Bitcoin, Kennedy, and Trump

An in-depth recap: They didn't quite "go there."

TL;DR:

The speeches by Robert F. Kennedy, Jr. and Donald Trump at the 2024 Bitcoin Conference are a strong net positive for crypto, but neither candidate really “went there.”

Let’s be realistic. Donald Trump is about his brand, which is valued in USD. It is unlikely he understands the issues beyond what his position on them means for his brand. Bobby Kennedy’s brand—frankly—is measured in the blood of his father and his uncle.

But honestly, Trump might be starting to realize the reality of that kind of brand.

Kennedy seems to have a much stronger grasp of the subject than Trump because he deliberately surrounds himself with people who do not care what he (Kennedy) thinks about a subject.

They are making similar proposals, but they both miss the heart of the matter. They haven’t quite “gone there.”

Getty Images for Bitcoin Magazine. From Frobes.com. Fair use claimed.

“There” is Legal Tender

“There” - in the sense of “He actually went there.” - is legal tender. The entire crypto space right now is a stateless, digital foreign exchange (FOREX) play. To understand why, this article in The Block about the bankruptcy of crypto exchange FTX is a classic example of burying the lede. It states in its last sentence: “The Bahamian claims, like the Chapter 11 claims, will be valued as of November 11, 2022, the original date of the bankruptcy claim.”

“…will be valued?” In what?

Here is what is happening here:

When FTX filed for bankruptcy protection on November 11, 2022, the BTC/USD price was $17,036. The bankruptcy plan filed with the court uses that date to determine the USD value of the crypto units customers held in their wallets. There is a court hearing on this plan scheduled for October 7, 2024. FTX customers who owned BTC on the exchange naturally want their BTC to be priced at a later date since BTC has appreciated a great deal. The plan filed with the court on December 16, 2023, uses the bankruptcy filing date. So let’s look at these dates:

• November 11, 2022 (bankruptcy protection sought): BTC/USD was $17,036

• December 16, 2023 (bankruptcy plan was filed): BTC/USD was $42,272 (+248.13%)

• July 28, 2024 (today): BTC/USD is $67,904 (+398.59%)

• October 7, 2024 (next hearing): BTC/USD will be ???

Now, let’s flip the price pair to USD/BTC. Please understand that we’re showing the drop in the value of USD using BTC as our reference point.

• November 11, 2022: USD/BTC was ₿0.0000586992

• December 16, 2023: USD/BTC was ₿0.0000236563 (-59.70%)

• July 28, 2024: USD/BTC is ₿0.0000147267 (-74.91%)

• October 7, 2024: USD/BTC will be ₿???

Let’s imagine an FTX customer with a claim before the court. He owned exactly ₿1.0 in his BTC wallet when FTX filed for protection. The court ordered that he be paid $17,036 from the liquidation of FTX. There will be a lot of hot air in the media about him being “made whole.” But was he? Flipping the price-pair math above shows clearly that the USD he will receive has lost 74.91% of its value as of this writing. And that is if we start at the filing date. If we go back further to when he bought the BTC, the loss will be even greater. And who knows what it will be on October 7th if the court accepts this plan.

Trade reserve status, the USD, and Crypto

In order to really understand what “going there” entails, we have to back up and consider a side to this matter of the USD as the world’s main trade reserve currency. This is a side that gets very little attention, which is why this article is a must-read. The money-quote:

In fact, there’s reason to argue that common law — enforceable in U.S. and U.K. courts — not only underpins the value of the dollar but is, in and of itself, the equivalent of a reserve currency. Rather than failing and fading as geopolitics becomes more fraught and contentious, both the dollar (sic) and the legal system that defines it will grow in influence and utility.

First, we should note the author is a bit parochial here. Singapore’s legal system is a common law system arising from the same English roots as the U.S. system. Hong Kong’s system is as well, but there is now this nagging little problem called the Chinese Community Party (CCP) that one has to deal with when considering Hong Kong’s courts.

The author is right, however, to ask (earlier in the article):

In addition, while technology may help to displace the dollar (sic) over time, decentralized finance has lost much of its luster after the last 12 scandal-ridden months in the crypto world — though “smart contracts” and blockchain-based public ledgers could offer transparent and enforceable transactions in the longer term, without the dollar serving as an intermediary.

However, the biggest failing of this decentralized nirvana is that there’s no one to complain to if — and when — things go wrong. To whom do you appeal for restitution when a contract fails? Until that important question is settled, trusted legal systems, which in practice means the U.S. and the United Kingdom [TPB: and Singapore], will remain the easy fallback.

BRICS, as it is configured today, will never issue a currency that will be widely adopted for the simple reason they (the BRICS members) do not even trust each other’s court systems. Engaging in trade where the contract is denominated in the currency of a sovereign necessarily implies trust in that sovereign’s court system to fairly adjudicate disputes. Does anyone really think a CCP court will adjudicate a dispute in a way consistent with Western traditions of common law? (This has to be asked of courts in Hong Kong as well as any other CCP jurisdiction.) Other BRICS countries come closer to what we otherwise would expect. But the question still must be asked.

NOTE: This little interlude is NOT INVESTMENT ADVICE OF ANY KIND!!! If Singapore becomes a full member of BRICS, we may find ourselves in a whole new world. The Monetary Authority of Singapore was recently the third-largest central bank buyer of gold. Singapore has an impeccable track record of fiscal competence. It has to place a premium on competence because it has nothing in the way of natural resources and must import almost everything. Singapore also has a highly credible court system built on the same common law foundation as the US and UK. If it has enough gold and silver to back the Singapore Dollar, it has a powerful trifecta that very well might herald the end of the USD’s preference in global trade.

Getty Images / The Washington Post. From CNBC.com, Fair use claimed.

This is where we see Kennedy's strength

Kennedy understands how the landscape of common law is the essential bulwark of individual liberty. He has been fighting on this turf his whole life. I am just not sure whether he has thought through the implications of cryptocurrency as money, the common law, and legal tender.

I am not even certain some Bitcoin maximalists want Bitcoin to gain legal tender status. Their argument is that Bitcoin is designed to be held with no counterparty risk. However, the bankruptcy of FTX clearly shows us that FTX customers did not own their BTC. FTX customers owned an unsecured claim against the FTX balance sheet that, as the bankruptcy proceedings show, is clearly a claim measured in USD. If your only recourse in a dispute is a recourse measured in the banknote of the Federal Reserve System (i.e., the USD), then the Federal Reserve System ends up being your counterparty anyway. (If you don’t believe this, go back up and review how much value the USD lost against BTC as the reference unit just between November 11, 2022, and today - nearly 75%.)

Holding your crypto in a “cold-storage wallet” (meaning a USB device designed solely for this purpose) does not change this. Why would we decide to contract with someone else in a crypto unit when we know that if the contract fails, we are not going to be paid what we are owed in that unit? There it is again—the Federal Reserve System banknote sits at the center of everything.

Can Kennedy see when crypto advocates are “talking their book?”

I believe some in the crypto space understand this and prefer it because it opens up a business opportunity. To see what I mean, consider this thing called a Stablecoin. They exist to reduce the transactional friction created by USD regulations. If you fund a crypto account in a crypto exchange with USD, you bear the regulatory burden on the front end of that funding, and then when you convert that USD to a Stablecoin. Once into the Stablecoin - acting as a crypto proxy for the USD - you can transact among digital assets (BTC included) freely without having to worry about the red tape such transactions would otherwise require.

This only works, however, if the Stablecoin issuer can maintain a 1:1 peg between the Stablecoin and USD. Terra Labs, the creator of the Terra Blockchain and issuer of UST/LUNA, tried to do this with an algorithm that minted (inflated) or burned (deflated) the supply of its coin called LUNA on their Terra Blockchain based on how UST traded against the USD. (There it is again. The Federal Reserve System’s banknote as the central reference unit.)

There is some speculation that Alameda Research, part of the FTX ecosystem, flooded the market for UST with sell orders. This forced the Terra Blockchain to “burn” (deflate) the supply of LUNA to defend the 1:1 peg of UST. Terra’s Blockchain is thought not to have kept up with the volume. As a result, Terra was not able to manage the supply of UST fast enough to protect its 1:1 peg.

If this is true, it is a fascinating combination of a “short sale” and a “denial of service” attack. Alameda Marketing allegedly shorted UST at a volume over time fast enough to overwhelm the ability of the Terra Blockchain to provide its service (maintaining a real-time 1:1 peg between UST and USD). As a result, market confidence in UST was crippled, creating the doom loop sell pressure that ended UST as a viable Stablecoin. Remember, the Stablecoin exists to proxy the USD in the crypto economy.

Another Stablecoin issuer - Tether - issues USDT. Instead of relying on an algorithm, it maintains a reserve of various other assets. That the Terra/LUNA catastrophe did not bring down USDT with it is noted by Tether as a remarkable story of market resilience. They were able to convert highly liquid assets from their reserves to USDT to defend the peg in real-time. But this is really an admission of a high degree of centralization. It is also an admission that USDT cannot be considered a commodity since its value is based on centrally held and managed reserve assets - which are valued in USD. (Yes, there it is again - the USD as the central reference unit.)

Why do this?

What is the for-profit business model? What are the assumptions of that business model?

The first assumption is that the USD will always and forever be the reference unit for all that is valued in the US economy. Please don’t miss the corollary: all business decisions will be based on knowledge that will depend on the value of all assets in the economy—value that will be measured in USD.

When you understand how knowledge management systems take data, bring them into context to create information, and then do the math on the information to create knowledge, you should see that as long as the USD is the reference unit for the value of all assets, the Federal Reserve System is our inescapable counterparty.

I think many in the crypto space are seeking to monetize this reality by creating a competing parallel financial system with their Stablecoin issuance as the intermediary between the legacy financial system and crypto. The winner of the Stablecoin Wars literally takes all the rents generated by transactions on the crypto side of this parallel universe. And when you see how Tether defended the USDT and compare it with how the Federal Reserve manages its reserve book of US Treasuries and Mortgage Backed Securities to defend the government’s ability to keep borrowing, you’ll see that these businesses are just competing to be the crypto version of the Federal Reserve.

The supposed crypto advocates who run these businesses are talking their book—not individual liberty. The only question is whether Kennedy can see through it.