Why Care About Crypto?

For non-crypto people

I originally wrote this as a thread for Twitter/X/TwiX/whatever we are calling it now, but I wanted to post it here as well as I think the arguments are relevant. If there’s some slightly janky elements in formatting or tags, you’ll have to go see the original Twitter thread to see what they are (linked at the end).

Enjoy!

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0/ So @GaryWinslett recently asked for a defense of crypto and why he, as a well-situated middle class American who largely thinks our system works, should believe in it or support it. I think that’s a totally legitimate question to ask, and one that cuts to the heart of why the debate has been so broken.

I think it was also asked in good faith, so I believe it deserves a real answer. One of my criticisms of the crypto space is that CT has a bad habit of just screaming at people instead of actually debating real concerns and questions, and I don't want to behave like that myself. Thus, I am going to endeavor to answer Gary in a few parts, and specifically point to some things I think align with the worldview of many antitrust folks, YIMBYs, classic liberals, and those who care about financial inclusion.

In other words, good question Gary, and I am glad you asked.

1/ One important thing to remember is that the starting point here is not neutral. The current position of the American government with regard to crypto is hysterically against. @SGJohnsson has a good thread on the receipts that I will put in the appendix of this post¹, so without turning this into a very long post about the wrongdoing of the Obama administration with regard to crypto, it’s important to understand that the current position of the administration is this:

If you have a token, you are a security, and there is no functional way to register or trade tokens as security, so your only recourse is to shut down. This is both unsupported by law (and if you don’t believe me, please read @NYcryptolawyer's² scholarship on this issue) and a backdoor ban by the SEC without any legislative or commercial purpose behind it.

Also you’re not allowed to have a bank account. No, literally, the FDIC went around pressuring banks to close the accounts of almost all crypto companies in the wake of the 2022 events (and if you don’t believe me, read @nic__carter's piece on Operation Chokepoint 2.0³, the details of which will shock you). This is the equivalent behavior to, when Bernie Madoff turned out to be a giant fraud, running around to all American banks to have them shut down the accounts of asset managers.

Additionally, Biden has been actively blocking all attempts to unwind what is, essentially, an extra-judicial blockade against the space. Biden vetoed the SAB-121 repeal, a custody rule promulgated by the SEC that bans people from doing crypto custody and, to make it even better, puts the assets of customers of crypto custodians at risk during a bankruptcy by making it entirely possible they are not bankruptcy remote. This is an anti-secure custody rule! And the Biden administration blocked the repeal, which was bipartisan!

Finally, if you look at the enforcement actions in the space, there have been a number of massive frauds: 3 Arrows Capital, Celsius, Terraform Labs, FTX, etc. How many of those were enforced against? Zero, until very far after the fact in a few lagging cases, and those mostly by the DoJ! Who did they enforce against? Coinbase, Kraken, Consensus, etc. Can anyone tell me what the logic is of an executive effort that specifically lets criminals go free until it blows up so much it hits the press, but attempts to prosecute those trying to obey the law and treat customers well? It’s hard to perceive that as legitimate.

In some cases, the administration itself is the criminal. The SEC was sanctioned for committing perjury in the Debt Box case, both forcing a whole project offshore and damaging the participants while lying to a Federal judge in such spectacular fashion that the entire Salt Lake City office of the SEC has been shut down after sanctions being levied against them. Again, none of that is hyperbole. This happened.

So my first point to people with the same question as Gary would be this: you may think your default stance is not caring, but your default stance is actually a complete disregard of constitutional rights and instead support for an extrajudicial, highly illegal, and incredibly stupid (if you don’t believe me, and you are a Democrat, imagine the Trump administration about to run this playbook against green energy, abortion providers, public sector unions, etc. and pointing at literally what Biden did as precedent) campaign against the industry.

TL;DR: we are not starting from zero. You’re actually on the side of a jihad against this technology, with the base assumption that it’s not just silly and useless, but evil on par with North Korea.

2/ Do you believe you should have to lend money to a real estate billionaire at below market rates to buy a coffee?

If you didn’t answer yes to that, you are actually opposed to the current structure of the financial system. When I say that kind of thing, most people look at me like I’ve grown a second head. However, this is precisely how the current system works, and reveals a point that I think most people don’t understand: our current banking structure is set up to hide the volatility and cost from the average user, so that you are the frog being slowly boiled and you don’t realize what is happening until it is too late.

This is such a long topic I’m writing a book that has multiple chapters about it (spoiler alert), but let me try to hit some key points here.

The first is that money in a bank is not safe.

I know I’m going to get a small army of objections about how as long as you are under $250k the FDIC will save you, but I’m going to raise two points in response to that. One is that for many small to medium businesses, this is simply not possible, and it’s not that they are rich - if you are in a high turnover, low margin business like a supermarket, you probably blow through that limit regularly but your actual net profit is far below it. So what’s the solution for you? There is none. Two is that the FDIC itself is not infinite and the insurance fund is certainly not sufficient to cover all, most, or even some of the deposits on an aggregate basis in the financial system. This means the FDIC is reliant upon good risk management at member banks, bailouts in the case of severe issues, and effective resolution of failed banks, all of which gets way harder in a crisis situation and requires some exceptional steering to survive. I’m lucky enough to know @SheilaBair2013, so let me tell you that this view does not start with me, and we still have 2008-era issues to chew on here that should be taken seriously and fixed!

You also often hear the cry of “well, you should due diligence your bank to make sure it is safe”, and I am here to tell you that is pants-on-head level crazy. Most people are just completely flying blind on this. I’ll remind the crowd that long, long before I was ever in crypto I traded one of the most bank capital focused trading books in the entire world (Bank Owned Life Insurance wraps, if we want to really go into the dark forest of finance), and I spent roughly 80-100 hours a week thinking about this problem and still couldn’t fully figure out the capital position and solvency of many banks. Did I have a decent guess? In many, but not all cases. Did I know for sure? No.

Thus, unless you genuinely believe that, in order to be allowed to have a bank account, the guy running the aforementioned supermarket should also have to become a bank capital expert solid enough to compete with psychopaths like me running trading books on the street, this is a complete lunatic position to hold (also where are they getting the time to run their actual business?). Don’t believe me? I dare you to go read some 10-Ks and Qs for banks. Let me know who YOU think the 5 most at-risk banks are for collapse in the next three months. Let’s see how good your results are and how long it takes you to figure that out. And if you don’t want to or don’t think you can, I actually agree that’s the smart thing to do. For anyone who doesn’t have this as a full time job, it’s a waste of time for nearly zero return.

Here’s the problem: our system is also based on the idea that you have to do this! Our regulators, in their wisdom, have decided to shut down better options within the banking sector itself for safe banking, as we can see from the sad story of things like the Narrow Bank or @CaitlinLong_'s Custodia. As a result, we have some hybrid solutions (like being able to pay for things with a money market fund through a debit card - Fidelity has a good solution for this that will be in a future article I’m writing about financial market structure), but currently, this brings us back to the first question I asked here: when you leave money in a bank, they make risky loans with it, often in the real estate space. This is the price of admission. You are exposed to that risk, the bank pays you 0% for it in most cases, but if the bank fails, you lose your money. Is that a fair trade? No. Oh, and the executives largely keep their giant bonuses at your expense.

It happens because we have given banks a monopoly on the payments system. Why did we do that?

That’s a great question. I'm not sure there is a good answer.

3/ Change will have to come from the outside. Asking the banking cartel who have created this setup where they get to sweep up deposits, not pay people for taking risk, and lend cheaply to billionaires to politely stop is not going to work. Instead, it’s going to take people creating competitive products that can break down what is essentially the extreme anti-competitive framework that exists around the current financial system to undo it.

It’s not clear to me specifically which one of these efforts will ultimately be successful, but we should be supporting all of them. My personal guess is that dollar stablecoins (more later on this) are going to slowly erode the monopoly moat of the banking system until it collapses and is forced to restructure itself in a way where it’s not just straight up stealing cents at a time, day after day, adding up to trillions but unnoticed due to it happening one penny at a time (Office Space predicts all).

This is a sort of antitrust problem where what we need is just a fair playing field. This is something that most antitrust fighters are familiar with (ht: @musharbash_b ), and simply having our regulators and legislators force fair competition is the core issue. The problem is our banking regulators only want that competition within a very specific type of bank, risk managed in a very specific way, that is coincidentally somehow hugely to the advantage of rich donors err borrowers and bank executives, and at the expense of the common customer in this arrangement. In many ways, I don’t think it’s even deliberate. I think it is what happens when there is a slow march through institutions over time tweaking things by 1 degree for 100 years.

This is before we get to the point that someone like @RitchieTorres has eloquently spoken about, which is that often certain disfavored groups can’t even get (or maintain) bank accounts. Anyone remember redlining? How quickly our memory fades. If only there was an open access solution where people could control their own money without needing permission from a racist 65 year old at a bank!

Funnily enough, crypto has an answer to all of this. What is it? Stablecoins.

What if I told you that you could have a product where you can custody your own money, or if you don’t, you can have a securities-style custodian who is not allowed to lend your money out and it belongs to you, where the only loans in the reserve behind this money are t-bills rather than risky loans to billionaires, and where transaction costs are less than a penny, rather than the percentage points currently charged to merchants and retail customers for their purchases?

Sounds like a pretty good deal for consumers (and a real competitive threat to banks), right?

Please go look at #PYUSD on @solana. I literally built the back end for this thing when I was at Paxos. It exists. It’s real. You can use it right now. Most of what is stopping you is what I discussed in point 1.

This is not a screed in favor of some random shitcoin, or even bitcoin. The value of crypto to the average American is a dramatic restructuring of the financial system that puts power back into the hands of the average consumer and trust in a global consortium of neutral actors, rather than letting Citi unilaterally decide your fate based on their whims (and then having to be bailed out with public money when they fuck it up for the 19th straight time).

TLDR, if you’re not strongly in favor of the public massively subsidizing bank executive compensation and rich billionaires borrowing money, you’re pro-stablecoin (at least, properly constructed ones - my critique of the bullshit we call “stablecoins” is a whole different topic and I’ll link to my congressional testimony⁴ at the end describing what I think works). You just don’t realize it.

4/ Let us, for the purposes of this discussion, concede that you either support bank executives and billionaires controlling the financial system at the expense of the average person or, if not that, you disbelieve everything I said and believe that the current financial system in the US is perfect with no incentive problems and competition should not be allowed (you may think this is a jest, but again, go back to point 1 on what is actually happening here).

Let me then ask a different question: do you believe women in Afghanistan should be allowed to have money? At all?

A stat that I often mention from my time at Paxos is that we believed about 95% of the holders of #BUSD were non-US persons, and that the only country where I am close to certain they did not have any of the stablecoin was North Korea.

Why is that? A dollar stablecoin is something you can purchase on an open-access network so long as the following two conditions are met:

You have the internet

You have something you can exchange for it (local currency? Bitcoin? Eth? Sol? Doge? Doesn’t matter, anything, really)

Congratulations. If you meet those two conditions, you can now opt out of your local financial system and into the US dollar system. You can do this with a private wallet, meaning that your (potentially exceptionally corrupt) local system cannot expropriate you. You can do this in dollars, meaning that your (potentially exceptionally corrupt) local central bank cannot inflate the value of your money to zero. You can do this without needing anyone’s permission (except, ironically, the stablecoin issuer not confiscating your money, meaning you are probably subject to dollar norms, so don’t try this if you are the North Korean government, we will totally seize your money).

I think people in the United States, because our system largely works, do not understand how massive this is for human rights. When you look at most of the world, the financial systems are coercive, abusive, and corrupt towards various groups (sometimes basically all groups). Are you a religious minority in a theocratic state? Are you a woman in a hardline muslim country? Are you a political dissident in mainland China? Are you guilty of the crime of not supporting the current regime in some of the basket cases in Central and South America? Did you just not pay a bribe to the right person in about 50% of the world?

These are all right now, today, current year things that happen to the majority of people in financial systems globally. It’s part of why the value of crypto was seen much earlier in Asia than it was in the United States. When you have at least somewhat secure property rights, it’s easy to believe the government won’t just lie in court to steal your bank account (unless you work in crypto, ironically). But this happens all the time, all over the world, to all kinds of people.

And now they have another option. The ability to call bullshit on your local system and hold dollars in secure fashion with respect to the local system is earth-shattering for many of these regimes. It will be an existential threat to autocratic and corrupt governments globally, and we are already starting to see the freakout begin in Nigeria over crypto, where they have kidnapped anti-financial crime people from Binance because people keep ditching the Naira due to local corruption to buy bitcoin, but also more so, USD stablecoins.

So let me ask this: do you hate religious minorities? Disfavored political groups in third world nations? Women? Gays? Anyone who speaks up against the government?

Unless your answer is yes, you are also pro-crypto. You probably just didn’t know that until now.

5/ None of what I just said should be read as an endorsement of a specific product in crypto (other than well-constructed USD stablecoins, I’m totally endorsing those, to be clear).

Do I think #BTC will hold up as a long-term store of value? Maybe!

Do I think ETH will become the main transaction layer globally? Probably not, actually, unless there is a lot of improvement.

Do I think the majority of the current crypto projects have long-term value? Unlikely!

Do I think the scammers and bad actors in the space should just be allowed to do whatever they want? No, and they belong in jail in many cases!

None of this, however, is an attack on the technology. Here is where we have really tied ourselves into knots. Just like Bernie Madoff was not an argument against asset management, Lehman was not an argument against banking, AIG was not an argument against insurance, and the S&L crisis was not an argument against mortgages, the actions of bad actors in the space is not an argument against crypto.

It is an argument in favor of smart, well-crafted regulation (like the @PatrickMcHenry and @MaxineWaters led effort on stablecoins) that improves safety while preventing monopolistic concentration, and it is an argument that our law enforcement and regulatory agencies really need to up their game and start executing better.

But the core value of the technology is very real, and if you aren’t convinced it has any value, I would also bring you back to point one: are you so convinced that we should destroy it, vs. letting it compete and just lose in an open market (as if you are right about it being useless, it will just go away when you force it to compete on equal terms)?

Unless you believe the former, which is that a top-down state-sponsored ban on the technology (not just bad actors) is appropriate, you actually disagree with the current political situation in the United States.

Finally - thank you. I appreciate you taking the time to read and consider this. I'm happy to discuss with anyone who wants to engage in good faith, so all questions welcome.

1. https://x.com/SGJohnsson/status/1796216669100036525

2. https://www.cahill.com/publications/firm-memoranda/2024-07-01-sec-v-binance-the-dis-embodiment-of-howey

3. https://www.piratewires.com/p/crypto-choke-point

4. https://docs.house.gov/meetings/BA/BA21/20230419/115753/HHRG-118-BA21-Wstate-CampbellA-20230419.pdf