Note: I started writing this before Trump and Melania launched their own memecoins, which really raised the stakes for everything I was trying to lay out - it validates for me how important it is for people to understand what is involved, and what is at stake, in the crypto space.
Policy moves slowly, tech moves quickly and finance moves in the shadows. I am always fascinated by the intersections of these worlds, and by the difficulty in making good decisions in the places where they overlap. Having policy keep up even with something as straightforward as ridesharing is a challenge, and it took years for the world to understand what was happening under the surface on Wall Street with CDOs.
Goal17 is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.
So crypto, which involves both a deep, obscure tech ecosystem wrapped in jargon and hype, and an intersection with financial services is ripe for policy chaos and poor decision making.
I believe that having the right questions sits at the heart of good decision making, and that, as it stands, we are so conditioned to ask the wrong questions about crypto that we are sleepwalking into a crisis.
The Problem with Crypto
I’ve been meaning to write this for some time, and the push that has finally made me do it was this article by Paul Krugman - the public economist and (formerly) NYTimes columnist - called “Crypto is for Criming”. It is infuriatingly elitist and dismissive, with a mocking image of Doctor Evil at the top driving home the point that this is a topic barely worthy of debate in polite society; it is, instead, the domain of “crypto bros” and criminals, rather than serious economists and investors.
So, then, one wonders, why would a Nobel Laureate feel the need to comment on it at all?
For context, I went “down the rabbit hole” on crypto and blockchain a few years ago when a colleague at a major tech company reached out because they were trying to evaluate whether blockchain technology would be a good choice for a particular challenge they were working on. She found that the answers she got from her peers were either cultishly supportive of blockchain, or vehemently dismissive, with little clear justification either way. I was intrigued, because there didn’t seem to be a clear way to evaluate the suitability of the technology for her particular use case, and the level of passion in the responses didn’t seem to correlate with any rational criteria.
And you see this pattern reproduced in media and society more broadly - either people are fanatically supportive of “crypto”, or adamantly opposed to the “Ponzi scheme” that is only fit for money-launderers, drug dealers and gamblers.
I believe that ignoring what’s happening in this space is increasingly dangerous, not least because backers of the technology are now taking over its regulation in the US, and we’ve spent the last 5-10 years deliberately avoiding the real issues surrounding it.
Question #1: Who Wouldn’t Want to Use Crypto?
In Krugman’s article, he can only think of three possible explanations for the rise of crypto:
* Maybe it’s a digital asset, like virtual gold, so it’s uselessness is okay? (but he clearly doesn’t think so)
* Maybe it’s “all speculation or gambling…largely driven by testosterone”
* Maybe it’s just for “tax evasion…blackmail [and] money laundering?”
Krugman, like many others, are limited in their thinking from their starting premise that this is all rather ridiculous. The persistence of crypto is so insane, that the only possible explanation for its continued existence is that it enables shadowy crime syndicates and knuckle-dragging, UFC-obsessed, Trump-supporting gambling bros.
So, what is the original proposition of a cryptocurrency that is so insane? The original problem it was meant to solve?
“How do I quickly, securely and efficiently send money or to someone I don’t trust, without a middle-man?”
Have you ever tried to send money to someone? How was the experience? Was it quick? Was it cheap? Are you a criminal, or were you just trying to split a dinner bill?
Have you ever tried to send money between countries? How did you like the fees? Why did it take days to clear?
If I reframed cryptocurrency as “competition on financial infrastructure to allow open systems of peer-to-peer exchange”, then one thing becomes VERY clear; the people who wouldn’t want to use cryptocurrency would be those with a vested interest in the current financial infrastructure.
John Cassidy, with The New Yorker, wrote a fabulous article years ago just after the 2008 financial crisis, titled “What Good is Wall Street?” that is very instructive here. Going back to base-principles, he explores just what the role of financial services is supposed to be.
When the banking system behaves the way it is supposed to…it is akin to a power utility, distributing money (power) to where it is needed and keeping an account of how it is used. Just like power utilities, the big banks have a commanding position in the market, which they can use for the benefit of their customers and the economy at large.
Part of the thrust of the article explores how the financial services industry has gone from a public utility to a rent-seeker on the entire economy. If up to 25% of GDP is devoted just to a set of functions that could be automated…might there be some resistance?
Question #2: What Does Crypto’s Persistence Really Mean?
Suffice it to say, the regulatory environment for crypto has not been very easy. Bitcoin was routinely criticized by the Biden administration for its voracious appetite for energy, with threats to clamp down to protect the environment. When the #2 cryptocurrency changed protocols to make it more energy efficient (to the tune of 99% more energy efficient), the administration turned around and threatened its users because now it had become a security (it’s a long story). The Securities and Exchange Commission has routinely refused to provide any regulatory frameworks for crypto, but has instead approached the industry only through enforcement, that is, they would never say what was allowed, but would prosecute based on shifting versions of what wasn’t allowed. High profile disasters like the collapse of FTX were the predictable result of setting no regulations around an industry with billions of dollars flowing through it.
Which is all to say, there has not really been any strictly legal ways to experiment with cryptocurrencies. I’m struggling to think of any example of an industry with no rules or regulations that has grown to the size of the crypto space, which is, by today’s count, standing at 3.64 Trillion US dollars. That’s right. Trillion.
So what’s going on? What does that mean? If Krugman is right, are we really looking at $3.6T worth of testosterone and drug deals? Isn’t this all just a scam, and a Ponzi scheme?
I think that the single biggest risk that policy makers miss when looking at young crypto investors is not that stupid young men have been tricked into a Ponzi scheme, it’s this:
Most crypto investors don’t think that crypto markets are fair, just like the stock market; they believe it’s fixed, just like the stock market. The only difference is that everyone in crypto admits it’s fixed.
What this represents is a colossal, generational, and entirely rational, loss of faith in the traditional financial system. Young people feel shut out of the stock market, knowing that a very small group is capable of manipulating markets in ways that work to their benefit at the expense of “the rest”.
A lack of regulation, in that case, becomes a feature, not a bug, as regulators are seen only as protecting the interests and privileged access of the elite.
This couples with a second risk to create a systemically volatile combination:
Stagnant wages, high living costs and a bleak sense of the future means many young people don’t believe it is possible to enjoy the quality of life their parents had without some kind of game-changing windfall.
The social contract between generations and classes is breaking down, and the “rules of the game” seem more geared towards protecting the old and the rich than they are to keeping free and fair markets. Elite economists and commentators will mock a young generation focused on get-rich-quick schemes, while missing the fact that many don’t see how they could ever afford a house or a family without some kind of breakout. An investment that gets a steady return of 5% over decades won’t pay back student loans, medical bills and next month’s rent, but a sudden 1000x return on investment for some imaginary coin named after a dog or a cartoon frog might just pull them back from the brink. Why else would someone invest their child’s college fund in a coin named after an oral sex sound effect?
Just as many in the establishment were blindsided by Trump’s election victory because they missed out on how alienated and disenfranchised many in the country felt, they are once again going to miss the same dynamic playing out in financial markets.
Ironically, crypto markets as speculative investments seem to have emerged largely because a lack of regulation has prevented cryptocurrencies from fulfilling their original use case: paying for stuff. In fact, wildly fluctuating, volatile markets make cryptocurrencies largely unsuitable as a medium of exchange. Instead of a relatively stable “coin” spreading through its use in new and interesting applications, the technology is spreading through proliferation into new speculative assets (as of today, there are more than 2.4 million cryptocurrencies being actively traded).
Question #3: Does Crypto Signal Parts of a Future We Want?
A big part of the reason the crypto world lined up behind Trump was a total frustration with the SEC under Gary Gensler and the Biden Administration, which seemed hell bent on the destruction of the industry. You can charitably say that the hostility towards crypto came from a genuine concern for investor rights and the integrity of the financial system. You could also, less charitably, argue that the Biden administration was acting primarily in the interests of the financial services industry, which is facing its Napster Moment.
With the Trump administration coming in on promises of setting the crypto industry free of its shackles, it’s worth asking what the actual potential risks and benefits are, and what design challenges new regulations would have to solve for.
What amazes me is that as we collectively mock cryptocurrency and ask “what is it good for?”, we don’t question why the financial sector soaks up a quarter of global GDP for what is, essentially, plumbing. If that was our entry point, you might start the inquiry with questions like “what would a financial system look like if it was designed for a globalized, digital age?” From that frame, and realizing that this January, we are going to start seeing some very rapid movements in this space, here is what I think we should be paying attention to:
First, let’s accept that exchanges have all the dumb risks we’ve already solved over the last 250 years with banks and stock markets
Let’s get the stupid questions out of the way first. It’s frustrating to watch the same risks play out that we’ve already sweat blood over. People wanted to buy and sell crypto easily, but it’s distributed. So some people made a centralized place - an exchange - to trade them. But there were no rules. Would you let the NYSE trade against the market, giving themselves an edge? Would you let a bank say it has your money, but actually spend it all? Would you let the bank bet all your money on something for itself? No. We’ve already been through all this, but we thought that somehow, with billions at stake, that “trust me, bro” would work just fine. This is almost a copy/paste on regulations. It is also no small irony that so much of the risks in crypto emanate from centralization in exchanges, when the technology itself is based on decentralization.
Because the regulators have just been captured, we need to be clear on the stakes of the game…and what game we’re playing
The debate so far has been successfully contained to “what would you even use the internet for?” Advocates of cryptocurrency have been so insufferable that everyone’s eyes glaze over when it comes up, but we are in a situation where Biden decided that the entire future of money and global financial flows was not worth talking about, so now all of those rules will be set by Trump. There are three possible, not-mutually exclusive futures with their own implications.
The Bitcoin Future - Virtual Gold Standard & Digital Scarcity
In this future we decide that cryptocurrency is best seen as an asset, or commodity to be traded and held as a store of value. Many in the crypto industry have been fighting for the classification of cryptocurrencies as a commodity, because the bar for regulation is much lower, and the requirements for disclosure and reporting are much less stringent. In this case, a digital asset is bought and sold with no implied contracts or obligations.
Like gold, the asset is valuable because it is scarce and there are people who will pay for it. Scarcity, in this case, is created by the rules that are encoded in Bitcoin’s blockchain itself and the algorithmic limitations on how quickly new coins are added to the available supply.
In its own way, the idea that a Bitcoin has value is no less ridiculous than saying a small piece of paper has value; it does because we agree it does. What we should be asking is, what does this allow that other methods of exchange do not? If we treat it as a prototype for a new system, we can evaluate its features, rather than just dismiss it completely for ideological reasons.
Pros: It is digital, moveable, universal, decentralized (i.e. not controllable by any particular entity), scarce (value responds to demand), immutable (creates a permanent record), open.
Cons: It is volatile (thus making it inefficient for exchange), inherently energy inefficient (scarcity created by increasing energy consumption), immutable (you can’t change it, even if you want to), open (as criminals have found out, all transactions are public).
As you can see, some of the things that are features, can also be bugs. But they are all elements to be considered in the future we want.
The MemeCoin Future - Snake Oil and Swampland in Florida
The generous reading of the SEC’s enforcement posture to date is that they were trying to avoid this future (the less generous reading is that they have been in the pocket of the financial services industry, preventing open financial infrastructure from emerging). This is the version of crypto that everyone tends to think of - it’s a Ponzi scheme, a scam.
Securities regulations have emerged over time as a way of protecting against scammers. While small, private companies can represent themselves as they please (up to a point - fraud is still fraud), once they attract a certain number of investors, there is a level of disclosure that we require of them to ensure that their claims are largely verifiable, so that the broader investing public can make informed decisions about where they put their money. At least, that’s the idea.
As crypto projects began to emerge, it became clear that instead of offering shares on a public exchange, groups could offer tokens on crypto exchanges to raise funds, with none of the rigour or disclosure required by the stock markets. While there were many serious projects that did this to fund real efforts in creating new use cases, it also sparked a gold rush of memecoins that would hype a release then sell quickly to make a quick exit. In the stock world this was known as a pump-and-dump, and in crypto is referred to as a “rug pull”. There is a very classic shape to these graphs:
The far left of the graph is the pump, and immediately after is the dump, where the project originators liquidate their holdings, take profit, and use retail investors as their exit liquidity. It means that the sellers make a fortune, and anyone who joins in even moments too late loses everything. The above graph, by the way, is $TRUMP coin.
This is what the SEC has been trying to prevent. When I first started researching crypto, the Reddit forums for TerraLuna - which had just imploded in spectacular fashion - had suicide hotlines pinned as the top post. It was that bad.
For the serious members of the crypto community, these are the embarrassing projects that tarnish the industry - hucksters and scammers hustling useless but catchy coins to the desperate, who are hoping to change their lives by catching the next big thing. At this stage, these “projects” make no claim to any kind of utility, but are acting as a kind of digital Beanie Baby. Melania Trump’s coin offers the following in its Terms and Conditions:
THE MELANIA MEMES ARE DIGITAL COLLECTIBLES INTENDED TO FUNCTION AS AN EXPRESSION OF SUPPORT FOR, AND ENGAGEMENT WITH, THE IDEALS AND BELIEFS EMBODIED BY THE SYMBOL “MELANIA” AND THE ASSOCIATED ARTWORK (THE “ARTWORK”) AND ARE NOT INTENDED TO BE, OR TO BE THE SUBJECT OF, AN INVESTMENT OPPORTUNITY, INVESTMENT CONTRACT, OR SECURITY OF ANY TYPE.
This version of the future is one where anyone can make any claim they like, and the onus is entirely on the buyer to ascertain whether a given project has any inherent value or not. The explicit classification here of digital coins as collectibles says it all, but also does nothing but reinforce scepticism about digital currencies.
The Ethereum Future - The World Computer
Ethereum represents an extension of the original logic that Bitcoin brought to life; if value could be stored and transmitted through a distributed, digital platform, then bringing that together with the many ways in which we exchange value in the digital world could allow us to collaborate and exchange in new ways.
Put another way, the first wave of the internet was all about the decentralized sharing of knowledge, but nobody really knew how to share any way other than free. The next wave of the internet was all about extracting value, as advertising and surveillance incentivized centralization and control. This is also the wave that has brought endless subscriptions and user-lock-in as the model for rewarding work. Ethereum, as a distributed computing platform, brings in the possibility of incentive design - the ability to create and share value between people and groups in a peer-to-peer fashion without the intermediaries and tech giants that have crushed the open internet today. Web browsers that share the reward for viewing ads, or micro-tip the authors of content you read. Content networks that distribute benefit to creators. Business cooperatives that are governed by stake, and distribute benefit based on contribution. Music that auto-distributes to creators based on baked-in rights contracts.
The vision is quite radical, and potentially quite disruptive to the many industries that are controlled by highly centralized organizations, like financial services, music, film, gaming, media, publishing and software.
And so…
It’s quite easy to see why there might be a considerable amount of resistance to blockchain and cryptocurrencies, given all that they potentially threaten in incumbent powers. Just in Canada, for music rights distributions, SOCAN collects $523 million (CAD) in royalties, and even after years of improvements, still only distributes $442 million…either by direct deposit, or by sending a cheque; a literal piece of paper in the mail. In 2025. Music rights on the blockchain could always and forever disburse automatically and instantly to all rights holders. The SWIFT network, Visa and other financial intermediaries would be potentially obviated as payments would settle themselves in real time.
Which is all to say that the reason to pay attention to how all of this unfolds is not because, as Krugman says, crypto is only good “for criming”, but because crypto is good for everything that involves an exchange of value. So here are a few policy areas we should all be paying attention to:
* Monetary policy: at scale, something like Bitcoin as a reserve currency affects a key monetary policy lever, as it involves a store of value that can’t be easily manipulated to address issues like inflation in a given economy.
* Privacy: part of the reason crypto currency was appealing to criminals originally was the perception of anonymity. What they have since realized is that the blockchain is a permanent, public record of all transactions, which means future crypto currencies would need to balance the needs for privacy for individuals and the ability to mitigate illicit flows like money laundering and terror financing.
* Securities: there has been no clarity on when crypto is a security and when it is a commodity. Initial coin offerings and similar efforts, to my mind, were clearly securities, but with Ethereum, a given contract on the network might be a security while the token is a commodity. There needs to be good faith, modern design applied to these rules to create regulations fit for a digital economy, not simply using old analogues for new paradigms.
* Transparency: blockchains and cryptocurrencies should be uniquely good at creating transparency because they are public; failures of centralized entities like FTX are inexcusably stupid, because creating transparent proofs should be easy, and financial disclosure for things like ICOs can and should be hard-coded into the blockchain. Good regulation would set standards for these things that could be instantly verified.
* Global Reserve Currencies: Again, at scale, this could represent a major rebalancing of how international finance works, and this comes at a time when global powers want to challenge the supremacy of the US dollar as a global reserve currency. Sanctions work, in part, because of that system, and the shift away from the US dollar to a universal digital currency would have a lasting impact on trade and geopolitics.
* Security: there have been a number of high-profile cases where coding errors and various exploits have been able to siphon money out of various crypto networks. The more value that is stored in these networks, the more attractive they will be as a target (not to mention the threat of Quantum computing to cryptographic systems). If, for example, the US were to create a National Bitcoin Reserve, it would be nice to know that a 12 year old in Latvia couldn’t just walk away with it.
So, while the previous US administration decided to just ignore this whole space and hope it would go away, we are now looking at the Trump administration setting the rules for, potentially, how all future trade and transactions will take place.
I happen to think that’s worth paying attention to, and I’d love it if people like Krugman - a Nobel Prize-winning economist - would take it seriously enough to weigh in on the future.
Goal17 is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.
Get full access to Goal17 at goal17.substack.com/subscribe