Market Lab / Crypto Report - 11-4-19 The Bleeding Edge: The Human Brain Often Ignores Second Order Effects; Precious Metals/GBTC

Cryptocoffin

Mainstream media is designed to shock. This comes at the expense of ignoring deeper truths. The mainstream typically only provides cursory first order levels of understanding. The closer one gets to revolutionary, bleeding edge technologies which defy the way things have always been done, the greater the deep thought that is required so one can understand the second and third order effects of such game-changing technologies. 

I attended Cryptofin, a blockchain conference here in Tallinn, Estonia. While Tallinn is becoming increasingly used in the same headline with Tel Aviv due to Tallinn being billed as the world’s first digital city, Cryptofin should maybe have been called Cryptocoffin. While some of the attendees were very bright, accomplished individuals, the panel discussions brought to light how many of these so-called experts and “thought leaders” sitting on panels have failed to deep think when it comes to bleeding edge technologies in the blockchain/crypto space. While some thought leaders are legitimate, others are the leaders of lemmings, ie, those who cant think for themselves, so get elevated to the status of a guru despite their thoughts being of the old school, flat-earth variety. One need not look far to see many such gurus in the investment space who leader their flock to ruin, or at least underperformance. 

Government and Law — Slow Herd Animals

At Cryptofin, a question was put to the audience by one of the panel participants who practices law as to whether the audience thinks law fails to keep up with the pace of technology. A number of hands went up which was met with disdain from some of the panelists which, in-turn, was met with disdain from us at some of the panelists.

Bobby Lee who started the first crypto exchange in China appeared on this panel. His brother Charlie Lee started Litecoin. The lawyer claimed that laws are written out in a way so there is no misinterpretation. Of course, this is nonsense. The Patriot Act in the U.S. as a consequence of 9/11 has been used to remove the Bill of Rights in certain cases. One’s act of transacting bitcoin may be perfectly legal but the individual, under the Patriot Act laws, could be labeled a terrorist or a money launderer without the right to legal representation. While the stated purpose of the Act is to “deter and punish terrorist acts in the United States and around the world, to enhance law enforcement investigatory tools, and for other purposes,” one of the many criticisms of the Act is that “other purposes” often includes the detection and prosecution of non-terrorist alleged future crimes.

This reaction from some of the panelists surprised me as countless examples abound of how governments thus justice systems are corrupt to some extent while government is the slow animal in the herd when it comes to innovation. Law is always playing catch up while many lawyers not of the patent law persuasion are notorious for failing to be tech-centric. And let’s not forget how a private company by the name of Celera Genomics mapped the human genome far quicker at much lower cost than the U.S. government back in the year 2000. The $300,000,000 Celera effort proceeded at a faster pace and at a fraction of the cost of the roughly $3 billion publicly funded project.

Meanwhile, some of the panelists, while highly intelligent, harbored old school views possibly because they are unable to connect the dots when it comes to bleeding edge tech which introduces major differences into the way things have always been done. Warren Buffet, Nouriel Roubini, or Jamie Dimon anyone?

Decentralized Tech: P2P BitTorrent and Bitcoin

Some panelists hold views that bitcoin must ultimately fail, that decentralized exchanges are doomed, and that DAOs and DAPPs are questionable at best, failing to see how such technologies are revolutionary to the way things have always been done. I have noted that peer-to-peer file sharing since Napster was shut down in 1995 continues to thrive despite billions of dollars of taxpayer money thrown at court cases aimed at shutting down Pirates Bay equivalents. I was told that this was just copyright law, not having to do with control of fiat which the U.S. government would take more seriously. Well, the U.S. government fired its heavy artillery at illegal file sharing yet p2p is a multi-headed hydra. Cut off one Pirates Bay and ten more materialize. 

The same is true of bitcoin which is more likely an infinite headed hydra as I wrote in a recent piece. We saw what happened to bitcoin when China banned various aspects of bitcoin. Instead of plummeting out of sight, bitcoin eventually hit new highs… again. 

U.S. Government Not Infinitely Powerful

Despite what some think, the U.S. government is not the end-all, be-all entity with infinite control. If they were to illegalize bitcoin, bitcoin is decentralized so good luck with that. Even lawmakers in the U.S. are starting to realize an effective ban on bitcoin would be incredibly difficult if not impossible. The U.S. Senate Committee on Banking, Housing, and Urban Affairs held a hearing on cryptocurrency and blockchain technology regulation earlier this year. The conclusion was that the U.S. would not be able to succeed in banning bitcoin because it is an open-source, decentralized, global innovation that moves borderlessly and frictionlessly everywhere on the planet. Anyone can use it where there is an internet connection. 

The way to have an impact on bitcoin usage is the same way Netflix and iTunes reduced illegal p2p file sharing. One economist suggested governments should offer more financial freedom and a better monetary policy. Certainly that would be a step in the right direction but remains to be seen since governments have always controlled and restricted the transfer of value. 

Old School Beliefs on Bitcoin

In the meantime, despite the conclusions cited above made during the U.S. Senate Committee’s hearing earlier this year, one remaining old school Congressman Brad Sherman went on an anti-bitcoin and cryptocurrency rant at Facebook CEO Mark Zuckerberg’s congressional hearing regarding Libra. 

Echoing sentiments of Nouriel Roubini, Sherman dismissed crypto technology as only useful for criminals and called for an outright ban earlier this year. Sherman still harbors the mistaken old school belief that the dollar is resistant to criminal behavior, contradicting numerous reports by Europol et al that physical forms of fiat such as the dollar, not cryptocurrencies or bitcoin, are the most vulnerable to criminal activity. 

Dollar’s Reserve Currency Status At Risk 

Sherman did rightly voice his concerns that the U.S. dollar will lose its reserve currency status due to bitcoin, stating reserve currency status enables the U.S. to influence other countries’ policies and actions through the use of economic sanctions. I wrote in a prior piece that petrodollars are one of the key ingredients to the dollar maintaining reserve currency status. The U.S. dollar has been the world’s dominant currency since the 1920s. But central banks are investigating how national digital currencies can allow for faster, cheaper money transfers across borders thus are viable alternatives to the U.S. dollar. Such would be embraced by nations concerned about the dollar’s outsize influence on the global economy.

While this could also blunt competition from bitcoin and its peers, should bitcoin ever hold reserve currency status or used as a fixed supply backstop to a reserve currency which can be inflated away, its valuation will certainly be orders of magnitude greater as a consequence. 

As has been suggested by Mark Zuckerberg and Anthony Pompliano of Morgan Creek Digital, if the U.S. does not tokenize the dollar, it will lose its reserve currency status as countries such as China are in the process of developing a digital yuan, with other countries aiming to soon follow suit. According to Pompliano, “China has a digital yuan, and we don’t have a digital currency, it will be much more accessible for people to buy the Chinese yuan in other parts of the world than the U.S. dollar.” After World War II, the U.S. accounted for 28% of global exports. Today, the figure stands at just 8.8%, according to the IMF. Yet about 40% of world trade is invoiced in dollars, roughly four times the U.S. share of world trade, and used in 88% of all foreign-exchange trades world-wide. Nevertheless, the dollar is becoming increasingly vulnerable to losing its currency reserve status. Further, when the dollar appreciates, debt denominated in dollars becomes more expensive for foreign businesses. This boosts the prices of a country's imports which can feed inflation. 

While Bank of England's Mark Carney has said the dollar won't lose its reserve currency status overnight, reports show China has surpassed the U.S. to become the world’s leading trading nation according to the Wall Street Journal's report The Coming Currency War: Digital Money vs. The Dollar. Further, over 900 million Chinese use mobile money apps like Alipay showing much domestic commerce in China already has moved into the digital world. This has spurred the People’s Bank of China (PBOC) to digitize its currency, the renminbi. Trends are important. The renminbi's use in world markets has increased over the past decade. According to Eswar Prasad, an economics professor at Cornell University and former head of the IMF’s China Division, digitizing the renminbi is a way to give their allies an alternative to the dollar and create a system that couldn’t be disrupted by the U.S. "Would the Chinese like to be less vulnerable to American sanctions? Happier if they didn’t have to use the dollar for their imports and exports? The answer to that is unambiguously yes,” he says. 

The second order effect may be to displace the dollar as the world's reserve currency with a digital renminbi which would be controlled by the PBOC. Blockchain provides unparalleled transparency. Thus bitcoin and other cryptocurrencies which offer privacy and specific functionality will not be displaced but rather can co-exist with such digital fiat. In fact, according to Travis Scher of Digital Currency Group suggests, “In a world where a country like China issues its own digital currency and tries to move the entire economy onto that, it actually will increase demand for cryptocurrencies and digital currencies that are more private and create the potential for more autonomy.” 

(͡:B ͜ʖ ͡:B)