You Don’t Want A Crypto Future. You Just Think You Do

In the weeks since the West moved to seize Russia’s foreign currency reserves, (too) many market participants have exhibited an updated, more fervent version of the cognitive dissonance that sometimes accompanies the weaponization of the dollar in the service of US foreign policy goals.

Typically, the US mobilizes the dollar to target rogue regimes or flailing backwaters where someone’s run afoul of the values Western nations purport to cherish, even if they don’t always uphold those values domestically. Nobody generally cares, and we conjure any number of excuses to justify our shared apathy. Iran is “the world’s number one state sponsor of terror,” we say, conveniently overlooking the incontrovertible fact that the Sunni monarchies are more deserving of such dubious distinctions than Tehran’s theocracy, which projects regional influence via organized militias, not jihadists (people die either way, but the distinction does matter). We describe Venezuela as a “socialist dictatorship” and North Korea as a “nuclear-armed, totalitarian cult.” If we’re being honest, our apathy is mostly attributable to intellectual laziness. Americans don’t known much about Canada and Europe, let alone Iran and North Korea, so voters tend to accept whatever Washington says in justifying the weaponization of the US dollar.

Occasionally, though, market participants in Western economies demonstrate something like sympathy for nations targeted by the US Treasury, not because anyone cares about the impact of the measures on locals (which is what we should care about when we impose sanctions), but rather because there’s something profoundly unnerving about being robbed or, more accurately, deprived of access to the universal unit of account. Bitcoin’s rise has amplified such concerns by presenting an alternative to a centralized system that can be leveraged for political purposes.

Russia’s invasion of Ukraine and the steps taken by the US and its allies to cut Vladimir Putin off from access to any and all hard currencies, galvanized this debate on a number of fronts. Publicly supporting Putin’s invasion is a wholly untenable position to take, and the sheer audacity of the incursion seems to have woken many Americans up to the fact that the Kremlin’s “Whataboutism” is logically inconsistent. No, it wasn’t a good idea for the US to invade and occupy Iraq. But also no, America’s history of military misadventures doesn’t justify Putin’s invasion of Ukraine, the same way I can’t steal your television and plead innocent on the excuse that other people steal televisions all the time.

And yet, simultaneously, the seizure of Putin’s foreign currency reserves was a wakeup call of sorts — the general public was forced to reckon with what it actually means when the US Treasury goes after someone or some group or some state. Not everyone was enamored with that realization.

There’s perhaps no better real-world manifestation of the cognitive dissonance inherent in the juxtaposition between opposing Putin’s war and abhorring the idea of seizing his (or, more to the point, anyone’s) dollars, than the crypto community’s simultaneous support for Ukrainian creators (e.g., through crowd-sourced efforts to secure mass, Ethereum-denominated purchases of NFTs created by local artists) and proselytizing about the bullish read-through of the sanctions for Bitcoin.

Putin is bad, and Ukraine’s financial system and economy are in limbo, so you should leverage Ethereum to help beleaguered Ukrainians. But robbing people is also bad, so you should stay bullish on Bitcoin because even if you don’t support the people using crypto to evade sanctions, you should support the evasion (not the invasion) itself on principle.

Matt Levine had a great take on all of this. I’ve been meaning to highlight it for weeks. “There is a lot to dislike, or at least to be uncomfortable with, in this situation,” he wrote, of the decision to effectively rob Russia and exclude it from transacting in the only currencies that matter. “There are the Bitcoiners’ complaints [that] financial transactions are a private matter, letting authorities interfere with them is bad for freedom, dictators (or democracies) can arbitrarily cut off money to people they dislike, etc,” he went on to write, in “Russia’s Money Is Gone,” adding that,

But there are also more specific complaints about “weaponizing the dollar”: The US-dollar-based international financial system, and the international financial system broadly, is an extremely valuable engine for global prosperity because people basically trust it to be reliable and neutral and rules-based; they trust that a dollar in a bank is usable and fungible, that the dollar system protects property rights. “Money is a social construct,” sure, in the back of everyone’s mind, but it is a well-constructed construct, one that works. Making the Russian central bank’s money disappear undermines that valuable trust. This is arguably bad for the dollar’s long-run dominance: Russia will develop its own ways around SWIFT, China will push other countries to adopt its digital yuan, everyone will use Bitcoin, etc. But it is also arguably bad for global prosperity: Trustworthy rules-based trade works better and produces more value than arbitrary uncertain trade.

Crucially, though, he suggested that if we want to cling to the notion that society is good, then it’s a good thing that all of us, countries and corporations included, are part of a network in which socially deleterious behavior can be punished.

In the linked piece (which is most assuredly worth reading in full), Levine countered the idea that conceptualizing of society and money in such terms is wildly dystopian. You wouldn’t, he conceded, “really want the US government making day-to-day decisions about who deserves to keep their bank accounts,” but consider how often we (all of us, really) complain about the wealthy being “above the law” or about the “haves” inhabiting an entirely different reality than the “have nots.”

What are we really saying when we lodge such complaints? As Levine put it, we’re arguing that money “can insulate you from the obligations of society.” That’s not right, we generally reckon. You might fairly be entitled to a greater share of goods and services if the money you’ve accumulated is predicated on some outsized contribution you’ve made (say you founded a company that employs hundreds of fellow citizens, for example) but, as Levine went on to write, “having a big number next to your name… does not relieve you of your obligations” to society.

A choice to undermine the collective with some heinous act demands a response, and centralized money allows society (in the current case, Western nations and their allies) to exact a toll commensurate with the perceived severity of your transgression.

You could argue (as Mike Novogratz endeavored to do on Tuesday), that between exchange KYC processes and the idea that a public blockchain somehow precludes nefarious actors, there’s “zero chance” Russia can evade sanctions using cryptocurrencies. To the extent that’s true, one wonders about the veracity of multiple core Bitcoin tenets. There’s something internally inconsistent about arguing that something designed to relegate centralized money to the dustbin of history can’t be used to get around impositions based on the “old,” centralized system.

From a practical perspective (i.e., stepping back from the theory side), Novogratz is “just wrong” (to employ his description of Elizabeth Warren’s concerns) about the endless ways in which the cryptoverse can be used to hide money. Anyone who opens a MetaMask wallet and spends a few weeks wandering around decentralized exchanges and NFT marketplaces knows that once you get your money on-chain, it’s essentially invisible, a paradox considering it’s actually visible to everyone via block explorers and analytics platforms. It’s invisible precisely because it’s completely transparent. You know someone bought a $3.9 million XCopy, and you can see the person’s wallet address, but there’s no way to know who, unless a celebrity admits to it.

A world where Bitcoin and Ethereum replace dollars, euros and pounds would be a world where money is no longer a tool society can leverage to punish transgressions. As Levine put it late last month, the idea behind the sanctions on Russia “is that the dollar represents a society — not just the US, but a global community of dollar users — and that that society is reflected in both a set of values that abhors the invasion of Ukraine, and in an economic system that other countries want access to, even if those countries do not share those values.”

What I’d gently note, based on my own, firsthand experience with Web3 in all its various manifestations this year, is that the people who currently occupy that realm aren’t generally the type of people who would fare well in a lawless world, where no centralized authority had a monopoly on the use of coercion to prevent bad behavior.

On Wednesday, Fitch stated the obvious with regard to $117 million in dollar coupon payments Russia owes this week. There’s no alternative payment clause, but there is a 30-day grace period. “The payment in local currency of Russia’s US dollar Eurobond coupons would, if it were to occur, constitute a sovereign default on expiry of the grace period,” Fitch said.

In other words: No rubles. And no Bitcoin or Ethereum either.