Some Progressive Concerns with Crypto
Is Crypto just another driver of inequality?
In short, cryptocurrency has the potential to consummate a marriage between two industries, finance and tech. Over the 10–20 years these industries have demonstrated little more than theatrical concern with morality, especially when profit is involved. Fusing these now, when the government struggles to regulate either, will create runaway inequality and accelerate the trajectory towards neo-feudalism we’ve seen over the last 40 years.
I’m going to argue in turn that there are two things that are likely going to happen if crypto gains widespread adoption.
- Creation of a new generation of uber-wealthy tech-bros and social media tech firms who are very powerful, not risk-averse, and scoff at regulations or ethical norms. More general, the loss of the State’s power to regulate commerce and enact progressive policy.
- The loss of friction afforded by internet payments will accelerate all of the undesirable effects of capitalism. These effects will be unstoppable by virtue of the inability of the State to do anything about it.
Before speculating about what will happen, let’s talk about what has happened.
Much of the internet is great (email for example). But what is built on top of the internet has a tendency to become progressively more diabolical as more money gets involved. Google used to sport the motto “Don’t be evil,” but they went ahead and dropped it. The epistemic terrorism willfully wrought by Facebook could easily have led to millions of avoidable COVID deaths.
It’s difficult to regulate Facebook, despite how much damage Facebook is causing in our nation, and how much profit they are making doing it. There’s a few reasons for this. Most obviously, most lawmakers have a demonstrated inability to even wrap their minds around the content of Section 230, much less comprehend how an algorithm that maximizes user engagement could be used for bad things. Tech is like this — regulation always takes years to catch up. Another problem with tech corporations growing very big, very fast, is that the power they have makes them difficult to regulate, due not only to size and lobbying skills, but to the God-complex of the leadership. The more brazen and heedless the corporation behaves, the more likely they are to take market share in a new field. Finally, a huge problem with regulating Facebook or Twitter is basic partisanship. Democrats see an unregulated platform that profits immensely by spreading toxic misinformation. Republicans see coastal elites with liberal bias using their power to persecute conservatives. The irony that these viewpoints have been forged largely with the help of Facebook’s algorithms is not lost. The end result is bad: We have a runaway corporation with a clear profit motive for spreading misinformation, and we as a people, as a nation, don’t have a good way to stop them.
Let’s mention Amazon. While their business model is legit — selling useful product to consumers, their poor treatment of employees is well-documented. Even scarier, they sent an army of social media advocates to influence the union vote. To me this is frightening: The world’s 4th largest company is using social media ringers to overpower efforts to form a union. The union is the free market’s primary defense against abusive employers. With this flex, Amazon made a point to chill aspirations that other union organizers might have when organizing against Big Tech.
And there’s Uber. Uber is a horrible, predatory, heavily VC-funded organization that has monetized the ability to brazenly ignore laws since inception. They play hardball with everybody, from municipal regulators to underpaid drivers. They use astroturf campaigns both on the ground and online to pressure municipalities to adopt regulations written by Uber. They throw billions of dollars to the wind in the short term hoping to push out the competition. They sucker drivers into signing contracts that are almost too unconscionable to believe. They enjoy a competitive advantage over any taxi company that chooses to follow laws. The founder and CEO until 2019, Travis Kalanick, is one of the most obnoxious sociopathic capitalists we have going: After being forced out in 2019 he sold his $2.5 Billion worth of shares and accepted a job on Trump’s economic team. “It’s douche as a tactic, not a strategy” one Uber investor said of Kalanick.
Uber is the distilled essence of predatory capitalism. Uber was infused with capital. This capital gave them years of runway, towage a PR war over the authority of the government to regulate, use leverage to screw everybody they could on the way all while losing money. When it comes to tech, douche has proven to be a winning tactic and a winning strategy.
Facebook capitalized on the network effects of the internet to use AI for evil and their size to avoid regulation. Uber capitalizes on the connectivity effects on the internet to seek rent in abusive ways and uses leverage to avoid regulation. Amazon uses money and leverage to create anti-competitive markets.
With big companies, users are faced with an ultimatum. Give up your data, sign an arbitration clause, or, don’t use the service. If everyone you know is one Facebook, or if your small business needs to use Instagram to reach consumers, you don’t have a choice.
Regulators are faced with a similar ultimatum. Allow someone in Silicon Valley or New York to write your local laws, or face an astroturf campaign calling you Luddites and undermining your authority to protect citizens.
Our new overlords
There’s a bumper sticker that reads “Every billionaire is a policy failure.” While this expresses a sentiment probably not to be taken literally, it’s important to note that Bitcoin may create possibly thousands of billionaires.
Who will these people be? The math isn’t so hard. If you want to be a Bitcoin billionaire, you have to buy $1 million in Bitcoin, before Bitcoin goes 1000x. Or you have to buy $10 Million before Bitcoin goes 100x. If you’re really early, you could’ve possibly put $100,000 in before it went 10,000x. The billionaires will be people that either started with a ridiculous amount of money so that they could afford to gamble on an internet currency, or just adopted a madcap approach to finances.
If you listen to Willy Woo, who has been giving ample bullish signals, he describes large investors wanting to buy Bitcoin in “one million dollar bullets.” Willy describes the recent set of investors as “family offices in high-net worth strata” and “large growth of whales” moving money to cold wallets. Willy is considered one of the most knowledgeable Bitcoin price analysts. He described in detail in an interview with Laura Shin, evidence that the wealth moving into Bitcoin is extremely concentrated.
The best explanation for the use of Tether is offshore accounts that want to enjoy the gains of Bitcoin, without repatriation. While some of your friends might have made a little bit of money, most of the gains are going to the type of people who have “family offices” and use “offshore” as a verb.
Even if you are reasonably certain that Bitcoin will continue to rise, as they say, only risk what you can lose. For most of us, this isn’t a lot. The Winklevoss brothers can risk $50 Million. Most people don’t have $50 Million. This is basic math, investing $300 before Bitcoin goes 10x is going to give you $3000, which for many American families is less than the recent stimulus checks. The 1% have money to spend on asymetric risk plays. The rest of us don’t.
It’s also important to note that there will be many. many dips. As happens in most economic cycles, the less economically secure get shaken out, while the rich will stock up. “Weak hands’” is pretty much equivalent to the motivation to feed your family and not default on your mortgage.
What makes this more obnoxious is that the new billionaires (unlike someone who worked hard over a span of decades like Bezos) are comprised of Chads who were born on third base and believe they have “strong hands” because they can afford to continue to double down on risk. Most of them have never paused to consider why we have laws, taxes, ethics or rules about things. Instead, they view any laws as an attempt by some jealous party to frustrate and persecute them for being superior.
Elon Musk comes to mind. He has no fear of the SEC. He’s not the least bit concerned that he’s used a publicly traded company to buy and sell Bitcoin. We don’t know what he could be doing with his own private stack. Despite being smarter than many people, he’s not nearly as smart as he is confident. He’s frequently cluelessly wrong about important issues, and yet he has a cult following. This should scare progressives. Elon could be the “just think if Trump had been smart” nightmare scenario we’ve been warned about. But Elon has something novel that previous demagogues haven’t: he has a large share in one (or more, who knows) decentralized currencies. If he gets cranky, he could leverage this in nasty ways. He has a lot of power. Much more power than progressives (or libertarians) should feel comfortable with one person having.
It’s also worth saying that the change of buying power between different currencies is necessarily a zero-sum game. Most of the first 90% of Bitcoins mined with be picked up by a small percentage of the population. The loss of buying power will be felt by the rest if Bitcoin continues to rise in price. So it’s not just the rich getting richer, it will mean the poor get poorer.
Due to it’s anti-government ideology, Bitcoin will attract more Travis Kalanick types. The new tech leaders, who will be leading the charge to profit from the new opportunities afforded by Bitcoin. The old adage, attributed by some to St. Benedict states that “It is easier to beg forgiveness than to seek permission.” But the new tech leaders will take that a step further: “It’s easiest just to tell the regulators to fuck off already.”
Meanwhile, Washington will remain polarized. Certainly, the libertarians and conservatives will embrace Bitcoin — probably many of their leadership will openly own it. When the Democrats attempt to regulate or tax, this will be viewed as persecution. Already, some Republicans see the simple act of funding the IRS as persecution against conservatives. They will go apeshit if the Democrats (even if they controlled the Senate and House and Presidency) tried to crack down on Bitcoin after the fact.
Even if Washington was able to de-polarize for a moment to deal with an economic threat, entities like Facebook would fix that. Heavily funded astroturf campaigns are now par for the course. If your business model generates tens of billions of dollars and is vulnerable to the US getting their regulatory act together, spending a billion dollars on an astroturf campaign is a given, especially in the era of Citizen’s United.
There is an inverse relationship between the power of the State to govern and the power of large corporations. Wealthy corporations and individuals with huge piles of wealth can continue to take advantage of a polarized government, feeding the polarization with social media manipulation. This manipulation is easy by now.
Ultimately, with less control on the monetary policy, it will be more difficult for the US to enact progressive policies. The US needs to collect taxes from the wealthy. The US also needs to issue Treasurys to deal with situations like the recent economic fallout. With a weakened USD, this becomes more difficult.
Mixing money and the internet
According to its advocates, Bitcoin is the native currency of the Internet. If we believe the excitement about the Lightning Network, this will enable anybody anywhere to send micropayments to or from anywhere in the world, with near-instant settlement.
Today, it requires some work to convert an internet user into a customer. There’s intentionality required to make a purchase. Most of us pause for a second before typing in a credit card number. Corporations have to work to get our money. Most payments are routed through credit cards, and if the consumer sours on the deal, there are avenues for the consumer to get the money back. Bitcoin would like to change that, in an irreversible and difficult to regulate way.
Money that is off the standard money rails provides vast opportunities for corporations with large data capabilities and little scruples. A company like Facebook has access to enough data to build hundreds of variables about each user that can be used to deliver each consumer with a ribbon to the next conspiracy theorist, political movement or corporation. Now the product could be money itself. Facebook (or any of the other big data players) will be able to compare financial history with other that of hundreds of millions of others, and tailor the advertisement most likely to separate you from your money. By current AI techniques, it’s child’s play to create advertisements that fork and mutate thousands of times while being played for millions of users, all motivated to maximize the profit objective. It’s inevitable that GANs will produce and train scambots literally out of thin air.
With money not subject to the slow and old-fashioned methods of being pushed around the globe, the velocity will be higher, and there will be more opportunities for clever marketers to grab a slice. This game will be pay-to-play of course. Because most internet activity will be concentrated on a few platforms, for example, Facebook, Facebook can continually bring in ginormous profits.
Fantasy of decentralization
It is an underemphasized point that pure decentralization is nonsense. No matter what, we will rely on algorithmic curation for the Internet to make sense. Decentralization is meaningless without the centralized distribution of information.
Similarly, we may use decentralized protocols, but a very small percentage of us are going to compile the code on our own machines and run our own node. Most of our interaction with the internet happens inside an app or an account created at a large corporation.
So when we think about decentralized money, this is not going to be going from computer to computer, but via conduits set up by Big Tech.
Apps that deal with Bitcoin will be taking small cuts, rounding errors, etc. Because of the wobbly nature of the price, spreads can be pocketed by entities like Coinbase. It worth noting how insane it is that Coinbase has a nearly $100 billion valuation, on the order of magnitude of some corporations that have existed for a century. The reason is clear, the Bitcoin trade is supposed to generate a lot of free money for Coinbase.
Data money and social media: what could possiblye go wrong?
Without more clear regulation, it’s inevitable that hedge funds will avail themselves of pump and dump techniques. Even if Bitcoin remains dominant, there will always be Doge and Nano and whatever other currency that can be pumped. A hedge fund can turn $100 Million into $1 Billion with a little bit of well-researched and focused effort, rinse and repeat. In a world where marketing is key, big data will be the great unequalizer. It’s more likely than not that there are patterns of human behavior or variables that can be detected with large data, or even affected with proper social media manipulation. Every idiot on the internet thinks they can time the market, beat the game, but in the end, the big players who have the most data and the most resources will always win.
Not only do the big players have access to big data, but they can also move markets. They can do this by hand, with money, or they can use individual pulpits or social media campaigns. Without significant regulation, this is inevitable.
Fantasy of sticking it to finance
We don’t need to hold up traditional bankers as if they’re saints seeking to make the world a better place. We know they’re smart, profited-motivated, and also, fortunately, do have to live by some very basic regulations that have been built up over the years.
These same corporations and individuals, if they see an opportunity to skirt the regulations, especially at a large scale— will jump at the opportunity. The notion that an MD at Goldman-Sachs is too steeped in the Fiat Kool-Aid to understand Bitcoin is nonsense. If you understand finance and how to use it to become richer, you will certainly embrace a more unregulated version of it.
What we need to restore economic justice is a federal government with the power to crack down on runaway tech companies. We need a government that can feel confident taxing gazillionaires and putting this money towards the common good. Tech leaders should operate under a concern that greedy and abusive behavior will bring about regulation. Instead of daring the government to regulate, tech leaders should stay motivated to proactively engage in prosocial practices. Bitcoin moves us in the opposite direction.
There are some problems that crypto can solve, but until the government has stepped up and demonstrated the power to deal with the problems it creates, nobody should be rooting for Bitcoin.