The problem with crypto is not that it is a scam. Or a bubble. Or used in any significant way today to evade taxes and finance terrorism.
The problem with crypto is it presents a viable alternative to monetary monopolies by national governments. A viable alternative to banks and other financial institutions. A viable alternative to intermediated exchange.
Pondering Durian is a tech-focused investor and writer who explores connections involving the U.S., China, and Emerging Asia (India and Southeast Asia) in the Emerging newsletter and blog.
The real problem – for politicians, nation-states and the less tech-savvy and affluent within their borders – is that holding non-sovereign, algorithmically scarce digital assets today may be a better vehicle to protect one’s future purchasing power than fiat backed by nation-states. The sky-rocketing prices of BTC and ETH are evidence of many reaching a similar conclusion. The shift in power between hierarchy and networks is underway.
“But Pondering,” you plead, “Divorcing monetary sovereignty from nation-states is a bit far-fetched, don’t you think? Surely, you don’t mean to suggest we are heading for a cliché ‘sovereign individual-esk’ world where nations lose control of their own monetary policy to … distributed algorithms? I mean, sure – the internet has challenged faith in institutions and boosted the relative power of networks and polarized populations. But Pondering, let’s be real. The power of governments has never been more secure. Please, stop the hyperbole”
To which I respond: EXACTLY. Which is why this crypto stuff is so wild. It’s why Act 3 of the internet may be the most dramatic yet.
In a way, the demise of the current financial system was embedded within its own creation. The real question was always: “What comes next?”
The Triffin dilemma
Robert Triffin was a 1960s economist who highlighted the paradox of a single nation’s currency serving as the reserve currency for the globe. In short, the inflated international demand for the reserve currency (U.S. dollars, in this case) to conduct trade and host FX reserves will lead to structural trade deficits for the issuer.
While an inflated value for the dollar makes imports cheaper, the cost is less competitive exports and mounting deficits. In its effort to supply the world with needed dollars, the U.S. has squeezed many of its own industries offshore, propelled inequality within its borders and fostered the return of more extreme politics.
It’s why Act 3 of the internet may be the most dramatic yet.
In many ways, the deficits of the U.S. are structural in nature. The U.S. now accounts for about 15% of global GDP, but the dollar still accounts for more than 50% of international trade. With a population of abouty 330 million on a globe of approximately 7.9 billion people, the writing was on the wall from the start. It took until 2021 but the petro-dollar system is starting to show cracks.
A decade of stimulus, accelerating deficits and $6+ trillion in COVID-19 relief spending are bringing questions of sustainability to the forefront. Just last week, Bridgewater’s Ray Dalio penned: “Why in the world would you own bonds when … bond markets offer ridiculously low yields?”
The sad reality is real returns on government debt have gone negative – you are literally guaranteed to lose purchasing power holding these assets. International demand for Treasury bonds is drying up at the exact moment governments are accelerating new issuances. With over $75 trillion in U.S. debts outstanding and rising by the day, buyers are beginning to flinch.
If you are a boomer, the status quo of inflated asset prices and entitlement spending is someone else’s problem. Just a few more kicks of the can. However, millennials are taking in this macro portrait and quietly asking: “Does this rickety scaffolding really have another 30-40 years? How does this play out?”
Looking at my social media feed, I can’t help but notice the relentless barrage of “money printer go brrrr” memes, a disdain for institutions and #Bitcoin hashtags burned into the minds of young people as if to say:
“Do you really want to be holding the bag when the trillions in debt, entitlement spending and monetary shenanigans come due from propping up the asset prices and lifestyle of the boomer generation? Are you really going to sit here and take decades of decreasing purchasing power on the chin as governments inflate away debts that benefited others?”
See also: Sofia Blikstad – MMT, Crypto and the New Nature of Money
I’m not saying it’s right or wrong. I’m just saying it’s viral.
One of the leading indicators of inflation is increasing expectations of inflation. Social media algorithms have been finely tuned to spread these exact messages of fear and greed like wildfire. Small matches have already been lit in many fringe communities online.
Taking in this increasingly precarious scaffolding, young people have started looking around for an exit. Like a just-in-time liferaft, the budding world of cryptocurrencies has emerged as an early favorite.
So here we find our millennial protagonists squeezed between 1) a rigged financial system and a controlled yield curve likely to destroy their future purchasing power, and 2) a risky, unproven libertarian experiment taking on the most powerful institutions on Earth.
Rock, hard place.
A tale of two cities
But which one is better?
On the one hand, the existing monetary regime is surprisingly regressive. Artificially depressed rates and cheap debt disadvantage the working class whose wages struggle to keep up with inflation – especially inflation in financial assets – benefitting investors/financiers at the expense of labor. Dovish monetary policy, globalization and automation are a three-headed monster rampaging through the blue-collar towns of western democracies claiming ever more territory for the expanding “rust belt.”
On the other hand, there is a budding “internet of value” built on distributed systems and cryptography, promising users an alternative to today’s “rigged” system. A system based on transparency, individual sovereignty, and a return to hard money principles with a deflationary currency like bitcoin at its core. A system promising to end the unsustainable fractional reserve banking excess of fiat and the regressive outcomes they encourage.
See also: Pondering Durian – Why >15% of My Net Worth Is in Bitcoin
Similar to the power-laws of the internet, I imagine a new crypto-centric financial system would be ruthlessly meritocratic, allocating resources to those who truly create value for others in a market-based economy on a global scale. The difference is the value-capture is now native to cyberspace and harder to redistribute for the large swaths within a nation’s borders who will struggle to compete in this brave new world.
Cutting out intermediaries is a double-edged sword. Sure, you can cut out banks, bankers and Big Tech from levying high fees and taxes on peer-to-peer transactions. A popular remedy, no doubt.
However, what happens when more wealth is stored in non-domiciled smart contract platforms or decentralized autonomous organizations (DAOs) – accruing value in the decentralized web, away from the reaches of the nation-state, the primary vehicle of redistribution? I imagine that will be decidedly less popular, especially in developed economies where populations have grown accustomed to transfer payments.
In a world where crypto succeeds as a nation-state resistant store of value (a big if), the most talented, most connected, most tech-savvy individuals globally will thrive to a degree never before seen. Inequality between the “haves” and the “have nots” will yawn further and votes towards ever greater redistribution will be increasingly impotent.
Taking in this increasingly precarious scaffolding, young people have started looking around for an exit.
So, friends, we find ourselves here: a broken, regressive financial system whose only realistic path to paying off its massive debts is devaluing the currency, which will only further accelerate the adoption of a new hyper-meritocratic crypto-economy that will likely lead to further social unrest.
I obviously expect nation-states to put up a fight, which is why crypto assets are still sublimely “risky.” Yet, governments will find themselves in a bind. As several have noted, governments can’t actually ban crypto assets. They can only ban their own constituents from owning them, pushing the innovation (and the financial gains) of the internet’s next iteration to the shores of geopolitical rivals.
The game theory for national leaders is a nightmare.
The real problem (for governments)
The next 10 years or so will be wild, but it’s impossible to put the genie back in the bottle. Crypto is here to stay. Instead of the hourly price updates from resident cheerleaders on Twitter, more people should be asking:
What would a crypto-denominated world actually look like?
Many people in emerging markets will be less subject to corrupt politicians and fiscal mismanagement that is still too fresh in the minds of many in Southeast Asia, Latin America and Africa. No longer would political negligence or corruption destroy citizens’ life savings. Financial access would be equal opportunity.
See also: Michael Casey – Why Quantitative Easing Is Here to Stay
On the other hand, equal opportunity from quite uneven starting points in a game without a referee to smooth out outcomes. Despite all the talk in decentralized finance (DeFi) about access to the un- or underbanked, Ant, Google, OVO, Mynt and mPesa have done far more for financial access in emerging markets than DeFi to date.
Despite the distribution of ownership to users or early adopters, my sense is that a crypto-denominated world will bring about an even more cutthroat meritocracy than the internet-laced world we inhabit today. The early and tech savvy with Swiss bank accounts in their pocket will bounce from friendly jurisdiction to jurisdiction while left-behind nationalists rage against the status quo.
Governments will be progressively stripped of their powers of redistribution to smooth out the unequal gains of a rapidly digitizing world. The majority will find a world of tech-enabled global markets unencumbered by protectionist policies, in which they cannot compete.
The real problem with crypto is it just might work.
And then what?