Money Reimagined: Tucker Carlson Is Right About Financial Privacy

Welcome to Money Reimagined. 

I’m on vacation. So this week’s main-bar column comes to you from Executive Editor Marc Hochstein. In it, Marc draws deeply on his objective consistency to remind us that wherever you stand on the politically charged issues of our day, we all lose when our right to privacy is breached in pursuit of them. 

Before I took two days off, my podcast co-host Sheila Warren and I got to record the first in a multi-part series on the nonfungible token craze. To explore why people in the art and entertainment world are so excited about NFTs right now, this week’s stage-setting episode starts with a look at how human beings decide how to value something.

For this, we were joined by perhaps the perfect guest: Nanne Dekking, the former vice chairman of Sotheby’s who is now the CEO of blockchain company Artory. This was an especially fun one! Check it out after reading Marc’s insights.

– Michael Casey

Bank of America: World police

Trigger warning: This column has something nice to say about Tucker Carlson.

On Feb. 4, the Fox News host broke a story that should concern all Americans, even those who normally blanch at his populist brand of right-wing politics. Indeed, the revelations should interest anyone who cares about the future of money, even if Carlson’s TV broadcast could have used more context.

Since the Jan. 6 Capitol Hill riot in Washington, D.C., Bank of America has been helping federal investigators search for extremists by combing through its transaction records, “Tucker Carlson Tonight” reported, without naming its sources (standard journalistic practice with sensitive stories).

Specifically, the country’s second-largest bank searched for customers who:

  • Transacted with debit or credit cards in Washington on Jan. 5 and 6
  • Paid for hotel or AirBnB reservations in the area after Jan. 6
  • Bought weapons, or anything else (“t-shirts included”) from a “weapons-related merchant,” between Jan. 7 and “their upcoming suspected stay in D.C. area around Inauguration Day” (Jan. 20)
  • Made “airline-related purchases” after Jan. 6 – “not just flights to Washington, but flights anywhere, from Omaha to Thailand.”

Of the 211 customers who met the “thresholds of interest,” at least one was interviewed by the authorities before being cleared of suspicion, Carlson told his more than 4 million nightly viewers. 

“Bank of America is, without the knowledge or the consent of its customers, sharing private information with federal law enforcement agencies,” he thundered. “Bank of America effectively is acting as an intelligence agency, but they’re not telling you about it.”

What else is new?

To seasoned observers of the financial services industry, including regulated cryptocurrency businesses, it’s tempting to scoff, “no kidding, Columbo.” 

Banks have been providing customers’ private information to the government without their knowledge or consent for decades under the 1970 Bank Secrecy Act and related anti-money-laundering (AML) regulations. 

“For B of A, as well as any other regulated entity, it’s not like we’re sheriff deputies or an extension of law enforcement, but because we’re regulated, we have regulatory obligations. That’s how the regulatory framework was designed by our legislature and politicians,” said Tim Byun, global government relations officer at crypto exchange operator OK Group and a former Visa executive and bank examiner. “The public and customers should and need to be aware of this.” 

Read more: Why Ledger Kept All That Customer Data

Financial institutions routinely file suspicious activity and currency transaction reports (SARs and CTRs), hundreds of thousands each year, to the Treasury Department. These reports contain sensitive personal information about customers who may not have committed any crime. As CoinDesk’s Ben Powers reported last year, they are stored indefinitely by a bureau that appears ill-equipped to guard them. A trove of them would make a comely prize for hackers. The SolarWinds breach only reinforced doubts about Uncle Sam’s cyber defenses.

After 9/11, the Patriot Act heightened banks’ “intelligence agency” role decried by Carlson. Particularly pertinent here may be Section 314(a), which authorizes the government to share with financial institutions the names, addresses and other data about individuals and groups suspected of terrorist and money laundering activity, and in turn requires those firms to search their records and tell the authorities if they find a match.  

On Fox, Carlson asked his viewers to put themselves in the shoes of the B of A customer. “The FBI hauls you in for questioning in a terror investigation, not because you’ve done anything suspicious, but because you bought plane tickets and visited your country’s capital,” he said. “Now they’re sweating you because your bank, which you trust with your most private information, has ratted you out without your knowledge.”

Don’t tell a soul

(Rachel Sun/CoinDesk)

Carlson’s indignation is understandable – but so would any bank’s reticence to notify customers they were being “ratted out.” Tipping off a customer to an investigation by disclosing a SAR filing, for example, is illegal, and both the bank and the officer responsible may be held liable for lapses. “All banks have responsibilities under federal law to cooperate with law enforcement inquiries in full compliance with the law,” B of A noted in its response to Carlson’s questions.

Some details of Carlson’s report were fuzzy. For example, he complained that B of A cast “an absurdly wide net,” but it’s not clear how absurdly wide. The broadcast didn’t explicitly say whether the bank reported only those customers who met all four of the criteria described, or all who satisfied any one of them.  

Read more: Marc Hochstein – Who Are the Real Monsters?

Also, while Carlson noted that B of A retrieved the information “at the request of federal investigators,” it would be helpful to know the exact nature of the request: a warrant backed by probable cause and signed by a judge? A subpoena? An order by the shadowy, Kafkaesque FISA court? (Neither Fox News nor B of A answered requests for clarification by press time.)

Here’s where the Patriot Act may come into play. Did B of A search its records in response to a Section 314(a) notification? If so, was this tool used because the suspects were considered domestic terrorists? (Remember, the law was written when the popular idea of a terrorist was Osama Bin Laden, not the QAnon Shaman.) 

Does a search for broad types of purchases, rather than named individuals, fall under the scope of Section 314(a)? How much leeway did B of A have to push back against the Feds’ demands, as Carlson implies it should have? Was law enforcement simply looking to supplement information already gleaned from public video footage, names to put to faces? It’ll be interesting to see what further reporting finds. 

But remember the big picture. Since the 1970s, courts in the U.S. have held that people have no reasonable expectation of privacy in information they voluntarily turn over to third parties. As a result, the investigative methods Carlson exposed, however shocking to Joe Sixpack, are pretty standard. Our financial transactions aren’t protected by the Fourth Amendment of the U.S. Constitution. 

Should they be? That’s a question we ought to revisit in this digital age. Say what you will about Tucker Carlson, but he deserves credit for drawing public attention to the matter. 

– Marc Hochstein

Ethereum’s whales

Signs of ownership concentration are emerging on the Ethereum network as participation grows in Ethereum 2.0’s stake-based validation system. The number of ether “millionaires,” or addresses holding 1,000 ETH or more, has dropped by 7% in 2021, as of Thursday, accelerating from 2020’s 6% annual decline, according to data provided by Coin Metrics. 

Meanwhile, at more whalish depths, populations are increasing. The number of addresses holding 10,000 units or more has increased by 8%, and Ethereum has added a single new “billionaire.” Since the start of the year, the number of addresses holding 1 million ETH or more has gone from seven, to nine, and back to eight as of Thursday. 

(Shuai Hao)

Source: Coin Metrics

Let’s be clear, these aren’t uncharted waters for ether ownership concentration. The number of 10,000 ETH addresses hit peak in February, 2018, at 1,284. As of Thursday, it’s 1,276.

These shifts in ownership are taking place as staking grows on Ethereum, with 90,349 active validators on the network, up from 77,890 at the beginning of February, according to CoinDesk’s Valid Points newsletter, which provides in-depth coverage of the Ethereum 2.0 roll-out. 

Fears of ownership concentration in proof-of-stake systems are not new. And it’s a little early for ETH bears to sound the decentralization alarm. For one thing, these are addresses. They don’t even necessarily indicate entities, let alone what kind of entities. They could be exchanges or other service providers representing many smaller entities. However, with Ethereum governance set to be tied to asset ownership in a proof-of-stake system, they bear watching.  

– Galen Moore, CoinDesk senior research analyst

The Conversation: Bitcoin’s energy

With bitcoin’s price rise pushing crypto back into mainstream conversation, Twitter alighted on a long-simmering question this week. Is bitcoin’s energy consumption – inevitably high because of its proof-of-work algorithm and decentralization – justifiable? 

Meteorologist and climate journalist Eric Holthaus said it this way:

But Yassine Elmandjra, an Ark Invest analyst, said a lot of bitcoin mining uses renewables these days:

CoinDesk columnist Nic Carter said bitcoin’s climate scolds fail to account for the dollar’s own impact:

And some said BTC could even restore stability to Texas’ troubled grid, with mining facilities (“bitcoin batteries”) helping to balance supply and demand:

Meanwhile, lawyer Jake Chervinsky said bitcoin was healthier for criticism:

– Ben Schiller, Features editor

Relevant reads: Adoption everywhere

Bidding up. In another sign of mainstream crypto acceptance, Christie’s is auctioning its first nonfungible token. “EVERYDAYS: THE FIRST 5000 DAYS,” by @beeple, is the “first purely digital work of art ever offered by a major auction house.” CoinDesk’s Jamie Crawley reports. 

Meme message. Dogecoin, which has seen year-to-date returns of about 1,000%, is often seen as a big joke. But in this op-ed, CoinDesk Global Macro Editor Emily Parker asks us to take the project seriously, if only because of what it tells us about the moment. Increasingly, she says, reality seems to be “shaped by collective belief, rather than underlying facts.” In other words, if a community wants a coin’s price to rise, it will rise, irrespective of fundamentals. 

ETF at last? Exchange-traded funds have long been seen as a prerequisite for Wall Street adoption of crypto, but they’ve fallen foul of regulatory approval. Is that about to change? CoinDesk’s regulatory expert Nik De stirs the tea leaves, including a change in regime at the Securities and Exchange Commission, strong institutional interest in bitcoin and a newly-launched bitcoin ETF in Canada. 

– Ben Schiller

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Money Reimagined: Musk Masters the Attention Economy

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.

Elon’s masterful meme rally

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:

Scarce attention meets digital scarcity

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.

Community = value

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.

A flippening 7,000 years in the making

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 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. 

The Conversation: ETH gas fees

(Rachel Sun/CoinDesk)

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.

Relevant reads: The blue-chips diving in

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?

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Money Reimagined: Enterprise Blockchain Isn’t Dead

Welcome to Money Reimagined.

A snowy week has left New Yorkers chilly. But ether investors must be feeling cosy. Ethereum’s native token has risen more than 25% on the week to clock new record highs and far outpace bitcoin’s gain, while Ethereum-centric decentralized finance (DeFi) data showed new records for total value locked in DeFi. The numbers speak volumes about the symbiotic relationship between DeFi and ether but also show how much pressure is on developers to execute on the Ethereum 2.0 upgrade. The congested network is grappling with sky-high transaction fees (as I discuss below).

From the vibrant trading in ETH, DeFi tokens and other crypto assets to another wild market story: the WallStreetBets/GameStop episode that we (and pretty much every other media outlet in finance) has been obsessed with these past two weeks. The political, social, economic and technological fallout from that affair was the topic of conversation in this week’s “Money Reimagined” podcast. In it, Sheila Warren and I engage in an edgy, far-ranging conversation with “Hidden Forces” podcast host Demetri Kofinas that ties the WSB/GameStop phenomenon into everything from FDR to Occupy Wall Street to surveillance capitalism.

Don’t miss it. Oh, but read the newsletter below first.

Enterprise blockchain’s not dead. It just needs crypto

The headline for CoinDesk reporter Ian Allison’s big story this week highlighted a major failure for the most influential enterprise IT company in history: “IBM Blockchain Is a Shell of Its Former Self After Revenue Misses, Job Cuts.”

But there’s a bigger issue here than Big Blue’s struggle to turn blockchain advisory services into an engine for cloud service revenues. It’s that this story will be viewed by Bitcoin maximalists and crypto skeptics alike as proof that “enterprise blockchain” is dead. There are no viable business applications for blockchain technology, these people will tell you, beyond supporting native cryptocurrencies for payments or as a store of value.

I think that’s patently wrong. There’s still plenty of innovation going on in blockchain-founded and blockchain-inspired multi-party computing solutions. Real progress is being made to overcome some of the sticking points that initially slowed the technology’s real-world deployment – in trusted computing, in internet-of-things integrations and in digital identities.  

Meanwhile, in supply-chain applications, in public health and in credentialing systems, blockchain technologies are already operating in the real world, though they are very much in the background as a low-key element inside otherwise multifaceted solutions. Worldwide, blockchain has been incorporated into a variety of active information management systems – for example, to trace diamonds and other products in mining supply chains, for private key management in digital identity systems and to enable the right mix of public data and privacy in COVID-19 contact tracing apps. Many of those use IBM technology. That there’s no hyperbolic “blockchain fixes this” fanfare attached to these backend implementations doesn’t make them less relevant.

The problem of “corporate adoption” revolves more around how businesses approach the technology, a flawed mindset that IBM has (perhaps unintentionally) promoted. It’s not the technology’s fault but one of a deep misunderstanding within C-suites of what it offers to their business environment. 

The road to success first requires recognition that blockchain technology is not an internal tool but an external one. Its main purpose is to allow non-trusting entities within a particular business ecosystem to share information that’s valuable to all participants without relying on a middleman. 

That structure means the blockchain-based data-sharing system must be equally supported by a firm’s competitors and business partners. It requires boldness: a willingness to cede control and to bear the cost of disruption that blockchain-based approaches will impose. Only then can it be used to unlock the rich, systemwide data needed to achieve efficiency around resource management and forge sustainable economic systems that serve both business and society. 

‘We technology’

Big-name consultancies selling “blockchain-as-a-service” (BAAS) have fostered the misguided idea that “blockchain” is akin to a proprietary ERP software product that, once plugged into the IT system, will start boosting efficiency and increasing the bottom line. 

But this is not plug-and-play technology. In fact, it’s hard stuff. 

To make a blockchain solution work across a supply chain or an electricity grid (for example) requires each player to contribute to the greater good, in code development, in computing resources, in sharing data. To quote a cheesy line I used in presentations during my own time consulting in a pre-CoinDesk life, “Blockchain is a we technology, not a me technology.” It only works when multiple, competing, non-trusting entities agree to use it and share in the gains and headaches.

(Moe Na/CoinDesk)

By extension, a working blockchain involves sharing resources with competitors, including with startups developing disruptive innovations that challenge the incumbent’s core business. It requires an open, collaborative, come-what-may approach to participation that’s anathema to business models built around trade secrets and protecting competitive advantages. For many businessmen, eager to protect people’s bonuses and jobs, it seems like a non-starter.

Yet, history tells us that doing nothing in the face of disruption can have even greater cost, including the collapse of entire firms. The reality is that first-mover companies bold enough to embrace disruptive technologies will gain a competitive advantage over those that can’t take the leap. This innovator’s dilemma is front-and-center for would-be blockchain participants and it’s not properly acknowledged. 

To be sure, enterprise blockchain advocates typically understand some aspect of the “me” versus “we” challenge. That’s why there was a rush to form industry blockchain consortia  between 2016 and 2018. But as Allison also reported early on in the formation of the TradeLens consortium founded by shipping giant Maersk, those groups are hard to manage precisely because competitors, as well as business partners, will mistrust the motives of the founding institution. 

Also, partly because of companies’ unwillingness to cede control, and partly because of regulatory and other constraints, these consortia almost always default to private blockchains with fixed membership. They create walled-garden, closed-loop environments that inevitably  innovate less well than open-source communities where ideas from anyone are welcomed and shared. 

Embracing the radicals

The hard truth is that for blockchain business consortia to succeed they must accept outsiders, with all the disruptive threats they pose. They must embrace the notion of open-access permissionless innovation that’s at the heart of public blockchain-based crypto communities.

There’s even a role for Big Blue in all this. Leave IBM’s consulting division and you find that open-minded approaches to blockchain still thrive. In those cases, the focus is about what can be built and developed on top of this open distributed ledger architecture, rather than on selling cloud services. 

In IBM research, for example, Nitin Gaur, Director of the IBM WW Digital Assets Lab, is doing groundbreaking research into how banks and traditional financial participants might engage with the dynamic, open-source world of decentralized finance (DeFi), perhaps the epitome of freewheeling, public blockchain innovation. (Perhaps only EY blockchain lead Paul Brody is on par in the consulting world for embracing DeFi’s potential.) 

Meanwhile, the health sciences team has developed an IBM Digital Health Pass, which provides an innovative, privacy-preserving solution to managing shared COVID-19 health records. You wouldn’t know from the app that it’s powered by a blockchain, but it is. 

While its sales pitch on blockchain may not have reflected it, IBM’s history is one of (eventually) shifting with the times and addressing disruption. The reason it has survived, despite massive waste over the years, is that, when push comes to shove, it embraces change. You see it in Big Blue’s journey from mainframe computers to PCs to software development to consultant services.

If it can get away from offering blockchain as some magical solution and instead incorporate it as a back-end element to useful new applications, IBM can help drive real change in business practices around this technology.

Bitcoin Slightly Less ‘Dominant’ Vs. Ethereum

Ethereum’s ether has been on a tear this past week, hitting a new all-time high of $1,740 at the time of writing. Bitcoin also had a good week, just not as crazy good as ether. So it made sense to look at how the metric of “bitcoin dominance” is playing out in the crypto universe, particularly as it compares to the boom period for ether of January 2018.

(Shuai Hao/CoinDesk)

In this case, CoinDesk’s Shuai Hao used the market cap measurements at the end of January for bitcoin, ether, and for the other 18 digital assets listed in the CoinDesk 20, as the foundation. Then he ran the numbers back to 2017. Sure enough, this is the second-highest proportion of total crypto market cap that ether represents after 2018. 

Sustainable? Who knows? For answers, watch how DeFi and the new Ethereum 2.0 project play out.

The Conversation: The fees are too damn high

One reason it was a big week for Ethereum was because it was another big week for decentralized finance (DeFi) applications built on top of it. The amount of total locked value in DeFi has continued to reach new all-time highs on a weekly basis, but its new record – at around $33.45 billion as of Friday morning – was impressive for the speed with which it jumped from $27.31 billion on Jan. 29. 

Of course, with growth comes problems, especially because Ethereum hasn’t yet migrated to what is supposed to be a more scalable Ethereum 2.0 blockchain. As such, the congestion of transaction orders pushed up fees paid to miners for clearing transactions. As of early Thursday morning, so-called Ethereum “gas” fees were at record highs.

This prompted Maya Zehavi to point out both the challenges and the opportunities for DeFi innovators, highlighting the gas fee sticker shock and the prospect for layer 2 DeFi solutions that don’t require costly on-chain transaction processing, which would in theory lower transaction costs. 

Meanwhile, someone with the Twitter handle @youngtilopa compared Google searches for “DeFi” and one equity stock that’s been in the news recently.

So maybe a sober view is needed. DeFi still has a long road to travel. Whether layer 2 will help it scale and open opportunities for lower-cost transactions remains to be seen.

Relevant Reads: Divergent global regulation

Approaches to cryptocurrency regulation and development continue to vary among the governments of the world. The one consistency is a wariness of crypto; the big difference is how proactively each government is itself acting to innovate with the technology.

  • Early in the week, we got news India would ban private cryptocurrencies under proposed legislation, fostering a firestorm of criticism for what many said would be the death knell for fintech innovation in the world’s second most populous nation. CoinDesk’s Omkar Godbole reports.
  • South Africa has a relatively vibrant crypto-using community. Now, as Tanzeel Akhtar reports, the South African Revenue Services is moving to make sure that growing user base doesn’t get away with untaxed capital gains.
  • Meanwhile, China has been playing the long game. CoinDesk contributor Michael Kimani argues China’s heavy investment and incentives to build out Africa’s connectivity with Chinese mobile technology has positioned the country well to deploy a Chinese digital currency on the continent in a bid to boost its influence.

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Money Reimagined: Narratives Wall Street Can’t Control

Welcome to Money Reimagined. 

This was the week the internet finally defeated Wall Street – at least for a few days. The wild rally in GameStop’s stock, fueled by an army of Reddit retail day traders, imposed devastating losses on hedge funds and showed how free trading tools and social media (memes) can now be harnessed by networks of individuals to achieve economic outcomes previously controlled by elites. The gobsmacking story of GameStop, Melvin Capital and r/WallStreetbets was tailor-made for the disruptive, anti-establishment vibe of the crypto community. This “WSB effect” theme runs throughout this week’s newsletter. 

On the other side of the masses vs. establishment divide, this was also the week of the “Davos Agenda” virtual event, held in lieu of the World Economic Forum’s annual meeting. It included the likes of German Chancellor Angela Merkel, Chinese President Xi Zinping, a host of Fortune 500 CEOs and so forth. 

My podcast co-host Sheila Warren, who happens to be the WEF’s blockchain lead, invited long-time WEF Managing Director Adrian Monck to this week’s “Money Reimagined” show. We talked directly about how the old guard deals with the changes that radical outsiders, such as crypto developers and tribes of activist retail investors, present. Have a listen at the link below after reading this week’s newsletter. 

BTC and ETH: Made for each other

As of 11:00 a.m. ET Friday, the year-to-date returns for bitcoin and ether show an easily discernible reversal of the BTC dominance seen in late 2020. Bitcoin is up 27% year-to-date and ether, 92%.

  • What’s going on here? Well, before we try to answer that, a caveat: If the past week’s WallStreetBets-vs-hedge funds spectacle has taught us anything, it’s that in today’s meme-consuming, radically democratizing markets, confidently defining fundamental reasons for price movements is difficult. What matters is which narrative is winning.
  • Narrative? So prices are just make-believe? Well, yes, but stories have always been about how people – and thus markets – reach consensus. It used to be Wall Street controlled the narrative. It’s unclear whether that’s still the case.
  • So, what narrative best explains ETH outperforming BTC? Well, let’s first challenge the “Tulip Bubble” angle that mainstream crypto critics might instinctively apply here: The idea this is a rerun of the 2017 bitcoin rally, which pushed speculators into comparatively cheaper tokens only to foster the mother of all bubbles. The loss suffered this week by short-selling hedge funds at the expense of hordes of retail investors from the r/WallStreetBets subreddit shows it’s dangerous to conclude that large groups of determined bulls are inherently wrong.

    This is not to say ETH’s price won’t correct as bitcoin’s has this month. It just means we owe it to ourselves to explore other narratives.

  • Such as? Here’s one: There’s a BTC-to-ETH price rotation going on that suggests thoughtful investors are starting to see Ethereum, and more specifically the decentralized finance (DeFi) applications built on it, as a constructive complement to Bitcoin. As sophisticated investors increasingly recognize bitcoin’s potential as a “digital gold” store of wealth, the thesis goes, they will soon see DeFi as a means to creatively unlock that value – for payments, for loans, for insurance, and so forth.

    This take sees Bitcoin as the base layer protocol for a software stack that handles the internet’s value storage and exchange. Bitcoin the currency is a simple yet hard-to-change, highly secure store of value. Much like gold, it doesn’t do much; you just lock it away and use it as security to back up your other investments and financial activity. But because it’s built on a permissionless protocol, developers can still do many more creative things with it than, say, a gold custodian can do with bullion.

    That’s where Ethereum and DeFi come in. With smart contracts, oracles, decentralized exchanges and multi-sig systems for securing digital assets, the degens of DeFi are now incorporating bitcoin into their freewheeling, “composable” world of decentralized financial products. Hence the summer explosion of wrapped bitcoin tokens such as WBTC.

    To go back to the software stack analogy, Ethereum is middleware and DeFi occupies the application layer.

(Moe Na/CoinDesk)

  • Analogies are also being made to the traditional finance “stack.” RealVision CEO Raoul Pal says bitcoin is “pristine collateral” that could even take on the $123 trillion market for U.S. Treasury bonds as the base-level security for all credit. It’s appeal is not only that it’s a provably scarce asset, but also that it can be locked up in escrow through a decentralized smart contract that leaves neither lenders nor borrowers vulnerable to the failures of a middleman. You build DeFi’s lending, borrowing and insuring products on top of that feature and you now have the makings of a financial system.
  • Now a mega-name celebrity investor is also warming to the thesis. Asked by CoinDesk contributor Jeff Wilser if he would ever see bitcoin as something more than a speculative investment, Dallas Mavericks owner and CNBC “Shark Tank” personality Mark Cuban responded, “Sure. If DeFi and BTC can evolve together in a manner that allows BTC to effectively be a bank account without the bank. That creates utility for BTC.” What does he think of Ethereum? “I like ETH. Obviously it’s a primary foundation for DeFi, and we will see what happens with ETH 2.”
  • Ah, Eth 2. The Elephant in the Room. If Ethereum 2.0 succeeds, over the next couple of years the blockchain will transition from a proof-of-work consensus model to proof-of-stake and will allow massively more transaction-processing capability. That scalability is needed if Ethereum is to play a meaningful role in the global financial system. But the transition is incredibly difficult to pull off within a large, decentralized community of users where billions of dollars are at stake.

    Still, there seems to be early optimism around Eth 2.0. The amount of ether locked and staked on the transitional Beacon Chain has steadily risen to more than 2.8 million ETH as of Wednesday (an amount currently worth about $3.89 billion). Indeed, ether’s steady January gain to an all-time high of $1,476.12 on Sunday was itself an expression of confidence in that project.

  • There are other ticks in the plus column for Ethereum. There’s a boom in non-fungible tokens, also captured in the Cuban interview. And there’s support, including from suddenly in-the-news social media platform Reddit, for using so-called layer 2 scaling solutions such as Plasma to expand Ethereum’s use cases. Meanwhile, EY blockchain lead Paul Brody is predicting financial institutions will bring DeFi to the masses.

    All of this points to an expanding and diversifying Ethereum ecosystem. For a blockchain, that’s the best story you can tell: a growing network.

Did Trump help bitcoin’s late-2020 surge?

Since we’re talking about narratives, let’s look at how we might visually represent a market-justifying story. I’ve chosen a take by CoinDesk Global News Editor Kevin Reynolds on the role played by fears of electoral chaos on bitcoin’s price rise during the late fall and early winter. I can buy this story: If bitcoin is digital gold, it should work as a backstop against dystopia. But what I also found interesting was how easy it was to illustrate this idea on a chart. I just grabbed a few election-related statements by former President Donald Trump and his supporters, got CoinDesk data visualizer Shuai Hao to mark them on a four-month chart, and the yellow line did the rest.

(Shuai Hao/CoinDesk)

(NOTE: This chart was produced late Thursday New York time, before bitcoin’s huge leap to a new post-Jan. 8 high of $38,000 early Friday morning. The story may need a new chapter. Arrival of the WSB effect?)

Kevin argues that electoral fear added an extra $10,000 to the all-time high that was hit right after the climactic Jan. 6 raid on Congress. The rest of the gains came from the standard stuff everyone was talking about: mainly that institutional investors were now adding bitcoin to their long-term portfolios. So, when things simmered down and new President Joseph Biden was sworn in, bitcoin’s price eased to what would be fair value in normal times – you know, amid a normal global pandemic and economic depression.

The Conversation: ants vs. elephants

In 2014, when the idea of decentralized autonomous organizations was first being kicked around, crypto pioneer and DAO enthusiast Joel Dietz founded a decentralized fundraising platform called “Swarm.” (It has since evolved into Swarm Capital, which provides tools for companies to issue security tokens.) The name always struck me as an evocative one for an entity comprising many individuals without centralized control. 

Now, after digesting this heady week on Wall Street, the term seems especially apt. I’m talking, of course, about how retail investors in a Subreddit that quickly swelled to 4.4 million people collectively forced big hedge funds into a “short squeeze” on supposedly has-been “meme stocks” such as GameStop, AMC Entertainment and BlackBerry. The WSB group maneuver imposed billions of dollars of losses on those institutions. Melvin Capital needed an injection of $2.75 billion from Citadel and Point72. One thinks of a swarm of ants attacking elephants.

That the name stems from a crypto venture is also fitting since the WSB saga prompted an outpouring of interest from the crypto community. It had all the elements of a crypto drama, even though the battle never occurred on a blockchain. 

For one, there was a much-discussed CNBC interview with Social Capital CEO Chamath Palihapitiya, who had spent time trawling through the r/WallStreetBets posts and, following the group’s lead, made a $500,000 profit.  Declaring that what he “learned over the last couple of days is important for everybody that’s watching CNBC,” Chamath said the insurgent investor movement was “a pushback against the establishment in a very important way,” one that harked back to the 2008 financial crisis. It captured the rebellious, anti-Wall Street vibe that’s long been part of the crypto community.

As the drama unfolded, Crypto Twitter lit up with people drawing parallels with and lessons about the crypto scene.

In a tweet thread about people demanding change to a system rigged for the big guys, Galaxy CEO Mike Novogratz said the movement was “a giant endorsement of DeFi.”

Then, on Thursday, when the Redditors’ favored trading app, Robinhood, shut down access to the the stocks in question – creating a vitriolic backlash in what one observer called the trading app’s own “Streisand Effect” – the crypto community leapt to remind the world that this could never happen on a decentralized exchange. It was the perfect opportunity for Erik Voorhees, CEO of Shapeshift, to weigh in about his company’s new decentralized offering.

Then, inevitably, the WSB phenomenon spread into the crypto world’s very own “meme token,” Dogecoin, which soared more than 800% to a new record high.

CoinDesk’s own Will Foxley couldn’t resist:

Relevant Reads: Dabbling, not diving

Going into the year-end was an exciting period for bitcoiners. Many large-name investors emerged to declare their appreciation of bitcoin’s potential and the price responded accordingly. 

As the price dropped back in the latter part of January, the “institutions are coming” rallying cry tempered. Big-name investors still showed interest in bitcoin, but some of their messages emphasized their caution and focused on the challenges they still see bitcoin facing before it attains a widely recognized place in institutional portfolios. CoinDesk’s coverage this past week captured that. (We’ll have to see how next week’s stories look if bitcoin holds the gains it enjoyed Friday morning and as these institutions take stock of the powerful reckoning they’ve been confronted via a retail investor insurrection.)

  • Guggenheim Partners Chief Investment Officer Scott Minerd, who made waves last year when he assigned a long-term target of $400,000 to bitcoin, didn’t exactly retract that prediction but added an implicit “not any time soon” caveat. In a Bloomberg interview he said, “Right now, the reality of the institutional demand that would support a $35,000 price or even a $30,000 price is just not there.” After Friday’s jump, that comment is looking a little off.
  • Journalists are always looking for comments from Dallas Mavericks owner and CNBC “Shark Tank” personality Marc Cuban. Crypto journalists are no exception. So, we were thrilled that CoinDesk contributor Jeff Wilser had a rich exchange with Cuban this week. As discussed above, Cuban sees real potential in bitcoin, especially if it can team up with DeFi. But as a standalone investment for now, his current view is, let’s say, “meh.”
  • We’ve also long been trying to get legendary Bridgewater Associates founder Ray Dalio’s thoughts on bitcoin. He has remained mostly skeptical, even if his tone has become moderately more upbeat over time and his view has emerged only via small snippets of commentary. Finally, in his widely read Daily Observations newsletter, Dalio and his team have delivered a detailed, deep-dive analysis of bitcoin’s opportunities and challenges. I’d say Dalio still has a small amount of learning to do – for example, on why bitcoin can’t easily be replaced by a “better” cryptocurrency – but otherwise this is a brilliant analysis. His team’s assessment of bitcoin’s infamous volatility and why that makes it hard for portfolio managers to adopt it as loss-mitigating uncorrelated asset is masterful. (Oh, and I’m super excited to tell you that Dalio will be a headline keynote at CoinDesk’s Consensus event in May. Stay tuned for more exciting speaker announcements as we update the events page.)
  • Perhaps the most important news of the week on the institutional investor side was Ian Allison’s scoop that the trustees who run the endowments of Harvard, Yale, Brown and other universities have been investing in bitcoin for over a year. What we need to know is why. The colleges are, for now, keeping the justification for their entry into this market close to their chest. Without that, it’s hard to know whether they’ll keep it up.

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Money Reimagined: Letter to President Biden

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.

Is Biden ready for a new world of money?

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: 

  • COVID-19 deaths: 408,000
  • Unemployed Americans: 10 million
  • Fiscal deficit: $3.3 trillion
  • Government debt to GDP: 98.2%

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.

Coordinated action

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:

  • The Federal Reserve would go full MMT (Modern Monetary Theory) printing dollars with abandon.
  • More circulating dollars equals higher nominal U.S. tax collection.
  • Voilà! The fixed-value debt is easily paid off.
  • Meanwhile, the USD exchange rate tanks versus EUR, GBP, RMG and JPY.
  • Cheaper U.S. exports, more expensive imports lead to U.S. production growth.
  • U.S. employers hire like crazy.

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.)

Mark Carney
(Peter Summers/Getty Images)

New system

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.

Parabolic expansion

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.

(Damanick Dantes and Shuai Hao/CoinDesk)

The Conversation: CSW strikes again

Craig S Wright
(CoinDesk Archives/modified using Photomosh)

“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: and 

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 and sparked yet another feisty debate over Wright’s actions and over how to deal with someone with a penchant for such legal actions., 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, who accused the moderators of 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’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.

Relevant reads: Biden’s crypto gang

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.

  • We learned that former CFTC Commissioner Chris Brummer, who runs the DC Fintech Week out of Georgetown and has written a book on crypto assets, is expected to be nominated to lead that institution.
  • The Wall Street Journal reported that former Treasury official Michael Barr is expected to be nominated to lead the Office of the Comptroller of the Currency, which regulates banks. As CoinDesk’s Nikhilesh De pointed out, Barr was once a board member of crypto firm Ripple.
  • And even after some tough words about bitcoin by Treasury Secretary and former Federal Reserve Chair Janet Yellen in her spoken Senate testimony Wednesday, bitcoiners were pleasantly surprised to find that her written testimony Thursday took a much more nuanced position toward the cryptocurrency.

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Money Reimagined: Bitcoin’s Warning for Central Banks

Another week, another lifetime lived:  

The U.S. President impeached, again. Worldwide COVID-19 deaths close in on 2 million. Bitcoin surges to a record high above $42,000, promptly plunges to almost below $30,000 and then begins a late-week rally above $36,000.

Meanwhile, the crypto community has been grappling with some contentious regulatory proposals that would strengthen U.S. monitoring of global digital currency transactions. 

That’s the topic of this week’s “Money Reimagined” podcast episode. We talk to Christopher Giancarlo, the former chairman of the Commodities Futures Trading Commission, and Marvin Ammori, a famed digital civil rights lawyer who’s now chief legal counsel at Uniswap, about how the crypto industry and regulators can better collaborate on rules that enable constructive innovation. 

Have a listen after reading this week’s newsletter.

What does it mean when the most powerful woman in finance scolds you?

  • Christine Lagarde: “For those who had assumed [bitcoin] might turn into a currency, terribly sorry, but it’s an asset. And it’s a highly speculative asset which has conducted some funny business and some interesting and totally reprehensible money laundering activity.” 
  • Did the European Central Bank President just give bitcoin a time-out? Or is punishment still coming? During those remarks in an online Reuters event on Wednesday, Lagarde called for crypto regulation “at the global level.”
  • Bitcoin is a disruptive force that demands attention. So such comments aren’t necessarily bad. They suggest the stewards of the global monetary system now realize they can no longer ignore it as a mere curiosity of zero. A soaring price is putting Bitcoin on central banks’ radars.
  • The question is whether high-level monetary authorities such as Lagarde truly understand why they should take it seriously. Do they get that it’s sending a message about the failures of their system, one that has made the owners of financial assets fabulously wealthy in a year that hundreds of millions have suffered unprecedented hardship?
  • Lagarde has actually been a well-informed supporter of crypto innovation, both as head of the International Monetary Fund and now at the ECB. (She’s spearheading the digital euro.)
  • So, why now trot out old, nuance-less critiques of bitcoin that, while arguably true, are mostly irrelevant?
  • A wide cross-section of bitcoiners welcome clear, internationally consistent regulation to dissuade bad guys and make crypto safe for good guys. But if your priority is attacking money laundering – rather than, say, boosting financial inclusion – then please first go after the trillions of dollars in “funny business” facilitated by mainstream finance’s bankers and lawyers.
  • Yes, bitcoin is “speculative” (though our chart below might suggest it has become less so.) And, yes, it’s “volatile, an “asset” and a poor unit of account/medium of exchange. But very few informed market participants expect anything more. They are betting on it to become “digital gold,” a future hedge against monetary dysfunction. Until a wide enough investor base believes in that, it will stay volatile and will be generally useless for buying groceries.
  • Lagarde has surely heard all that. So why the rant?
  • Perhaps, just as crypto people join forces when regulators come after their industry, she, too, is siding with her community: international financial policymakers. Much of what Lagarde said sounded like solidarity with the U.S. Treasury Department’s hardline proposal that crypto exchanges be required to track the identities of self-custodial wallets.
  • Or, as Bloomberg’s Brian Chappatta suggested this week, do central bankers like Lagarde see the soaring price of bitcoin, and perhaps also Tesla, as symptoms of a wider bubble in capital markets that will require a tighter monetary response?
  • Maybe. But let’s be clear: Bitcoin is still nowhere near big enough to encompass actual systemic risk.
  • Yes, its market capitalization, about $650 billion, has suddenly become higher than Facebook’s and is just shy of Tesla’s. But it’s nothing like, say, the $55 trillion credit default swap market of 2008, whose complex interconnections with bond markets meant that when defaults accelerated, they fueled that year’s global financial crisis. If bitcoin investors lose money, it won’t lead to meaningful knock-on effects in other markets.
  • So, instead, might it be that Lagarde and Co. are starting, just slightly, to get a hint that bitcoin’s price says something about public confidence?
  • If we view owning bitcoin as a short position against the financial system, then its surging price – alternatively, the plunging price of fiat – along with its increased attention from institutional investors, reflects waning faith in that system. Will financial authorities take the right message from it?
  • Short-sellers are often maligned. But one value they bring to society is that the price movements they generate are a signal that something needs fixing.
  • So, policymakers: Yes, you should regulate bitcoin. But even more urgently, fix the legacy financial system.

Speculative? It’s all relative

Last week, we brought you a chart showing how data from the Bitcoin blockchain described how the current bull market has been driven by large investors, unlike the “Mom and Pop” rally of December 2017. (The number showed a recent rise in the number of large addresses that hold more than 1,000 BTC, whereas that measure was falling three years ago.)

This week, we use exchange data to suggest another difference in investor type, this time between the new, incoming large investors – thought to be large, sophisticated institutions such as hedge funds – and the more established crypto-native players. While the latter are more sophisticated than the naive retail newbies of 2017, they tend to be individuals or crypto startups. 

(Shuai Hao/CoinDesk)

Source: Skew, CoinDesk Research

We looked at open interest in bitcoin derivatives on six of the biggest exchanges, which reflects the amount of money invested in options, futures and other such instruments that hasn’t been converted into the underlying asset, in this case bitcoin itself. Then we compared that to the  volumes traded in the underlying spot market for bitcoin, creating a percentage that we treat as an admittedly imperfect proxy for how much leveraged speculation is going on. 

Then we split these results between the four online crypto exchanges that are outside U.S. regulation and which allow for significantly higher leveraged bets – OKEx, Huobi, BitMex and Binance – and two long-established U.S.-regulated exchanges that follow the more traditional, low-leverage models on which they were founded: the Chicago Mercantile Exchange and Bakkt, which belongs to the Intercontinental Exchange, the owner of the New York Stock Exchange.  The idea is that the crypto natives typically play in the first and the institutions in the second.

From the chart that CoinDesk’s Shuai Hao pulled together, which uses a seven-day moving average for open interest, you’ll note that although speculative bets in the CME and Bakkt futures rose steadily over the spring and summer, it was nothing like the build-up that occurred in the crypto-native exchanges. 

Then, after criminal charges were brought against the BitMex founders, a sharp pullback occurred. And although the crypto-native speculators came back for a bit, they haven’t sustained it, closing out their positions as bitcoin started to soar in December, presumably at a profit. Meanwhile, the institutions, the big money players who’ve been pouring cash into long positions in the spot market, have kept a comparatively steady hand. 

As the price quadrupled in four months, the bitcoin market appears to have been driven by a moderately low level of derivatives-based speculation and leverage, at least compared to the summer. All things considered, that should mean less volatility. That seems hard to square with the past week’s rally-plunge-rebound. But it might explain why the early-week sell-off was so short-lived.

The conversation: Platform or publisher?

(Moe Na/CoinDesk)

Perhaps the biggest immediate fallout from last week’s insurgence of Donald Trump’s supporters into the Capitol came from Twitter’s and Facebook’s moves to suspend the outgoing president’s accounts and those of some of those supporters in what some have dubbed Silicon Valley’s own impeachment process. Inevitably, they drew support from many who saw Trump as an instigator of violence but also sweeping criticism from others, who complained of these platforms’ unique power to curtail speech. 

It’s a complicated debate, one that animates the call for decentralization within the crypto and blockchain community, where people are trying to build a new, censorship-resistant architecture for the internet and for digital money. Twitter and Facebook – and Amazon, which joined in by kicking right-wing-friendly social media site Parler of Amazon Web Services’ servers – are private companies. They aren’t subject to the government’s First Amendment free speech standards. Yet, because of their massive size and the dependency of their users, and because they have proprietary control over users’ data and an algorithmic capacity to curate what they view, these de facto public forums have a monopoly power that can shape society. 

Ironically, some of the best discussion occurred on Twitter. 

  • CEO Jack Dorsey published a thoughtful lament that his company, as a private entity, is forced to make these difficult decisions. He said he’d rather a less centralized internet, which is why he has a “passion for Bitcoin,” describing it as “a foundational internet technology that is not controlled or influenced by any single individual or entity.”

  • Chess grandmaster Garry Kasparov, whose experiences under the totalitarian regime of the Soviet Union have made him an articulate voice for freedom, emphasized the need to distinguish private power from state power.

  • But it was former presidential candidate and now New York mayoral wannabe Andrew Yang who nailed it. Moving beyond the contentious issue of Trump’s account, he focused on the broken state of the media economy, on how it rewards people for disseminating destructive disinformation. He skewers the business models of the big tech companies, calling them “essentially quasi-governments unto themselves,” where “their decisions are driven by maximizing ad revenue, user engagement and profit growth … not the set of incentives you want when deciding what millions regard as truth.”

Relevant Reads: A crypto-savvy SEC

Reports emerged this week that President-elect Joe Biden would nominate former Commodities Futures Trading Commission Chairman Gary Gensler to head the Securities Exchange Commission. This news that someone with such deep knowledge of this industry (Gensler has taught courses on cryptocurrency and blockchain at MIT for several years) was widely welcomed by a crypto community, which has been whipsawed of late by big shifts in the regulatory environment. Our coverage reflected that. 

(Disclosure: I worked with Gensler at MIT before joining CoinDesk, including co-authoring an economic paper with him and other colleagues from MIT Sloan School of Management and the MIT Media Lab’s Digital Currency Initiative. It’s true what they say: Gary gets it.)

  • CoinDesk initially picked up Reuters’ scoop on the story. Kevin Reynolds’ account noted that Gensler had testified before Congress on cryptocurrencies and, in his course on cryptocurrencies and blockchains, had called the technology “a catalyst for change in the world of finance and the broader economy.”
  • In his “The Breakdown” show on the CoinDesk podcast network, Nathaniel Whittemore optimistically described Gensler as “a partner we can work with” who “is going to try to get the space in line with the regulatory mainstream” but who “also appreciates what makes it different, where the opportunities lie.”
  • OpEd contributor Jeff Bandman, a former CFTC official, wrote that Gensler will start the job “shovel ready.” He predicted that his wariness of incumbents having too much power could create opportunities for crypto innovators and that the SEC would now finally move to approve a bitcoin exchange-traded fund.



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Money Reimagined: Your Data, Our Humanity

“For the first time in history, privacy and personhood are both mediated digitally … [I]t’s really hard to be a person without being digital, without exchanging data, without passing data.”

So says tech ethnographer Tricia Wang, the co-founder of Sudden Compass, which works on bringing human insights to big data analytics. 

The comment reminds us of what’s at stake as we debate the data-monopolizing power of the internet’s biggest companies: the future of what it means to be human. 

For the first time since the “Internet 2.0” era began at the turn of the millennium, the dominant social media, search and e-commerce platforms are facing existential challenges. The disruption could come from legal efforts as anti-monopoly lawsuits evolve in both the U.S. and Europe. Or it could come via some nascent alternatives to the platforms’ centralized model, including from blockchain-inspired startups. 

Wang, who joined us on this week’s episode of the “Money Reimagined” podcast, says these responses won’t lead to a meaningful alternative until we gain a better appreciation of the role data plays in our internet interactions. Data, she says, “is not just information. Data is relationships.”

The algorithms of Google, Facebook, Amazon and others place the greatest value not in static, simple information points like your name, address and income, but data that reveals your relationships with other people. Their commercial interest in that data creates real tension because, as Wang notes, the story of our social connections is the story of who we are as human beings. 

It’s why the “if you don’t like Facebook, just leave” idea is so naive. All over the world, services like Facebook and WhatsApp are must-have tools. They’re how people find jobs, build businesses and stay in touch with their families. People simply can’t just get up and leave.

Yet, those same people are caught in a dependency and have almost zero visibility on how their data is used. It creates an unbalanced economic relationship Wang compares to the idea of the 20th century “company town,” where employees were housed and fed by their employer but had no idea of the real value of their labor. 

The “own your data” movement led by people such as Cambridge Analytica whistleblower Brittany Kaiser is no silver bullet either. Once it’s disaggregated from all those connections and human networks, your data alone is not worth very much. A Financial Times calculator put a person’s basic data at a price of less than a dollar. 

Nonetheless, it’s vital to educate ourselves on how we, the people, give up so much in the current relationship. 

The imbalance is not just that ad dollars flow to Facebook and Google rather than to the users who generate the content and build the audiences the platforms and their advertisers monetize. It’s that, as detailed in Shoshana Zuboff’s “The Age of Surveillance Capitalism,” we are trapped in an ever-tightening feedback loop in which these companies use our data to modify our behavior. There’s a scary Matrix-like aspect to all this. 

It’s why the other guest on this week’s podcast, metaMe CEO Dele Atanda, views his company’s work building a more decentralized, blockchain-powered data marketplace as an exercise in protecting people’s human rights. Creating that marketplace and figuring out a meaningful expression of the value of people’s data is how we will ultimately restore agency over our digital lives, he says. 

(Pan Xiaozhen/Unsplash)

“We need to create a unit of account that we can measure – not just on the basis of size [as bytes] but on the basis of sensitivity, identifiability. These issues are central to how this information can be used to help or harm us,” he said. 

Also important, Atanda says, is the governance structure of the database storing the information, which speaks to the potential role for blockchain technology. The more “permissionless” and decentralized the architecture behind the data marketplace, the more confident individuals can be that they retain ultimate rights to their data. 

All of this seems pertinent in a week in which society was once again found vulnerable to data failures at centralized systems. 

Google’s servers went down, creating problems for home devices plugged into its network. A hack of a software company SolarWinds compromised numerous U.S. government agencies data. Also, allegations of irregularities of Michigan-based voting machines in last month’s U.S. presidential election helped to further erode trust in the overall electoral system, even though supporters of President Donald Trump failed to substantiate an actual conspiracy in favor of his victorious opponent, Joe Biden. 

The reason decentralization is worth considering as a potential solution in all these situations is not because it makes things more efficient. Most often, decentralization makes processes more inefficient. (Note also that Google’s systems run remarkably well the bulk of the time.) It’s that we must restore people’s power over their lives, whether it’s in confidently knowing their votes are being accurately counted or that their data is not being sold to and manipulated by the highest bidder. 

Decentralized solutions such as blockchains are expensive and complicated. They are definitely not a panacea for the world’s ills. 

But they do deserve consideration. Humanity is at stake.

Breaking resistance

With bitcoin’s spectacular mid-week rally, we were reminded that big round numbers matter to markets. There’s nothing innately special about the $20,000 level, but the price action before and after bitcoin broke above it suggests plenty of people did invest some significance into that number.  

On two separate occasions earlier in the month, bitcoin made a run at the $20,000 level but failed. The second was when it set a new all-time high of $19,920 on Dec. 1, putting an end to the high set during the last big rally at the end of 2017. It seems investors had left loads of sell orders just below $20,000 and some may have been there for at least three years. Every time buyers pushed it higher, those orders kicked in to prevent a higher move. 

But look what happened when those sell orders were eventually exhausted. Once buyers had pushed bitcoin’s price through the $20K mark, all that resistance disappeared. A mere 24 hours later it had jumped a whopping $4,000. No doubt sell orders are being placed at levels somewhere up above, but for now bitcoin feels quite unencumbered. 

Global town hall

WHEN THE BILL COMES DUE. When I read about a new study authored by Mario Draghi and Raghuram Rajan on behalf of the Group of 30 Consultative Group predicting a post-COVID “solvency crisis,” my first reaction was, “Finally, the powerful are speaking with honesty on the unsustainable stimulus debts governments are racking up.” My second reaction was, “Oh, yeah, Draghi (former president of the European Central Bank) and Rajan (former governor of the Reserve Bank of India), are no longer in positions of real power.” 

The details of the report are illuminating. They make clearer the distinction between the kind of eminent person role Draghi and Rajan now occupy and the significant authority they previously held. As Bloomberg’s Paul Gordon writes, “The report acknowledges that its recommendations require ‘hard choices’ – such as winding down broad aid programs and limiting government support to areas where the market is failing – that could cause a political backlash.” 

For the last decade, central bankers have been the biggest conduits of “broad aid programs” in the broadest form of all: monetary expansion, even as they called on governments to relieve them of that stimulus responsibility by taking on the more politically challenging exercise of fiscal stimulus. In office, they are circumspect about that criticism. Out of office, they can be more direct. 

(Jeffrey Blum/ Unsplash)

The biggest takeaway from this report is concern. In an understandable effort to stave off economic ruin, governments have gone heavily into debt and allowed monetary expansion efforts to pump up financial assets, which has maintained the illusion of balance inside financial institutions’ and corporations’ accounts. The price for all this will need to be paid and it will probably be paid by further deprecation in the value of fiat currencies against other assets. It’s the backdrop to the “why bitcoin matters” thesis now being voiced by big shot investors like Guggenheim Partners’ chief investment officer Scott Minerd, who on Wednesday pronounced that bitcoin should be worth $400,000. 

TWO REALITIES. As bitcoin soars and as U.S. stocks continue marching into new record-high territory, the reality is very different from anyone without access to those kinds of assets. As observed by the folks at Upfina, a refreshingly frank economic commentary site, while hedge fund managers and bitcoin HODLers have gotten fabulously rich, 8 million Americans have slipped into poverty since June. In noting that “the main problem is it is expensive to be poor,” Upfina drills down into why the Federal Reserve’s quantitative easing efforts – buying $120 billion in bonds a month – is helping a privileged class of Americans but doing close to nothing to help the suffering of so many more in this pandemic. It’s hard not believe that a major reckoning with monetary policymaking is coming.

Relevant reads

Coinbase, With Bitcoin Soaring, Files in Preparation for Landmark Public Offering. Talk about symbolic timing. After much speculation about going public, Coinbase, the leading cryptocurrency exchange and the first crypto “unicorn,” announced it had filed preliminary documents for an initial public offering with the U.S. Securities and Exchange Commission (SEC). As Danny Nelson reports, it came just hours after bitcoin had burst through $20,000.

Nationalizing Stablecoins Won’t Improve Financial Access. With his inimitable ability to break down the facts of a complex, confusing issue that has into its core realities, CoinDesk columnist Nic Carter weighs in on the STABLE Act fracas. Carter makes a strong case that the motives behind this legislative attempt to impose banking laws on stablecoin issuers of all description is about state control, not about protecting consumers or promoting financial inclusion.

Crypto Is Booming in Economically Challenged Argentina. With its perennial financial crises, Argentina was always ripe for crypto. It has long been one of the most important centers of crypto innovation. But now, it seems, popular adoption is starting to fire up. Sandali Handagama reports on some impressive recent growth in the country.  

CFTC’s Latest Crypto Primer Highlights DeFi, Governance. The Commodities and Futures Exchange Commission has long been ahead of its regulatory agency peers in getting its head around technical developments in the cryptocurrency industry. As reported by Nikhilesh De, the CFTC’s latest guidance suggests it is continuing with that trend as it offers a useful primer on decentralized finance (DeFi), a sector that would make many other Washington bureaucrats’ heads explode.

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