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.


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11 thoughts on “You Don’t Want A Crypto Future. You Just Think You Do

  1. Speaking of the supposed end of the dollar system, Noah Smith pointed out talking about the Yuan made no sense.

    As in – if your problem with the $ is that sometimes the US uses it to coerce countries then what are the chances you would choose the Yuan as a substitute? Like, which country do you trust most to not interfere and f**k you over? The US or China.

    Despite gallons of electronic ink being spilled on anti-Americanism screeches, the question answers itself.

  2. Your insights are great. I am old school and can not bring myself to even dabble in bitcoin.
    I am, however, wondering what will happen to the USD as the world shifts away from fossil fuels, thereby decreasing international trade.

  3. “having a big number next to your name… does not relieve you of your obligations” to society.” On the contrary, as far as I’m concerned it increases those obligations, something our well-heeled corporations and individuals don’t seem to take very seriously. While I remain a staunch capitalist, and with apologies to Milton Friedman, If those with enough resources to share don’t do so, who will? The bell curve applies to the distribution of nearly everything, including despair. Jesus had nothing and yet He gave even what He didn’t have to others who had nothing. Neither was He particularly fond of those who had plenty and didn’t share. If we don’t lower the level of nasty and mean in our society exponentially, and soon, we won’t have a society when the next flood comes (the one that disappears Florida …)

    1. Ideally having more would incline one to feel more obligated to the society that benefited them, however that assumes a person was raised with these kinds of values or learned them in some way. Without the presence of those values, a rich man will not of his own inclination feel an obligation to anyone. Since values are not forced upon anyone in a free society, the only mechanism that can force accountability is the law. In the United States the law has been gutted and misread to the point that a person will only be held accountable if they are prosecuted in front of a judge that believes that person should be held accountable (and it’s really on a person by person case by case basis). With rich people having access to all measures of legal experts, they have the upper hand against civil servants who might desire to prosecute them. James Comey referred to this as the chickensh*t club and we see this continuing on today in SDNY not pursuing charges against Trump despite the fact his own accounting firm basically admitted that he lied on his taxes. On a similar note, there is an article in the Atlantic by Anne Applebaum about how we (the United States) can make a more concerted effort to stop Oligarch’s before a Putin type invades another country that is well worth reading.

  4. Then there is the following which I have been expecting:

    YEREVAN, March 14 – Sputnik. The member states of the Eurasian Economic Union (EAEU) and China will develop a project for an independent international monetary and financial system. This was agreed upon by the participants in the economic dialogue “A New Stage of Monetary, Financial and Economic Cooperation between the EAEU and the PRC. Global Transformations: Challenges and Solutions”, which was held on March 11 via videoconference. It is envisaged that the system will be based on a new international currency, which will be calculated as an index of the national currencies of the participating countries and commodity prices. The first draft will be submitted for discussion by the end of March. As Sergei Glazyev, Minister for Integration and Macroeconomics of the EEC, emphasized, China was the first in the world to move to the stage of national economic recovery.

    This sounds very much like the proposal John Maynard Keynes made at the Bretton Woods Conference instead of the fixed exchange rate gold standard the US wanted. He wanted an international currency which he called the Bancor based on a basket of currencies of the members. The US nixed it.

    Could the above announcement be the beginning of the end of what economist Michael Hudson’s called “Super Imperialism – The Economic Strategy of American Empire”?

    1. I realize not every reader is apprised of my policy on Sputnik, RT and/or any associated outlets, so I’m not going to remove this comment. But I do want to reiterate that policy: No quotes or links to Sputnik, RT or any of their affiliates, arm’s length or otherwise, are permitted in our comments section.

      Sputnik and RT are FARA-registered entities. In other words, they are registered agents of the Russian government and operate as international propaganda mouthpieces for the Kremlin.

      Again, I’m going to let this comment stand because I know not everyone is apprised of my policy, but this is a reminder.

  5. Best Post in a long time. It addresses realities and not heavy on Biases . After watching the gum flapping in the Main stream Media for at least a month I was beginning to think there was amnesia inducing compounds in the air that made people (in general) think that no actions by any party ever have any consequential reaction by any other party. That isn’t as Geopolitics works or has ever worked or will ever work. Think back to about the turn of the century and look through a lens called objective and voila there appears a cast of villains.

  6. Some thoughts.
    – USD as global trade and reserve currency gives the US power but at a heavy cost in inflated FX level, competitiveness of manufacturing, structural deficit, lack of control over flows.
    – It also requires rules-based and open legal and financial system, and a substantial level of perceived trustworthiness, which also reduces control by govt.
    – If a country wants its currency to become the global trade and reserve currency, it has to take on those costs and meet those requirements.
    – Will China want to do that? Govt control is priority #1.
    Is the additional power worth the loss of control?
    – Will other countries want to replace USD? What exactly is the motivation? Want to be able to start a large land war in Europe*** without risking the US leading a global coalition to wage financial war on you – okaaay, how many countries have that “ambition”?
    – Certainly, China will be able to get “some” countries to do “some” trade with it in CNY, as a political statement. Russia obviously. Saudi likely. India likely. Those countries will accumulate “some” portion of their FX reserves in CNY. The US and USD will have less financial power over those countries. How much less? Russia went to huge lengths to hold as much of its reserves as possible in not-USD and it wasn’t enough.
    Will Saudi, India, etc want to have substantially all their reserves in CNY? See the first two points. Russia, alas for it, may not have a choice any more.

    *** Or somewhere else that the West considers vitally important. You can probably start a large land war in Africa without much risk to your USD reserves. Unfair but true.

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