Welcome to Money Reimagined.

Well, this past week felt historic. As bitcoin surged to all-time highs and found its way into TV studios and onto newspaper front pages, it felt like we’d crossed the chasm and gone mainstream. This happened in predictably weird and wild ways, with memes and attention-grabbing stunts – as discussed in the column below. Regardless, it seemed like no one could stop talking about bitcoin. 

Ethereum had a big week, too. The Chicago Mercantile Exchange launched ether futures, which helped the token hit all-time highs as well. And the buzz around decentralized finance (DeFi) and nonfungible tokens (NFTs) just got louder. 

All of that activity is putting ever more stress on the Ethereum network, where transaction costs – in the form of “gas fees” –  are surging (see below). There’s an urgent need, in other words, for the scalability promised by Ethereum’s long-awaited 2.0 upgrade. 

That’s what Sheila Warren and I discussed in this week’s episode of our “Money Reimagined” podcast. We asked Danny Ryan, a key Ethereum core researcher and communicator, to give us the lowdown on what’s happening with the massive upgrade, and more. 

Have a listen. After reading the newsletter below.

Are we not entertained?

When news broke Monday that Elon Musk’s Tesla had invested $1.5 billion in bitcoin, it capped off weeks of cryptic crypto tweets from the colorful CEO and it conveniently distracted people from some not-so-positive news about his company. As he set off a massive bitcoin price surge, he proved that for all his talents as an entrepreneur, Musk’s greatest skill lies in mastering the “attention economy.” 

In the attention economy, everybody – literally, all of us in the user-generated world of social media – are competing for the one scarce commodity that digital technology cannot replicate into abundance: our time. The attention we give to entertainment and information is in scarce supply; command of it dictates how money and power is distributed across the internet. 

Musk and others of his ilk – think Dave Portnoy, Kim Kardashian or Donald J. Trump [no social link available anymore] – are the ones winning this competition. They’ve developed giant audiences and have figured out how to deploy shareable memes, sexy images or shock commentary to trigger dopamine releases among their followers, whether it’s from amusement, anger, arousal or some other emotion. 

Along the way, their hyper-engaged communities share their leader’s work, creating viral effects and, ultimately, inspiring people to buy things: stocks, country club memberships, celebrity-branded perfume or crypto tokens. This is how the game is played, how the dominance of messages and their social distribution is converted into money and power. 

Now, more and more of these attention masters are turning their virality machines to crypto. The celebrity impact of Mark Cuban, Gene Simmons, Snoop Dogg and Lindsay Lohan each separately had a noticeable impact on certain crypto assets this past week. The winning meme in all that surely went to rapper Snoop Dogg, with a paean to dogecoin that included a shout-out to Musk:

As Felix Salmon noted in his newsletter for Axios this week, crypto is made for this because it allows attention masters to essentially convert clicks, likes and shares into tangible rewards. The activity and enthusiasm they draw to a project creates buzz and steers buyers to tokens. In essence, they drive scarce-supply human attention into scarce-supply digital assets, a marriage that results in price gains. 

This kind of behavior goes far beyond crypto. Attention economics has been a thing for some time, well before “meme investing” moves by Reddit group WallStreetBets’ two weeks ago fostered a powerful movement to drive up GameStop’s stock. (“The Attention Economy,” a book by Thomas Davenport and John Beck, appeared in 2001.) The use of viral, social network-driven communication is really the foundation of the information economy. 

And it’s not necessarily a positive development. This business model creates massive social distortions and shifts incentives both for those who command power within the system and those who don’t. 

Beyoncé can make $1 million from a single, short Instagram post and image. That’s a far more efficient way to generate money than the intense work that goes into a music album. How does that affect her priorities? (Note: the trade-off is quite different for the vast majority of musicians, who have nowhere near Queen Bey’s 165 million followers.)

Think also of Donald Trump and what he represents. I would argue his presidency wasn’t about political power in the traditional sense; it was a mechanism for amplifying his attention engagement power. His tweets seemed deliberately designed to manufacture outrage and division among both his millions of loyal supporters and his vehement opponents. The relentless, irresolvable arguments he fomented generated traffic and engagement, all of which he monetized in various ways.

That crypto is fueled and buffeted by all this noise raises many issues. It’s not necessarily bad, but for those who believe in the technology’s potential, it does put into sharp relief some core questions about who gets to influence its development. Crypto prides itself on meritocracy: The best developers, the best ideas are supposed to win. It’s not about reputation, seniority and definitely not celebrity. How do we square that ethos with all this unseemingly self-promotion?

On the negative side, a Musk-led rally looks and feels to some like an empty “pump and dump” moment, one that the Tesla impresario or anyone in his circle could exploit, leaving meme-following investors holding the bag. It’s not a good look for crypto generally.

But if you buy into the idea that bitcoin will one day be a reserve asset for companies and people, regardless of how it gets there, then Tesla’s purchase can be seen more positively. Musk is motivating masses of ordinary Joes in a process of democratization. Mass, social participation in these price rallies is a decentralizing force, simply because it diminishes the dominance of latecomer institutions. 

What makes these arguments tricky is a circularity problem around where value comes from in crypto projects. Unlike a stock such as GameStop, where value will ultimately be dictated by expectations on whether the company can earn profits in the future, value in a cryptocurrency like bitcoin is intrinsically linked with the expansion of its user network. The wider the adoption, the bigger the network, the more is at stake, the more secure it is and the more it is accepted as a store-of-value and, perhaps eventually, as a medium of exchange.

Building a community is the single most important factor dictating value for a cryptocurrency. So, in theory, an episode of meme-driven mass social vitality that stirs widespread engagement, as silly as it all might seem, can be a route to success. 

At the end of the day, though, value can’t be separated from values, from the underlying narrative of why a crypto asset is worth owning. If a crypto community expands on the basis of a viral sales pitch alone, that diminishes and overshadows the core technical features of the project – say, Bitcoin’s censorship resistance or its principles of self-custody and peer-to-peer exchange.  

Do meme rallies make regulators more or less likely to intervene in a crypto token’s growth? And what does that mean for the long-term goals many of us want to see occur, such as financial inclusion? Or is expansion and adoption, regardless of how it grows, the only thing that matters at this point?

What we can say is the technology itself doesn’t care what we do with it. It’s up to us to decide whether to ride with Elon “to the moon” or take a more prosaic path to mainstream acceptance.

As I’ve written before, it’s unfair to judge bitcoin’s aspirations to become a “digital gold” store-of-value by its current, volatile price performance. It will take time for bitcoin to become accepted widely enough as a universal reserve asset, much as it surely took gold a long time to become a widely accepted currency thousands of years ago. Bitcoin is not yet digital gold. It is becoming digital gold. 

The writer Grant Bartel has come up with a simple way of tracking that becoming: a  proxy called “Flip Progress” that measures bitcoin’s value versus gold based on market capitalization. This is from his bitcoinflips.gold website.

What’s striking, of course, is the acceleration. At 7%, the flip progress ratio still has a long way to go. But when compared to the 1% ratio it held a year ago, it suggests a real shift in narrative could be occurring. 

While bitcoiners, dogecoiners and NFTers were obsessing with Elon Musk, Snoop Dogg and Gene Simmons this week, the “Degens” driving the DeFi craze on Ethereum were consumed with another topic: gas fees. Surging activity means that the already overburdened Ethereum blockchain is becoming even more congested. And when that happens, the miners who run the computational network start to rake in higher fees as users jack up rates to complete transactions.

DeFi enthusiast @JeanneDeBit put the math problem of high gas fees in stark terms:

And then she offered a rationalization, which, although in jest, was quite spot on. Fees are indeed a form of natural, on-chain regulation. They add friction to the system to keep activity within the bounds of capacity.

Meanwhile, Messari CEO Ryan Selkis, offered a different take: that, if you’re smart, you can join the “yield farmers” who play the DeFi market to profit on interest rate arbitrage opportunities while the bigger issue of Ethereum fees works itself out. 

But, ultimately, said Ryan Sean Adams, there’s not much you can do in a booming market.

The story flow during this crypto-mainstreaming week was full of blue-chip companies. 

Tesla announced a $1.5 billion investment in bitcoin…

Mastercard said it would enable crypto payments for merchants on its network… 

Amazon announced plans to develop a digital currency in Mexico…

And custodial giant BNY Mellon said it would start providing custody services for crypto…

Who’s next? Apple?

Welcome to this week’s Money Reimagined, coming to you two days into a new U.S. presidency. 

Already, with various executive orders and a host of cabinet and agency nominee names emerging, President Joe Biden has fostered the palpable sense of a slate being cleaned. 

As for what it means for crypto, the turnover in the White House gave Sheila Warren and me reason to invite Kristin Smith of the Blockchain Association and Amy Kim of the Digital Chamber of Commerce onto our weekly podcast. We discussed the outlook for regulation under the Biden administration. Check out the episode. But first, read the newsletter, which starts with an open letter to the new U.S. president.

Dear President Biden, Congratulations on an inspiring inauguration. 

The stirring speeches, uplifting poems and dazzling fireworks conveyed a real sense of purpose and hope. But now they’re over. Time to get to work. 

Let’s first check the dashboard: 

You most urgently need to tackle the first two items. But that will only push the third and fourth numbers much, much higher.

What’s more, the dashboard is dangerously simplistic. The problem is not the U.S. government balance sheet per se, but the global account. In November, the Institute of International Finance forecast that world public debt would hit $277 trillion by year’s end, or 365% of world GDP. As for advanced economies, their aggregate debt was at 432% of GDP in the third quarter. 

The task at hand: to get the international community to jointly get those numbers into a sustainable state and avoid a 1930s-style global depression.

Ignore the deficit hawks telling you fiscal austerity is the answer. You can’t ask an exhausted public to bear the cost of making bankers and hedge fund managers whole unless you want a violent insurrection far bigger than the one on Jan. 6. 

Yet, it’s impossible to foresee the degree of economic growth needed to repay those debts.

The only way out is through synchronized debt monetization. That means addressing the elephant in the room: overhauling the global financial system in which the U.S. dollar is king. It means recreating that system around digital currencies.

Why must this be an international solution? Well, let’s first look at how a unilateral fix would play out, if it were actually possible:

Appealing, right? In this case, the cost – inflation – is essentially exported to foreigners. 

The problem, of course, is that it only works if every other major economy has the opposite problem – if their economies are too strong, their currencies too weak and their government debt loads well under control. Since that’s not the case, this kind of unilateral action would have catastrophic consequences because it would immediately trigger counter-devalutions from other countries. You’d get something like the devastating currency war triggered by the 1933 Smoot-Hawley Act. 

It’s why, in this case especially, monetization must be jointly calibrated. 

What does that look like? Well, for one, all central banks’ balance sheets would explode even more than they have already – see chart below. But this time it would likely be with bonds bought directly from their governments. 

Governments would use the proceeds to repay creditors, the catch being that money, now in greater supply, would buy less than it had previously. The big question is whether this inflationary hit comes as a one-off price adjustment or breeds self-perpetuating hyperinflation – results would vary from country to country, depending on the degree of trust commanded by the government. 

But whether they deliver a one-off transfer from creditors to savers or trigger an ongoing collapse that hurts everyone, those extra dollars, euros, yen and yuan must go somewhere. Because all currencies are increasing supply simultaneously, their holders will instead seek out scarce assets such as gold, real estate and, of course, bitcoin. 

(Pro tip for the new president: While bitcoin (BTC) is well off its early January highs, its spectacular surge through December suggests people are seeing the scenarios play out. Its price is a useful temperature gauge. Keep your eye on it.)

Setting aside the inflation challenge, there’s a structural problem with synchronized monetary policy: All currencies are not created equal, which makes it difficult to find common ground. The rules for the dollar, the one currency that’s universally used as a denominator for assets and liabilities outside of its home country, differ from others. 

This creates incentive misalignments for the Federal Reserve, which has a mandate to serve the U.S. public but also acts a de facto lender of last report to the outside world. 

We witnessed this last March. When the global economy seized up due to COVID-19, the world’s banks scrambled to find greenbacks to ensure they could meet their dollar obligations. So the Fed went on an asset-buying spree like never before, creating bank reserves and international swap lines that pumped trillions of dollars into the global banking system.  

But what happens if the outside world’s interests conflict with those of the U.S.? What if the U.S. needs a weaker dollar but the world needs a stronger dollar? 

Over time this mismatch has created imbalances in the global economy. Many economists worry that it’s approaching the breaking point. 

Willem Middelkoop and David Marsh of the Official Monetary and Financial Institutions Forum, a high-level think tank, this week called on the U.S. and China to find a coordinated digital solution or face “monetary breakdown.” They point to former Bank of England Governor Mark Carney’s suggestion for a new, International Monetary Fund-coordinated digital international reserve currency as a possible mechanism. (Carney refers to this dollar-alternative as “synthetic hegemonic currency.”)

Is a multilateral currency the answer? Or might we instead just move to a common protocol enabling decentralized exchanges between central bank digital currencies and other digital assets such as bitcoin? In the latter case this new, programmable form of money could enable low cost exchange-rate hedging, making an intermediating reserve currency redundant. 

The point is that although the U.S. seems all-powerful right now, digital alternatives to the dollar-centric financial system are emerging. Washington, Wall Street and Silicon Valley must be ready. 

It’s a good sign you’re seeking to fill regulatory agencies with crypto-savvy leaders, all people well placed to address the big questions raised here. (See “Relevant Reads” below.)

But the changes coming will be huge. To navigate them will take leadership, a bold vision and an openness to new ideas. 

Thanks for listening.

Consistent with the theme of this week’s column, a look at central bank balance sheets is in order. 

This chart, produced by CoinDesk’s Damanick Dantes and Shuai Hao, using the Federal Reserve Bank of St. Louis FRED database, gives a pretty good sense of the monetary expansion delivered by five of the world’s most important central banks over the past decade and a half, and especially in 2020.

They’ll likely do much, much more as a reckoning with debt and the COVID-19 fallout comes due. It’s why many bitcoin enthusiasts aren’t phased by this week’s pullback in its price.

“Faketoshi” is at it again. 

Craig S. Wright, the man who wants you to believe he is Satoshi Nakamoto, is pulling more stunts. This time, he is doubling down on his May 2019 move to register a claim to Satoshi’s famous 2008 white paper with the U.S. Copyright Office, by sending takedown messages to two long-running Bitcoin sites: bitcoin.org and bitcoincore.org. 

Upfront, let’s be clear: Anyone could have made the U.S. copyright registration. The registration is merely recognition that a claim has been made; it’s not proof of authorship. In fact, the U.S. Copyright Office took pains to clarify that after Wright’s registration, saying it “does not investigate the truth of any statement made” and that it “does not investigate whether there is a provable connection between the claimant and the pseudonymous author.”

Nonetheless, diverging responses from bitcoin.org and bitcoincore.org sparked yet another feisty debate over Wright’s actions and over how to deal with someone with a penchant for such legal actions. 

Bitcoincore.org, which is associated with a group of developers focused on the upkeep of Bitcoin’s core protocol, decided to remove the white paper from its site. This prompted an angry reaction from Cobra, the pseudonymous moderator of bitcoin.org, who accused the moderators of bitcoincore.org of “surrendering” in a way that “has lent ammunition to Bitcoin’s enemies, engaged in self-censorship, and compromised its integrity.” 

This, retorted long-time Bitcoin Core developer Greg Maxwell in a Reddit thread, is absurd. “With due respect, Cobra is just wrong about ‘capitulation’: The real capitulation is agreeing with the conman that his impotent drama about the white paper might matter or could really accomplish anything.” 

Maxwell defended bitcoincore.org’s decision as a “pick your battles” move, arguing that it wasn’t worth letting the well-funded Wright force a costly legal battle when it does nothing to the resilience of Bitcoin itself. Taking it down didn’t matter, Maxwell said, because the MIT-licensed white paper is already everywhere. And “with publicity about this nonsense it’s going to get published in 1,000 more places.”

Sure enough, a race to host and re-publish the white paper quickly got underway. A Twitter thread by Jerry Brito, executive director of Coin Center, which started with a tweet listing five websites that were hosting the white paper and which asked, “Who else wants to join this party?”, just got longer and longer. By the end of the day, 124 replies were on that thread, most of which included fresh links to sites hosting the white paper. One reply, from Michael McSweeney at The Block, even pointed out that the U.S. federal government was one of the sites. 

For the record, CoinDesk has been hosting the white paper for some time. You can find it here. Free to read. Free to share.

Last week, we looked at the mostly positive responses in the crypto community to news that former Commodities Futures Trading Commission Chairman Gary Gensler was likely to become head of the  Securities and Exchange Commission. The community likes people who understand the tech and there was good news to celebrate this week as well.