Canadian Truckers, Ukraine, and the Case for Crypto
The Case for Crypto Part V: The Ruling Class has shown their hand. It's time to end this tyranny once and for all
I have been lurching back and forth over the past couple months with the final installment of my “Case for Crypto.” Given a number of current events, I am glad I waited. The unprecedented crackdown in Canada - even on ordinary people who did nothing other than register their support for a protest by donating a small amount of money - has led crypto advocates to rightly point out how the Canadian government has unwittingly provided a powerful case for crypto.
Click here for Part I of this series.
Click here for Part II of this series.
Click here for Part III of this series.
Click here for Part IV of this series.
The war in Ukraine is the other current event of interest. In Part III of this series I look back to the Second Bishops War and how King Charles I confiscated the money supply (then the gold in the Royal Mint) as a forced loan to pay his soldiers to fight a war literally no one other than the king wanted. (Over on Medium I wrote about this link back in 2018).
The news from the Ukraine requires some nuance. Before hostilities broke out, I expressed my general sentiment here. Much has been said about Vladimir Putin’s writing on the collapse of the former Soviet Union, and his apparent sentiments about re-establishing the former empire. I do not disagree with these assessments of Putin. But no one can rule entirely alone and Putin is no exception. There are people around him who have many reasons to moderate Putin's sentiments and inclinations.
The problem is how NATO expansion - especially the potential for it to expand into Ukraine - sows to some of the deepest suspicions pervasive to the Russian world view. This is not even close to being a new observation. In 1998 Thomas Friedman interviewed George Kennan, the U.S. ambassador to Moscow at the start of the Cold War. Before reading on here, please take the time to read this interview and Friedman’s most recent reflection here. But the most salient perspective comes from the man who assumed Kennan’s portfolio at the U.S. State Department - current CIA Director William Burns:
“Ukrainian entry into NATO is the brightest of all redlines for the Russian elite (not just Putin). In more than two and a half years of conversations with key Russian players, from knuckle-draggers in the dark recesses of the Kremlin to Putin’s sharpest liberal critics, I have yet to find anyone who views Ukraine in NATO as anything other than a direct challenge to Russian interests.”
— William Burns, Current CIA Director, from his 2020 book titled The Back Channel
To wrap this up and go on to the case for crypto,
what we have done what has been done in our name is all of the people who otherwise might have been able to restrain Putin’s darker sentiments and motives have been robbed of any incentives to do so. They may well think Putin is crazy. They likely believe the Russian economy cannot possibly support the maintenance of a Soviet-style empire. But where there will almost certainly be complete agreement among them is NATO in the Ukraine is a movie they have all seen before - Hitler’s Germany. That movie did not end well for them last time. Our protestations about NATO being “defensive” are shockingly stupid and naïve. Defensive vs. offensive is a distinction without a difference to the memories of those who lost 25 million friends, family, and neighbors the last time a large military was at their borders.
All of this has to be paid for
Ultimately, however, all of this has to be paid for. When the Western world can depend on the unrestrained issuance of money (in the form of bank credit by which arms are bought and paid for) it becomes inevitable that a “defensive” alliance like NATO metastasizes into a cancerous bureaucracy shopping around for its next client state. This really is no different than Charles I wanting to enforce his preferred social order on the Scots and finding that he has to confiscate the money supply as a forced loan to fight a war only he really wants. England’s merchants decided they had enough of this nonsense and abandoned the Royal Mint in favor of local goldsmiths. The present sentiment against Western “fiat” money in favor of the Blockchain and crypto is EXACTLY the same sentiment.
Whether it is perpetual expansion of NATO with a complete disregard for the world view of a nuclear-armed Russia, or of Canada deciding a $10 donation to support truckers who hold “unacceptable views” merits confiscation of all other monies, the Ruling Class has shown its hand. It’s time to put an end to this tyranny once and for all.
Reprising the case for crypto
I will restate the Case for Crypto as I started: No one likes a thief. It is absolutely crucial that we keep the focus on ownership and theft because crypto is about quite a bit more than money. It is first about the integrity of recorded ownership. I have imagined in this series an unbanked potter who has a smart phone. She is thinking about opening a bank account. I am going to try to persuade her not to. Here is why:
If you receive a paper check from your employer and use it to open a bank account you simply must understand that you are trading your labor for a “demand deposit” claim against your bank’s balance sheet. Ugh - that is going to be tough for my unbanked potter friend to wrap her head around. Here’s the easier way to explain this: You NO LONGER OWN the money you received in return for your labor.
When you deposit money in a bank you are handing over ownership of that cash. It now appears on the bank’s balance sheet as an asset. The corresponding liability on the bank’s books is their obligation to return that cash to you on demand — which to most of us means at the ATM. And the bank will honor that liability - until it won’t (as ordinary Russians are starting to discover).
It is commonly understood that demand deposits up to $250,000 are insured by the Federal Deposit Insurance Company (FDIC). But if we look at how much the FDIC has in assets against the total insured deposits we see a paltry $0.0135 cents for each insured dollar on deposit. The only way this makes any sense is by assuming the Federal Reserve can print the remaining $0.9865 for each the $1.8 trillion held on deposit to make everyone whole in the case of a large scale banking crisis.
And this made at least some sense - before the Great Financial Crisis and the COVID pandemic. Again, doing my best to simplify for my unbanked potter: The major consumer banks are all part of the Federal Reserve system... The “Fed” is just the “bank-of-all-banks.” If, all of a sudden, the FDIC needs a massive infusion of money to make depositors whole, they will have to lean on the U.S. Treasury to borrow that money. If the U.S. government was not so deeply in debt ($30 trillion) the market would likely provide the needed support. But with this huge debt load, that will simply not happen. So the Federal Reserve will have to lend the money to the Treasury by creating it out of thin air.
If the Fed’s balance sheet was $800 billion, as it was in 2007, there might be room to do this if needed. But it isn’t - it is just south of $9 trillion. This balance sheet roughly doubled during the GFC and then doubled again during the pandemic. The combination of all this new money, lockdowns, parents not able to work because of school closures, and resulting supply chain issues has sent consumer prices soaring. The kind of additional balance sheet support to enable the FDIC to make consumer depositors whole will only throw massive amounts of gasoline on the raging fire of inflation.
So let’s revisit the most important thing about money: It is an incentive to work. We trade our labor for it, and once we spend an hour working for someone else, that hour is gone - we cannot fudge it to be more and our employer cannot fudge it to be less; it is immutable. Take out your wallet right now - seriously, do it - and look at your paper money. The first three words at the top, of any denomination, ($1, $2, $5, $10, $20, $50, $100...) is “Federal Reserve Note.” This is what you are accepting in return for your labor. Is it also immutable?
Not even close. First, if you deposit it into a bank, you no longer own it. And its value is measured in those things you use it to obtain. Rent? See how many days shelter $1,000 buys you when inflation is in the 8% ballpark. Utilities? Groceries? I doubt I need to explain to anyone right now how the value of that dollar in the real terms of real needs is collapsing right in front of us.
The case for crypto proceeds from my observations about ownership to how the Blockchain as a technology makes a crypto currency the second half of an “immutable pair.” I explain in Part I why gold and silver can also provide that second half of the immutable pair. The time we spend working for someone is the first half - it is immutable. If we accept gold or silver, because of its chemical properties it will not rust and lose its weight. The second unit of measure here - the weight of the gold or silver - is also immutable. Blockchain technology does for crypto what chemistry does for gold and silver. It makes the crypto currency arising from Blockchain transactions a mathematically immutable way to measure our labor. We have an immutable pair. And we own it. And the record of our ownership is equally immutable.
Blockchain technology does for crypto what chemistry does for gold and silver. It makes the crypto currency arising from Blockchain transactions a mathematically immutable way to measure our labor.
Thanks for reading Thomas Paine's Blog! Subscribe for free to receive new posts and support my work.
I had planned for this last part of the series to tackle the matter of crypto-tokens vs. crypto-currency. I’ll be very brief because this is really more for the market/finance pro and less so for my unbanked potter. A crypto-token is just like a token for the local arcade. They are only worth something within the “market” in which they are issued. (If the arcade goes out of business, you’re out of luck.) Thus, the value of the token arises from the success of the “market” it serves. It is for this reason that crypto-tokens are being treated as securities. If we borrow terms from marketing, crypto-tokens are market-vertical money; crypto-currencies are market-horizontal. Perhaps even more salient to the case for crypto is how crypto currencies can be politically horizontal (with national fiat money being politically vertical). There is some consternation in the crypto community about the U.S. Securities and Exchange Commission (SEC) treating crypto-tokens as securities. The problem is the SEC is right. The sale of these tokens is an effort by for-profit vendors to raise money for the maintenance of a particular market. And the value of that token will be a function of the success of that effort.
Some market/finance pros have mistakenly noted the “inflation” of these tokens. They really should know better. There is a “proliferation” of tokens because there is a massive excess of fiat money looking for speculative opportunities and seeking gains from the relative differences between various pairs (e.g. the Dollar vs. Bitcoin or the Dollar vs. Ether). The finance pro will call this “arbitrage.” My unbanked potter just needs to know it is gambling. If you’ve got some extra money lying around you might otherwise use for chips at the poker table, by all means enjoy yourself at the crypto-token table. But do not be deceived, the proliferation of tokens is not inflation - it is in response to the demand for speculation.
Laying out an exit plan
The case for crypto is a painfully simple call with respect to legacy banking and its “fiat” notes — get out as much as you can and as soon as possible... for all of the reasons I have presented in these essays. The closest thing we have today to what a crypto-currency future might look like is the credit union. All of what is said about about deposits remains true of credit unions. Yet due to the fact they are depositor-owned non-profits there is no pressure from investors to maximize returns by making risky investments. Credit unions tend to be very conservative in comparison to for-profit, shareholder owned banks.
If, for the reasons I have laid out in this series, we assume Ethereum 2.0 and Ether is the future of the Blockchain and crypto, a non-profit might be organized to run a “staking pool.” In a credit union one opens a basic savings account. Some minimum amount (usually $5) is required to be maintained in that account. The credit union then offers other consumer banking products like checking and money market accounts. Some offer mortgages and home equity lines of credit. But they are all tied to the main savings account, which requires a nominal minimum deposit.
A staking pool requires 32 Ether, which as of this writing (2/28/2022), would require $93,592.00 (rounding). If we wanted to form a non-profit to run a staking pool, we would need 18,718 members to put in $5 each. To be a little more realistic we might require $20 worth of Ether from each member. This would require 4,680 members. The computer node we would run will then have priority on the Ethereum 2.0 Blockchain to validate transactions, earning extra Ether to the pool. This is part of where our ‘yield’ comes from. (Remember, an asset has to earn a yield in order to be an asset.) Once we have 4,680 members we close the pool so everyone knows what fraction of the yield they will receive. If more people want to join, we simply create another staking pool.
Each member would then be able to maintain extra Ether to use as spendable money. Their yield from the pool is added to that spendable account. Assuming each member has a smart phone, when buying something, an application would issue a QR code to be scanned by the smart phone of the seller. In practice this is no different than writing a physical check. The check is an authorization to deduct money from the account holder’s account. The advantage of the Ethereum Blockchain is we can incorporate any manner of conditions as smart contracts. As noted previously, this might be no more complicated than confirming the milk is fresh when you get home. The condition is encoded in the smart contract. The buyer confirms the milk is fresh in the smart phone app and the transaction is completed.
Fixing the number of members in a staking pool is critical. As the value of Ether fluctuates, the value of each stake follows. If I start out with a $5 stake, and Ether grows in value, the minimum “deposit” to join the staking pool increases. Whatever the difference between that increase and my initial $5 deposit is the value of my stake. Herein lies another (more traditional) avenue to a yield - and the incentive for landlords, utilities, and grocers to establish their own stake and accept Ether as payment.
The key here is - again - found among the unbanked. They are the ones with the most skin in the game with the current legacy Federal Reserve Note - based system. They are seeing their standard of living crushed by it. It will be when they see an alternative in Ethereum 2.0 that the larger economy will start seeing the same.
All of this, actually, is not new. Not only have we seen this sentiment before among English merchants, we have seen competing bank notes before the Federal Reserve was created. Without the computer, there was a great deal of uncertainty, opportunity for fraud, and transactional friction. Legacy banking will almost certainly point to this history when they object to these ideas. The problem is the PhD set which runs the Federal Reserve knows nothing about computers beyond where the power button is and how to use a mouse and keyboard. The immutability of records on the Blockchain, the immutability of mathematical computation, and the ability to resolve balances across the economy via the Internet solves for all of the previous problems once found when we were able to choose the form of money we preferred to use.
Legacy banking is now obsolete. My unbanked potter now has a viable alternative. And so do we. The sooner we seize this opportunity the better - and freer and safer - we will be.
Disclaimer: I am a cyber security professional, not a financial advisor. I hold no licenses in the financial sector. This is not a recommendation or solicitation to buy anything. I have relatively small positions in ETHE and GBTC which hold Ether and Bitcoin in trust on behalf of shareholders. I am weighted toward ETHE for reasons that should be clear from this series of essays.
Others observe a correlation between stocks and crypto. I have managed this with inverse ETFs which are short tech and small caps as these sectors are most dependent on cheap money. My personal theory - and again, I have no training or credentials that would commend this theory to anyone - is that rising interest rates will lead to a cascade of defaults which will in turn threaten the legacy banks. If the Fed lets them fail, their bank notes (the Dollar) will fail with them. If the Fed bails them out - again - their bank notes will fail anyway since no one will know what their dollars will buy them tomorrow. Either way, I believe the correlation between crypto and stocks will not survive much longer.
But, again, do not - under any circumstances - make investment decisions on the basis of anything I write.