essentially be a big subsidy to this market. So before we get into the reaction, effectively what he's saying is that there is a symbiotic relationship between the speculators who are in this game just for money and the folks who want Bitcoin to be outside of the purview of the state, outside of the purview of traditional law enforcement, right? The ability to be something that can move around the system of power as we know it. He's not actually attacking Bitcoin.

At least that's not what I got, although that's where a lot of people went with it. However, basically, he is making an assertion and this goes down. There's no getting around it. If your intention is totally legal or benign or inoffensive, use a visa card. A blockchain is too computationally inefficient and expensive, to waste on anything but the transactions which big business and business, big government, don't want you to do. These transactions wouldn't be possible if it weren't for speculators providing

fiat liquidity into the system. The more we see Bitcoin ETFs and other institutional vehicles allow dollars to flow into the space, the more these transactions are able to thrive. So this really gets into a question about the nature of the relationship between institutionalization of Bitcoin. and what it means for kind of cipherpunk values. So there were a lot of folks who took, you know, intense, who had issues right away with what he said.

So Pomp came out, he said this is wildly inaccurate. You're claiming that non-censorship is the only value proposition of Bitcoin. What about the non-seizure element? What about the disinflationary money supply or the sound money element or pseudonymity? And so this was kind of where the conversation started in some way. ways. And I think that, you know, if I had to characterize the first thing that people were really contentious about, it was, it ended up being a question of this idea of censorship resistance on the one hand versus sound money on the other, right? And so, you know, a few

different people made the point that what they were in Bitcoin for wasn't just the censorship resistance or wasn't even really the censorship resistance. It was the idea of a money supply that couldn't be debased, right? That was their big thing. It's interesting that part of the reason that you'll often see me rip on the idea of debates on Twitter. And I appreciate how they can be a useful intellectual exercise. More often than not, they paint people into corners that are unn nuanced, that are memified, that don't reflect the reality and the complexity of the world and force them to take root in those things. So the idea that somehow we started debating about censorship resistance versus sound money in which is better,

there's nothing incompatible about these two things. It is a completely reasonable point of view to care about one more than the other based on your personal experience, based on your context, while also still appreciating that they make up a fundamental attribute of Bitcoin. And again, the medium itself of Twitter is, I think, culpable in to some extent here because using words like only in useless and hyperbole that basically, you know, only one of those concepts and makes it the entire game reduces it creates a reductionist feeling around the other which is what people got got flared up about right so so yeah so you know argument one or antagonistic thing one was this idea of sound money antagonistic thing two was this idea that it was only valuable if censorship resistant there was also I believe kind of a more broader a broader triggering I would say is around the idea of because of kind of the tweets that Joe sent out last night,

which are more about the association of bad people with Bitcoin, right? Like this is the most powerful, most classic, most ongoing foot. We talked about it in Narrative Watch earlier this week when we were looking back at the letters that Sherrod Brown and Brian Schatz sent to the CEOs of Visa, MasterCard and Stripe trying to get them out of Libra. It always comes back to the crime fight. It always comes back to why do you want to be associated with child predators? right? And so I think some people were a little bit triggered just because this was literally explicitly about taking down child predators. So all of this stuff was going on, right? And there's,

you know, a lot of commentary flying back and forth. Joe responds, he says, love all these people suddenly claiming Bitcoin is just about protecting against inflation. Folks, if that's all you care about, just buy tips. And then he goes on to really qualify his opinion. He says, people keep accusing me of attacking Bitcoin. No, I'm attacking guys in loafers, jeans, and blazers, whose careers consists of sitting on panels, spouting pavlam on programmable money and inflation protection, while whitewashing Bitcoin's radical anti-establishment roots. So this is kind of what Sabao was talking about in that first quote as well. And so this, I think, is the actual really interesting debate, is forget whether sound money or censorship resistance is more important. That's a stupid

conversation, in my opinion. I mean, I guess that maybe let me qualify that. To the extent that we're ever at a point where one of those, we can't have one without the other, then I guess we have to debate that. But where we are right now, they are not only not mutually exclusive, they're very kind of simpatico. And so it feels to me like that's, again, an artifact of the particular medium and echo chamber nature of where we're having this debate. The more interesting conversation, I think, that does have much bigger implications for this entire industry and for how it develops is the larger question of what institutionalization does to Bitcoin. Can Bitcoin as a non-sovereign, uncontrollable force coexist with adoption and, you know, basically whitewashing through the,

whitewashing is Joe's word here, through the existing system. And I think that's a meaningful question to ask. And we often dabble into it, right? We often dance into it when we're talking about ETFs. We often touch it just a little bit when we're talking about, you know, different banks and things getting involved with Bitcoin. New products, new derivative products with Bitcoin, we touch on this. But we don't really have this debate straight on about, like, is there actually a battle between, you know, the Satoshi element of this industry, of this space, of the Bitcoin world, and the folks who are going for ETFs, right? The people who are trying to regulate this, the, the the Winkleveye. Like, that's a meaningful question. And I don't necessarily think that there's a

clear answer. People have lots of different and complex feelings on this, right? So let's look at Udi. He says, I think he's right. We're losing, in this case, he's referring to Joe Wisenthal again. We're losing track of the fundamentals lately in the never-ending quest to get rich old men to like us. You have Nick Carter who posts a cartoon. He says, the stalwart versus Bitcoin Twitter today. For those of you guys who are listening, it's a picture of kind of the folks

who are listening to Jesus and saying, shut up. And he says, most people rejected his message. They hated Jesus because he told them the truth. Nick goes on to qualify, he says, here's the non-trollist version of his point. If you want Bitcoin to be a milk toast, palatable, neutered thing, fully surveilled and transparent, so it can be perfectly

integrated into the financial system, it's probably not useful for much anymore. more. And, you know, there were other folks who were kind of on the other side of this. So Cameron Winkelboss says, have you ever used blockchain forensics tools? If you did, you would realize the early folks who thought it was a good idea to use Bitcoin for illicit activities weren't best and brightest. It's a failed use case. Appreciate your contrarian view, but this native narrative has been debunked. I think this point following up that Alex Gladstein makes is

incredibly important. So this is directly following that tweet. He responds by saying, people use Bitcoin to break the law all the time. I'm mostly referring to A, unfair laws imposed by authoritarian regimes, or B, international sanctions. But either way, it's a powerful tool for people to circumvent financial barriers in Iran, Turkey, China, Venezuela, etc. Gladstein is the chief strategy offer for the Human Rights Foundation. He's helped Peter McCormick get his new Defiance podcast up and running. And I think that this is a really important point that when we're having this conversation, we're having it from the very particular context of, at least for myself, you know, obviously you guys are from all over the world.

So you might be experiencing things differently, which is by the way, one of the things I absolutely love about Twitter. But when I'm having this conversation, when I'm seeing basically a bunch of New Yorkers have this conversation together, there is a very particular context for this conversation. And what Bitcoin means to them and what lawbreaking more importantly means to them is something very different from people who are living inside capital control. that are entirely politically motivated for people who are living inside just hyper-controlled regimes, right? And so the idea of being a force outside the law, we can't just get lost in the context of that, or we can't assume that the only context for that is U.S. laws. And that what we're talking about when we're talking about lawbreakers are these child predators on this

site that was just shut down, we're talking about people who are trying to live. and this idea of a non-sovereign money for them is something that's very powerful, because it allows them to move in and around systems that are designed to be unjust and designed to perpetuate power. So a couple follow-ups, or wrap-ups, rather, and then we'll move on for the day. So my take, obviously, you can kind of get some of it. So first, I just don't know how it's a debate that censorship resistance is a key part of what we're talking. about. By the way, someone at some point made the point that traceability and censorship

resistance are fundamentally different. Sensorship resistance is a protocol level thing. Traceability is a whole different thing. But I think that the point is that this set of factors, this idea that Bitcoin can be used by anyone, and it can be used for purposes that are outside of what a central authority deems to be allowed, appropriate, legal, whatever. I don't know how it's a debate that that's important. Again, it really does feel to me like this there is a false debate going on between that and the principles of sound money. I just don't know how they're incompatible in this case. No one I've seen looking at all of the responses to this has made a strong argument that they're incompatible.

I think very reasonable people can agree to disagree about which of those things matters most to them as the attribute that attracts them to Bitcoin but Bitcoin doesn't give a shit which attribute attracts you to it. It gives a shit that it's able to do what it's designed to do endlessly unceasingly and without anyone to control it or stop it. So that's part one of my take. Part two, I do believe that there is an inherent tension between an existing power structure both financially and regulatory, government, so both a government and an economic power structure that will do whatever it can to try to co-opt a new and valuable force, to impose upon that new force, things that reinforce the

system that exists now and further perpetuate it. I think that there is inherently an attention between that and the fact that those folks coming in, particularly the existing financial system, creates a huge amount of liquidity demand, you know, number go up that allows this force to grow and to self-repetuate and to actually provide a counterweight to those things. There is a real deal with the devil that everyone is doing in this equation for the financial. industry, it's the deal with the devil that is an uncontrollable force that exists outside them that could fundamentally undermine and shift their business models in new ways. For the people who are taking on the mantle of that new force, the deal with the devil is people who don't give a shit

about the cypherpunk roots of this company, you know, getting them bought in because they provide liquidity. I think that we can recognize that there is this inherent tension and still decide to proceed and try to and think that it's important to basically build together. I often think when I'm sitting back and looking at this, that to some extent there's this interesting three-actor system inside any new innovation, economic innovation. You've got the people, the citizens, the everyone, right? You've got the businesses, the institutional interest. And then you have the government interests. And they all represent different types of power. At any given point, if two of the three align against the one, that one is going to have a very hard go of it. And I think that

there is an inherent destabil, there is inherent tension, even more so than the financial industry, between a non-sovereign money and sovereign money, the state, right? Like, there is just no way to get around that. The capacity for states to print money has been a central and unique authority of the state for a very long time. This represents what Bitcoin represents, what Libra represents as we're seeing, is a threat and a potential undermining of one of the most powerful authorities, maybe the most powerful authority has even over or at least just behind the ability to raise an army, right? That is a very, very powerful contrast. And so that, you know, when I look at that tension, that triangle of tension, I feel like that to some extent these

cryptos and Bitcoin are always going to have an inherent anti-state or at least state minimization property to them just by their very design. The question then is where the traditional economic power, where the traditional financial infrastructure goes, do they get co-opted into the state power system that doesn't want this, that doesn't want to see it, so that between the two of them, they just basically kind of cut out all of the powerful thing that's new and represented in Bitcoin. and maybe shift to whatever, the corporate controlled digital money that is backed by Fed digital money or whatever, right? That's one possibility. The other possibility is that you get those unstoppable forces like Bitcoin plugged into the financial system

such that there is huge economic interest in them being able to exist, right? Again, if big companies are making big money from Bitcoin in ways that don't fundamentally undermine the things that make it Bitcoin, the things that we're debating right now, then all of a sudden that that triangle of tension has the citizens who want to see a different system, who want this non-sovereign force, money force to exist in the world aligned with big economic interests. And that creates a lot of leverage vis-a-vis the government and state power and what flexibility and freedom those protocols and new ideas have to flourish. So anyways, the point of all of this is to say that just because there is an inherent tension between the economic power structure that exists and the citizens who are kind

of trying to assert something new, right? The broader Bitcoin community, just the nature of the protocol itself doesn't mean that there aren't still, that the central power of this whole thing, this whole experiment is in their alliance. So, you know, I guess just a couple people reaffirming that. So you have Lucas Nuzzi over here saying the thing is Bitcoin's compliance is fully malleable. ETF issuers can buy recently mined BTC and offer spot trading in a siloed surveilled market. Next door, hacker is buying a VPN sub with shuffled BTC. The duality exists today because Bitcoin doesn't discriminate. Angus Champion wrote, with the stalwart making everyone angry this morning with his column, I thought I'd bumped the article I wrote in January.

To inject into the discussion traditional finance speculation and the on the ground actual use case of Bitcoin can coexist and it's not a bad thing. That was on Coinbase. It was called the coming bifurcation of Bitcoin. So, and then this is another great article, but that's neither here nor there. So the, I guess the wrap up for me, and the last point I'll make is that this is an actually awesome conversation on crypto Twitter on Bitcoin Twitter. Unlike the stupid amount of conversation yesterday about who wore a friggin shirt to some panel and whether there was, you know, whatever on that panel, like that was helpful to no one.

accept the people who are basically just their entire business model is media attention. Instead, today we're having a real conversation about a really important thing, which is the nature of how these interests converge and where they diverge, and what should be our response and what should be our responsibility. So I'm really pleased to see everyone who's involved in this. I encourage us to talk about this stuff more and that the stupid, irrelevant crap less. So that's my soapbox for today. Like I said, tomorrow we will be back on the news tip.

Thanks for listening. Thanks for watching. And I will see you guys tomorrow. Peace.