In the last ten years – historians of the future will note this – we’ve observed the creation of a new monetary and financial architecture that could serve as a replacement for everything that’s been known and used in the lifetime of every living person.
We’ve experienced a useful and secure money that works all over the world, is not connected to the state, and doesn’t need the existing banking system. This same system can serve as a replacement for all existing payment systems that use national monies. This money is a purely market creation that adds to traditional accounting and store-of-value functions one additional feature: it is also a global peer-to-peer means of payment.
A decade ago, even high-level theorists said this couldn’t happen. Then it did happen.
We’ve seen the creation of smart contracting systems that can manage a vast number of human deals, commitments, and interactions. Even people who accepted that Bitcoin was real doubted that Ethereum could achieve this. But it happened anyway.
We’ve even observed how this system has become a tool for raising capital and replacing even traditional lending functions. Three years ago, this was merely a speculative idea. Then it become a one-hundred billion dollar reality, and new forms of capital being raised through tokenization.
Seemingly out of nowhere, we have now an entire suite of technology that could conceivably displace and even replace national money, traditional payment options, and even regulated capital markets, and bring us something new and much more wonderful.
You are reading this and thinking: here we go again with crypto-utopianism. But here’s the thing. It’s not just theory anymore. These technologies exist in real time, even if only in their beginning stages. This is why there are so many Bitcoiners out there who speak so exuberantly about the future. They have already experienced it. They are drivers of Maseratis on roads filled with Model Ts and they know it. An improvement over the status quo that is this impressive won’t be suppressed.
You might not have used any of these new technologies. That’s fine. With all the failings of the current system, the old structures do get the job done. So long as there is no great crisis in the system, people are confident in it. There is no strong reason to switch, even if the new system is more secure, faster, more democratic, more inclusive, less risky, and less compromising of personal privacy. Still, the old system enjoys the momentum that comes from the network effect. Everyone else uses it, so you keep doing so.
Regulation Is Key
There is another factor that is holding back the switch from old to new. Regulations are trying to force the new technology to behave like the old technology. In the US, to buy Bitcoin or any cryptocurrency, you are required to comply with know-your-customer regulations, giving up every detail about your person. Any money you make from upward price movements in your new asset must be reported and you must pay taxes on it. Companies that want to assist in onboarding and offboarding crypto to fiat have to register with government as money exchanges. And with the capital-raising functions of blockchain technology, the regulators are threatening to shut them all down and make them behave like traditional securities.
I’ve watched as these regulations, gradually imposed and arbitrarily enforced, have introduced an element of fear in a fearless technology, distorting the sector and making it less innovative and competitive. Every time a new use of distributed networks is revealed and begins to catch on, some bigwigs emerge from on high to warn about compliance with decades-old laws designed for a different technology.
Consumers are scared and the end-user experience has not improved as much as it might have in the absence of huge compliance costs. I’ve seen how legal uncertainty has caused merchants and consumers to lose access to a variety of services. I’ve seen entrepreneurs put their plans on hold pending some administrative edict coming from Washington, DC.
How much further along we would be in the absence of these interventions? It’s impossible to see the innovations we have not experienced. We only know that things would be different. But once you consider just how different, the reality becomes something beyond awesome. And yet it is not to be.
How Long the Delay?
Consider what happens when power is deployed to stop the progress of a new technology. Does it really ever work over the long term? To answer the question, we have to engage in counterfactuals.
Imagine if governments in Europe had cracked down to stop the printing press. What if cities around the world had banned the automobile? What would have been the fate of railroads, domestic electric lighting and indoor plumbing if special interests had suppressed them in order to favor prevailing technologies?
We can only guess because none of this really happened. It’s true that not everyone welcomed the printing press. Scribes in monasteries worried about the future of their talents. Some people wondered if the old faith could survive people having access to the ancient texts. But for the most part, the advent of printing was seen as a welcome innovation. So too with internal cumbustion, lighting, and plumbing. Some people were slow to adopt it, to be sure, but governments mostly let the innovation happen.
What if they had not? Does anyone really believe that these innovations could have been stopped and not merely slowed? I don’t think so. There are cases in history when grants of government monopolies delay competitors from going to market with improvements. This happened with the steamship in England, airplanes in the US, and some software applications in the last decades. But these delays are temporary; patents expire and history moves forward.
Regulations are different. Entrepreneurs have to innovate around them. Gray and black markets emerge. Risk takers deal with running afoul of the authorities. But eventually, something gives. Consider, for example, the results if every Lord and Baron in Europe in the 12th century had banned the horseshoe. Do you think that would have stopped the implementation of that technology for centuries? Highly doubtful, and the reason is fundamental: ideas are more powerful than governments. Eventually the costs of enforcement vastly exceed the benefits to the existing ruling class.
A Cryptoized World
In light of what we’ve seen over ten years, here’s a thought experiment I’ve been toying with. It occurred to me while daydreaming as my tax attorney was going on at length about the taxable events in the regular dealings with crypto. I was considering just how incompatible these impositions are with a technology that emerged from and operates within a framework of perfect freedom.
Some legislatures have come to understand this. Wyoming, for example, has exempted crypto from all taxation, defined certain tokens in a way that make them exempt from securities law, and made special provisions for corporate forms that are distributed, among other changes. The legislature did its best to make the state attractive to this new industry.
Now let us enter into the realm of fantasy. Let’s say that the US Congress passed legislation that exempted all cryptocurrencies, cryptotrading, and cryptoassets from all taxation and regulation. The legislature establishes complete laissez faire in this sector, while everything else in the regular world (the dollar, the Fed, the SEC, the Treasury, and everything else we know) stayed the same.
What would you expect to happen? Ten years ago, had Congress done the same thing, not much would have changed, obviously. The technology didn’t exist, and we didn’t really know that it could exist.
What would happen today? You are no longer punished for buying and selling in crypto, floating new tokens, putting out new applications in smart-contracting platforms, innovating new payment systems and so on. Companies could tokenize rather than float stock. Businesses could pay in crypto and do their accounting in crypto and face no penalties. Consider carefully: you could keep a third more of your just earnings merely by switching to a better technology.
How long would it take before crypto economics mostly replaced everything else? If this legislative change actually happened – and no it obviously will not – we might observe the wholesale displacement of old-world economic and financial systems with 21st century systems, and maybe it would happen much sooner than anybody would expect, perhaps 12 to 48 months, provided the crypto infrastructure could scale in time to meet the new demand.
Forcing the Present Into the Past
Now, if this thought experiment is correct, there are some mighty implications. It suggests that the financial and monetary world as it exists today is really being held together by force that is holding us to old forms. This force is not only imposing limitations and inefficiencies; it is literally keeping a vast infrastructure in place that otherwise cease to dominate or even exist, and forestalling the onset of a new way of living. And this new way is not just about buying and selling. So central to our public lives are nationalized money and regulated capital markets that the advent of a cryptoized world would fundamentally change the relationship of the individual to the state.
Am I wrong to be slightly in awe of this realization?
Keeping a vast system alive solely by force does not strike me as sustainable over the long term. If you have a massive suite of technology that is waiting to take over and is only being held back by purely artificial means, that does not bode well for the likelihood that the past can be forever preserved. The future cannot be forever put off even by the world’s most powerful governments. Eventually ideas win out.