The Crypto Battlefield: Financial Visionaries vs. The Regulators
A Primer on Disruptive Technologies and the Regulator’s Positions
Mark Twain has been credited with expressing that “History doesn’t repeat itself but it often rhymes,” Regardless of who crafted the sentiment; it is clearly consistent with my experience associated with some disruptive technologies that are showing up in today’s financial markets.
Philosopher Arthur Schopenhauer once stated, “All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.”
Distributed Ledger Technologies (DLT), the underlying software system that is simply and commonly referred to as Blockchain is an example of this “Truth”. This DLT system uses the collective computing power of many autonomous systems all agreeing on factual transactions covered by a specific ledger (e.g. Bitcoin, Litecoin, Dash, etc.). A permanent history is built upon “blocks” of agreed to records each referencing the historical transactions along with the current ones to make an agreed to real-time record of who owns what, who was involved in the transactions, and what were the paths the associated “token” took during this demonstration of “block” transactions.
In essence, Cryptocurrencies rely upon the veracity (accuracy and accountability) of the underlying ledger. The ledger works a lot like the Federal Reserve and Central Banks where transactions are cleared between and among different bank accounts and where there is a constant supply of money for growth, prosperity, and/or an eroding faith in the system.
Crypto values, like formal currencies, change over time relative to other financial alternatives (like gold, land, jewels, bonds, and even the proverbial tulip ). Candidly, the US Dollar is one of the most stable global currencies. As noted, whenever there is a global or regional financial panic or disaster, foreign funds flow into US Dollars faster than US Dollars can be created and/or replaced. This is a continuing economy dynamism that isn’t only a crypto or physical money supply issue and a subject more akin to a Ph.D. dissertation than this short blog post.
While I believe in the long-term value of DLTs (Distributed Ledger Technologies) and cryptocurrencies, there are many other financial professionals who may disagree with my beliefs and perspectives. I believe we learn nothing by studying those that agree with our positions. We can learn much from those who disagree as long as we engage in an open dialog. Accordingly, I believe we should listen in a meaningful way and learn from the opposing views of the Anti-Crypto Proponents (ACPs) in order to hopefully improve the DLT overall operating environment in an equitable way.
Anti-Crypto Proponents (The Regulators) believe that DLT based monetary systems present real risks to the global economy and stability. (I refer to most ACPs as Regulators, even though the majority are likely not officially Regulators, they are generally believers that risks to consumer, businesses, and traditional systems far outweigh perceived flashy benefits of the current DLT environment and youthful enthusiasm.)
The following arguments are how I have received them via conversations, email exchanges, and public comments to my previous postings. I am certain that many ASPs will disagree with some of my conclusions and I encourage them to share their thoughts as that only improves the meaningful conversations and our journey as this technology evolves hopefully for the benefit of all.
Lack of Regulation: Regulators like regulation. That is why they do what they do. It is natural for them to be comforted by rules, processes, and laws. They tend to believe in “protecting” the public as a calling. While protecting the public is actually consistent within the DLT, there are always different perspectives including:
- Transactions are outside of government control and/or influence. This means that transactions between buyers and sellers are more akin to a trade at say a flea market where there is a handshake, an exchange of payment, and the delivery of a good or service immediately concluded and hence closing the transaction. Local sales tax regulators, for example, dislike these types of transactions as too frequently the exchange is never reported and taxpayers never receive the government’s rake relative to the transactional value.
Essentially small-time dealers of used items can essentially increase their profit margins or lower their prices if they don’t report their financial activity. While both sides of the transaction are responsible for “proper” legal-behavior, there are incentives for each to remain silent to improve their “deal” (outcomes). This is wrong in my book of beliefs and it shouldn’t be supported or rewarded. People trading in cryptocurrencies have an obligation to follow their local rules relative to taxation, reporting, good citizenship, and the like.
- Secret transactions provide fertile ground for bad actors. This is “True”. Secret transactions provide fertile ground; this is why global drug cartels have challenges with “too much cash” on hand. It was once noted by the former finance officer of the Medellin Drug Cartel that they recorded a loss of currency of $1M USD/month due to rats and mice eating the money for nests. Clearly, a DLT system that would allow the conversion of physical currency transactions to virtual currency transactions creates an opportunity for exploitation. In the beginning, some early adopters combined the Dark Web and Bitcoin to move Heroin and other illegal activity. Ultimately the perpetrators were caught and the DLT was used to prosecute. While the activity was illegal, wrong, and abusive, the same and similar transactions occur regularly with physical currencies as noted above. The overall DLT network of providers and systems need to demonstrate diligence to avoid participating in bad acts including money laundering, terrorist financing, and the drug trade.
- The overall DLT money process is a scam. Here the argument is that because there is no “physical backing” of the underlying coin (currency) and/or its value (e.g. gold, governments, etc.), users are being duped and that its value can crash to zero without warning and people will be harmed. Of course, I don’t believe it is a scam even though there are strong valuation risks. Just like the housing market prior to the 2008 housing bust, values of many cryptocurrencies lack a rational support. For the record, I can’t defend the meteoric rise of the stock markets in the past year either, however, the documentation and the evidence are there and seemingly rational people are still investing (albeit I would call it speculating – but that is a different blog post).
All money is really valued on faith. Credit cards are accepted by merchants based on the faith that they will receive payment and that users will fulfill their obligations with their credit card company. It is all faith. Now some faiths are easier to accept than others. The US Dollar is so strong because the USA has tremendous wealth, reputation, and assets that others value. The same economics occur in a virtual world as well, albeit differently.
- Cryptocurrencies promote illegal activities. Of course, illegal is frequently geographically as much as let’s say morally dependent. For example, prostitution is illegal in most places and legal in others. Using the anonymity aspect of the DLT, it is quite possible for people to engage in transactions that may otherwise be illegal under a physical currency concept.
Two additional thoughts:
Let’s assume that you live in South Florida and your extended family is in Cuba. Historically, the USA has really limited any USD transaction between the two countries. With a DLT coin system, it would simple to move virtual funds from your “digital” wallet to your Cuban family’s wallet and potentially avoid any embargos. Additionally, many families may have smuggled cash back and forth for decades as well. So, the process and method may have changed, but the results and outcomes frequently do not.
Alternatively, let’s say you want to play online poker and bet on your favorite NFL team. Both activities run afoul of various US Federal laws and activities. However, with Crypto, you might be able to fund your non-USA account and enjoy your pastimes to the fullest. Again, Crypto helps with the execution. It is merely an “adaptation” of another physical process (cash or credit method) used every day and understood.
In both of the above examples, the Regulators would like to help control them. Their motives are genuine and well-meaning in most cases. A complaint Regulators have is they have no one to “regulate” with. Under a DLT, the underlying creators are autonomous and decentralized. This is the system’s strength and also its weakness. One coin, DASH is structured to help alleviate this challenge by having a more formal governance process. This might be the best solution so far on the path forward.
Several countries are at the forefront of creating favorable regulatory schemes that promote DLT systems by sometimes adding a level of governmental oversight that is agreeable to both sides. Of course, these are new and evolving solutions and models of doing business in this frontier arena as well.
DLT systems are new. They are still infantile in their activities and growth. There will likely be large gains and large losses within the system to come. Regulator’s voices should be heard and the system should adapt to minimize threats and execute their strengths.
DLT currencies are addictive in nature relative to physical currencies. They assist with and are not replacements of the traditional money supply.
The future is bright for DLTs without regards to the most recent turbulence that in all likelihood will repeat frequently during its transition from infancy to adolescence to adulthood.
Be well, think for yourself, and always ask questions.
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