The Breakdown - The Boring-ification of the Crypto Narrative

Episode Date: July 30, 2023

A reading of: A Crypto Truce Emerges Between Fraud and Revolution - Aaron Brown Today's Episode Sponsored By: In Wolf's Clothing -- The first startup accelerator exclusively for Bitcoin and Lightning startups -- Applications for Cohort 3 open NOW -- https://wolfnyc.com/apply ** Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribeto 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, July 30th, and that means it's time for Long Read 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, happy Sunday. Today, we are reading a piece by Aaron Brown. Aaron Brown is a former managing director and head of financial market research at AQR Capital Management.

Now, this piece, which appeared on Bloomberg, I think, is a good one for the particular moment that we are in. We are seeing, for example, serious progress being made on the crypto regulatory front. One of the driving narrative forces this year is BlackRock, of all people, filing a Bitcoin ETF application and throwing their full weight and force of narrative behind it. This piece is called a crypto truce emerges between fraud and revolution. Innovators and regulators may still not agree completely, but there's more common ground now than a few years ago. Brown writes, I sense a growing middle-of-the-road regulatory consensus on cryptocurrencies. It splits the difference between crypto as a Ponzi scheme to defraud investors and enable criminals on the one hand, and crypto solves ancient financial problems and

will usher in an era of prosperity and freedom on the other. It envisions a future in which domesticated crypto plays nicely within the traditional financial regulatory system. Last week, four senior international monetary fund executives published an outline for international regulation of crypto on the IMF blog that does a good job of summarizing this view. It proposes four principles for crypto regulation. One good, one bad, and too ugly. One, the defense against the substitution of sovereign currencies is the maintenance of robust, trusted, and credible domestic institutions. The good? A refreshing blast of sensible fair play. When competition threatens, up your game. Keep your market share by giving customers a better product, not by whining to regulators

to hobble your competitors. Satoshi Nakamoto created Bitcoin in response to the 2008 financial crisis, when traditional financial institutions seemed in danger of collapse, and financial regulation seemed to be part of the problem rather than part of the solution. Confidence in sovereign credit, central bank competence, and respect for rule of law was low. Crypto gained where sovereign-managed fiat currencies were mismanaged and financial repression was severe. Commercial successes were areas where traditional financial institutions charged outrageous fees and offered abysmal customer service. Crypto reversed Gresham's law. Good money drove out bad. Second from the IMF blog? To protect national sovereignty, it is important not to grant

crypto assets official currency or legal tender status. Doing so could just generate fiscal risks for government finances and could threaten financial stability or rapid inflation. Bad. A direct violation of the first principle, it's not sovereignty the authors want to protect its government revenues. Ever since money was invented, governments have generated large profits from seniorage. In the old days, this was maximized by debasing the coinage, cutting down the precious metal content of coins, while insisting citizens accept them at the old values. The fiat currency system introduced by the 1971 Nixon shock made this even easier. The government creates money at near zero cost, spends it for real goods and services, and only a fraction of that money comes

back to the government as taxes or fees. Seniorage can also be generated by the central bank, holding non-government interest-paying assets, funded by zero interest accounting entries, on its balance sheet, and other indirect means. Governments protect their senior age with a favorable legal and tax status for currencies issued by sovereigns versus other assets. If these advantages are extended to cryptocurrencies, government revenues will suffer. If crypto is better than government currencies, it's better to replace loss seniorage revenue with taxes rather than protect an inefficient monopoly that harms consumers. Don't outlaw email and instant messaging to protect the post office. Third point from the IMF blog. To address the volatility of capital flows associated with

crypto, policymakers should integrate them within existing regimes and rules that manage capital flows. Ugly. Managing capital flows, typically either forbidding foreigners from buying domestic assets or preventing foreigners from taking assets out of the country is a euphemism for financial repression. For example, the movie The Good, the Bad, and the Ugly is a spaghetti Western. When the movie was made in 1966, Italy, quote-unquote, managed capital flows by refusing to let people take lira out of the country. Foreign companies with lira profits could not repatriate them. The solution was to use the lira to finance American movies made in Italy that had worldwide appeal. Foreign companies repatriated their lira profits in the form of global movie ticket sales.

Had crypto been around in 1966, there would have been no need to make the movies. Foreign companies could have sold their goods in Italy for GBU coin, good-bad ugly coin, and move their profits out with little hassle. Italy could try to control purchase and sale of GBU coin, but since crypto allows pseudonymous global peer-to-peer transactions, enforcement would be difficult. Managing capital flows is terrible economics, and there's no way to enforce capital flow management rules on crypto without destroying its advantages. Fourth IMF blog point.

Finally, tax policies should ensure unambiguous treatment of crypto assets, and administrators should strengthen compliance efforts. Ugly. You can't straitjacket innovation with predefined treatments. Long before there was crypto, tax collectors struggled with theoretical differences between casual human exchanges, gifts, you grill the meat and I'll make the salad, hitchhiking, pick-up basketball games, etc., and taxable events. In practice, if currency is involved, it's usually taxable.

If not, it might be taxable in theory, but in most cases the authorities won't try to collect. Many crypto projects cannot possibly fit into the commercial exchange human exchange dichotomy. Lines are erased among customers, suppliers, employees, and investors. Projects intertwine economic and non-economic human incentives. In the future, we may be able to observe the crypto ecosystem and figure out ways that are good to extract government revenue from it. That's a reasonable goal for a forward-looking regulator. But this principle is ugly because it wants to insure taxes today and threatens to strengthen compliance as if this is a battle against evil tax evaders

rather than a genuine explanation of improved human cooperation. The good news is that one has been the main impact of crypto to date. Governments and banks have improved their services to compete with crypto. The bad, two, and the ugly, three and four, won't go far because they're too difficult. The authors of this IMF blog post have correctly identified the challenges for regulators, protecting government revenue and mitigating disruption from volatile capital flows. They have just suggested impossible solutions. I am personally optimistic about crypto regulation at the moment. I don't mean that I or anyone else knows how to do it right. I mean that there seems to be positive communication between innovators and regulators. They may not see eye to eye, but there is more common

ground than there was a few years ago, and more willingness to entertain unconventional approaches. With goodwill and luck, we may have a Pax Bitcoinus in our future. All right, back to NLW here. One thing that I want to discuss briefly is the problem of constantly looking at crypto or Bitcoin through the U.S. dollar lens. It is a trope at this point to say it, but it doesn't make it any less true. The reality is that the people who understand Bitcoin and Crypto Best are those who by accident of birth live in a place that has an unstable or corrupt monetary regime. In the U.S., yes, there are, of course, many people, including many Bitcoiners, who will argue that the design of the Fiat system comes with huge,

huge problems. Some might point to the funding of foreign wars. Some might point to the destruction of savings. Some might point to systems that deny access to certain parts of the population. But comparatively speaking, being born into the U.S. dollar system is an unbelievable privilege relative to the rest of the world. It's one thing to think that Bitcoin is a better long-term solution or a better long-term way to design your system. It's another thing to experience 100% inflation and have your life savings and earnings wiped out because the money and the place that you live just doesn't work. One of the things that's helpful for these institutions in places that aren't like that to do, to understand about places that are like,

like that, is I think it gives crypto a little bit more context. It makes for a reminder that the implicit critique of existing monetary systems might apply more to somewhere else, and that there are good reasons to create a safe space for this innovation, even in the systems where the regulators have their greatest efforts. The framing of the piece was a truce, a splitting of the difference between revolution on the one hand and fraud on the other. And I think in many ways, when it comes to the U.S., both the business community and the regulatory community, that's just about understanding that its disruption here may be ultimately more modest. Now, of course, many of the hyper-bitcoinization folks out there will disagree,

but I think that's the mainstream point of view that this shift in thinking represents. Anyways, guys, interesting food for thought on a Sunday, which is, of course, the goal of these shows. Now, before we get out of here, one quick note, Today's episode is, of course, once again, sponsored by In Wolf's clothing. Wolf is the startup accelerator for Bitcoin and Lightning companies. Participation in the program comes with mentorship, guaranteed funding, access to opportunities, and they are in applications for their third cohort right now. Now, we are coming right up to the application deadline.

It's on August 4th, so go check out Wolf-NyC.com, and let's get some breakers in there applying. Thanks to those guys for sponsoring the show. Thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.