The Breakdown - The Central Bankers Who Think Bitcoin Could Destroy Society

Episode Date: October 23, 2024

A paper published by the ECB makes some incendiary arguments. Is this the latest greatest expression of "and then they fight you" or are we getting all worked up for nothing? Unlocking Bitcoin DeFi with ExSat The exSat Network aims to unlock and scale the Bitcoin ecosystem without compromising Bitcoins Ideology. The network has partnered with the largest mining pools in the world, major custodians and exchanges, BitTrade, Cubolt, Matrixport, Everstake, OKX and aims to have over $200M TVL at mainnet launch on the 23rd of October. Follow exSat’s Twitter to stay up to date @exsatnetwork or visit the testnet exsat.network 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 Monday, October 21st. And today we are talking about how Bitcoin could destroy society. 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. Well, friends, economists from the European Central Bank think that Bitcoin could, yes, destroy society. A new paper was recently released called The Distributional Consequences of Bitcoin, written by two ECB economists. The economists argue that perpetually rising Bitcoin prices

would only benefit early holders and would, quote, imply a corresponding impoverishment of the rest of society, endangering cohesion, stability, and ultimately democracy. The paper explicitly ponderes the scenario where Bitcoin is not a bubble. Well, welcome to the party guys, but rather a perpetually rising investment asset. Under those circumstances, it argues that, quote, early adopters exactly increase their real wealth and consumption at the expense of the real wealth and consumption of those who do not hold Bitcoin or who invest in it only at a later stage. The underlying premise of the paper is that Bitcoin is not a productive asset like stocks, commodities, and real estate. Therefore, the paper argues, the new Lamborghini, Rolex, Villa,

and equity portfolios by early Bitcoin investors do not stem from an increase in the economy's production potential, rather they are financed by diminishing consumption and wealth of those who initially do not hold Bitcoin. Because its valuation is not tethered to cash flows or other metrics, they suggest, quote, any price for Bitcoin is equally plausible, including 10 million or more, as none of these prices as any particular economic justification or imputed basis. This then leads to the conclusion that, quote, missing out on Bitcoin is not merely a lost opportunity for wealth accumulation, but means real impoverishment compared to a world without Bitcoin. This redistribution of wealth and purchasing power is unlikely to occur without detrimental consequences for society.

From there, the paper begins making legislative and societal recommendations. It argues that, quote, current non-holders should realize that they have compelling reasons to oppose Bitcoin and advocate for legislation against it, aiming to prevent Bitcoin prices from rising or to see Bitcoin disappear altogether. Latecomers and non-holders and their political representatives should emphasize that the idea of Bitcoin as an investment relies on redistribution at their expense. Failing to do so could skew election results in favor of politicians who advocate pro-Bitcoin policies, implying wealth redistribution, and fueling the division of society.

The paper is obviously triggered huge outrage across the Bitcoin community. Bitcoin analyst heard Demeaster wrote a long thing. thread breaking down the paper. His conclusion was, in all the years I've been monitoring the Bitcoin space, this is by far the most aggressive paper to come from the authorities. The gloves are off. It's clear that these central bank economists now see Bitcoin as an existential threat to be attacked with any means possible. Many of us have warned that this was coming. Bitcoin has a major political fault line, both in national and international elections. Well, here it is. It means that us holders must take action to ensure that governments respect our basic right to hold property.

And no, this won't be a war between haves and have-nots. Rather, this will be a historic clash between those who stand for the natural rights of the individual and those who clutched the failed ideologies of collectivism and central planning. Now, it's worth noting before we go any farther that this is the same pair of ECB economists who notoriously published a paper called Bitcoin's Last Stand in late November 2022. This was mere weeks after the collapse of FTX and marked the bottom of the last cycle. In it, they wrote that price stabilization was, quote, likely an artificial induced last gas before the road to irrelevance. Oman Malikon, an adjunct professor at Columbia Business School gave an interesting peek behind the curtain, tweeting,

First, if we are going to comment on papers, we should do so honestly. Ulrich and Juergen's paper states clearly on the front page that it's their view, not the ECB's. Stop saying ECB said X or using hyperbolic language like True Declaration of War. Like, it's just an academic paper, my dude. Second, Ulrich is a friend and co-author. He sent me this paper for feedback weeks ago. When I told him I disagree, he invited me to write a rebuttal, one they'd reference and link to directly. That's how intellectual honesty and the pursuit of ideas work when done right.

We are accelerating the progress and I hope to have the rebuttal done by tomorrow. None of us thought people would wig out over a draft. Others noted that this pair of economists seemed to have a somewhat unhealthy obsession. Bitcoin Policy Institute fellow Troy Cross wrote, reading the ECB paper for real, it's clear that Ulrich and Yergen are thoroughly obsessed with Bitcoin Twitter, citing Marty Ben and Molly White, quoting from Bitcoin magazine, excerpting Trump and RFK from Nashville, matching price movements with electoral polls. Wild. Now, getting into the substantive arguments, the most common was that Bitcoin is fundamentally no different to any investable asset in history. Pierre Richard, the VP of Research at Riot Platforms,

picked up on the argument about Bitcoin having no legal use cases, tweeting, this is where the ECB paper really fell apart. Market value is not a function of societal benefit. This is why diamonds are quite often more expensive than water. Eric Yake, the author of Bitcoin the 7th property, tweeted, ECB economist writes 30 pages of research telling you that people who buy Bitcoin early will have more wealth than those who buy it later. The concept reminds me of every investment that has ever gone up.

Parker Lewis thought it wasn't so clear that Bitcoin is no productive value, tweeting, facilitate trade or that it's not today, and therefore, quote, assume that Bitcoin does not change the production potential of the economy. Looking at Bitcoin as zero sum is the error. The Bitmex Research account commented, assuming that Bitcoin price increases will continue and that Bitcoin won't contribute to economic growth is probably wrong. There are massive potential improvements in banking, payment systems, and capital markets, which could increase economic growth, which the ECB cannot see. And seeing as we're talking about central banks and

the distribution of wealth, James Van Stratten of CoinDesk chimed in, let's talk about the fact that when the cost of capital is zero and issuing debt steals from future generations. This, of course, isn't a new argument for those who have been in the space for a while. Jameson Lop, the CSO of Kasa, tweeted, hilarious to see one of the oldest buck-coiner arguments make it into the ECB, where the haters fall flat is explaining how this is any different from every publicly traded asset. Investor Alan Farrington, in fact, wrote an extensive rebuttal of this point way back in February 2021. In his essay, Bitcoin is Ariadne, he wrote, Bitcoin is often framed as, quote-unquote, competing with fiat currency. This is true in a sense, but I fear there is a retort of

historical danger in invoking the wrong kind of competition. It is not a fight, for example, there is no conflict. Bitcoin is not trying to damage or sabotage its opponents because it isn't trying anything, and it knows no opponents. It is no awareness whatsoever of who might oppose it or why. It is simply an alternative, an exit valve, an opt-out. It is competing only insofar as it is proving to be a far superior alternative. It is not a sword for Theseus to fight the Minotaur, but a thread to follow to exit the labyrinth. Bitcoin is Ariadne. Farrington also foresaw this exact argument coming from monetary institutions and governments over the years, add there will be tremendous value in normalizing this rhetoric amidst the likely growing chorus of opposition

desperate to smear Bitcoin as inherently nefarious or hostile even. Opponents must be forced to explain what is wrong with people interacting freely and why true goodness can only follow from coercion in their understanding. Should those who have found a way out of the unbearable labyrinth of capital strip mining not take it? What do they owe the Minotaur? Rahim Tagizadegan, who bills himself as the last Austrian economist in Austria, leveled his critique directly at the foot of the ECB's interventionist policy, tweeting, the euro's price in Bitcoin is the result of an unjust and antisocial arbitrary distribution, of which Yergen Schafe is a beneficiary, open two, but a selected few based on coercion and not only discouraging learning but actively subsidizing

its prevention. The ECB may as well blame the Swiss franc for the latter's appreciation. Isn't it unfair to the non-Swiss? Alas, the SNB does everything in its power to depreciate the franc and just can't keep up with a euro. What's great about Bitcoin is that it does not care about politics and experts. It is just distributed software in the first digital hard asset. If the ECB did its job of maintaining currency stability, maybe no one in Europe would care about Bitcoin. Who gets the blame? This episode of The Breakdown is brought to you by XAT Network. As regular listeners know, one of the things that I think is really exciting right now is all of the new builder energy around Bitcoin, and XAT Network is a great example of that.

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on Twitter at XSAT Network. That's EXSATN-E-T-W-O-R-K. and unlock Bitcoin Defi with ExSAT. Lodmila Kozlovska, the president of the Open Dialogue Foundation, reminded Schaft that she had requested a meeting with the ECB some time ago on behalf of a coalition of human rights defenders and humanitarian organizations. She tweeted, we wanted to provide you in the ECB with our personal testimonies about how and why we use Bitcoin, how we were financially excluded or transnationally persecuted due to the abuse of AML-CFT, not only in the authoritarian countries but in Western countries,

including the EU. Your colleagues promised to get back to us and never did. That is why you never heard our testimonies on use of Bitcoin as the lifeline for human rights and humanitarian aid. We still hope we can meet and address both, raising issues of transnational repression in the EU and groundless derisking as well as the use of Bitcoin for human rights and humanitarian aid. Shaf said the request was still under assessment to ensure the right people within the ECB could be at the meeting, noting that the request hadn't been rejected and asking for more time. Kuzlovska responded, and ever said we were rejected, I just mentioned that we sent

you a request to meet on the exact topic you have presented, and unfortunately you already published your study. But we didn't get a response, as you rightly noted. The exchange felt emblematic of the position the EZB has found itself in. Ostensibly, they are making an argument on behalf of the weakest members of society for fear that rising Bitcoin prices will further impoverish them. However, when representatives of those people seek to meet and communicate their stories, they can't find an audience. Joanna Kotar, an independent member of the German parliament, was even more direct in her response to Schaff's Twitter thread, commenting, aren't you embarrassed by yourself? Now that you have realized that your supposed bubble will not burst, but Bitcoin

is really hard money and the price will rise, you are trying to stir up social fears? The very people who benefited most from the cantalon effect? Your only way out now is the cheap and despicable attempt to divide the people. You will lose, and that's a good thing. Matthew Sigil, the head of digital asset research at Van Eck noted that Bitcoin's disruptive power has become a recent focus of academic research across central banks. He cited an October paper from the Minneapolis Fed entitled Unique implementation of permanent primary deficits. The paper discussed the sociopolitical ramifications of running permanent government deficits. It concluded that permanent deficits can be run using nominal debt and continuous markoff strategies. Essentially, the game of fiat money can be

continued indefinitely as long as no one notices. The paper noted, this result fails if there are also useless pieces of paper, Bitcoin for short, that can be traded. It therefore suggested that, quote, a legal prohibition against Bitcoin can restore unique implementation of permanent primary deficits, and so can a tax on Bitcoin. Essentially, the government can run a policy of continuous deficits and monetary debasement as long as no one notices. However, the people have noticed and are buying Bitcoin, so bans or a hefty techs are the appropriate solutions to enable the fiat game to continue. Generally, there was a sense that we're now deep into the and then they fight you phase of Bitcoin adoption. Marty Bent tweeted,

The central bankers are very scared and they should be. They will attempt to convince politicians to use lawfare to punish those of us who have been championing sound money freedom as they continuously debase their fiat currencies. Shinobi, an anonymous writer at Bitcoin magazine had an even more ominous take, tweeting, I don't think most of you truly understand what the recent ECB comments are a signal of. Most people don't understand the first thing about how the economy works. When things go to hell, they are going to blame us. This is why I've never shown my face publicly. It won't matter how large or small your stack is, you are going to become a scapegoat. Now a few bitcoiners had a relatively sensible solution.

Alex Thorne of Galaxy Digital wrote, just put Bitcoin in model portfolios and indices and voila. Now everyone is a hoddler. Jameson Lopp took it a step farther, commenting, the ECB is one logical leap away from realizing they need Bitcoin on their balance sheet. Mark van der Chies, the Dutch founder of Hutt 8, reminded everyone that we're already seeing the leading edge of these anti-Bitcoin policies in Europe, and that it might be time to start taking this a little more seriously. He tweeted, Europe seems to be preparing a war on Bitcoiners. Higher capital gains on Bitcoin in Italy, a proposed exit tax in the Netherlands, no mortgage in the UK if you made the money for your real estate and crypto, and now the ECB is telling no-corner

that Bitcoiners are keeping them poor. The last one is truly unbelievable. The early adopters were simply smarter or spent more time on it and willing to take more risk. Now they are getting vilified for that. Very dangerous that these words are from the ECB. Sounds more like the communist Chinese central bank to me. The Overton window is quickly shifting against Bitcoiners and against wealthy people in general. I've heard from a number of people in the Netherlands who hold Bitcoin that they are getting a bit worried about the changing regulations. If Bitcoin should double or triple in 2025, I would not be surprised to see more politicians turning against Bitcoin and trying to tax it excessively. Be prepared. So there are really two takes here. On the one hand, this is just an exploration and

everyone should chill. On the other hand, this is a flag and an attempted new narrative that reflects a place that leaders are going to drive and is a very scary place for Bitcoiners to go. I think in either case, it's probably worth spending some time expanding the academic footprint of Bitcoiners to be even louder about why and how Bitcoin fits in a more fair financial system. Still very interesting stuff, certainly a conversation that's worth watching. For now, that is going to do it for today's breakdown. Appreciate you listening as always, and until next time, be safe and take care of each other. Peace.