For the Bulls
It is a rare thing that you actually leave a regulator’s testimony in bullish mood (unless you’re Wall Street), but that is exactly the sentiment following the CFTC and SEC joint testimony on February 6. The money quote came from CFTC Chairman Giancarlo, who stated “[w]e owe it to this new generation to respect their enthusiasm for virtual currencies, with a thoughtful and balance response, and not a dismissive one.” Indeed. So no bans for currencies are forthcoming, not yet at least.
I am lately fascinated by Friedrich Hayek’s 1976 essay The Denationalisation of Money–The Argument Refined, which is available here. Hayek’s central thesis is that private currency is better and would win a fair competition, because public currency (aka “legal tender”) usually gets inflated to oblivion. Weimar Germany is an example.
This is not a new idea: it is hardly controversial to note that the history of nationalized currency, generally, is one of gradual (and sometimes flagrant) debasement interrupted by spurts of reinvention. Turkey, my wife’s country of origin, denotes their lira YTL, which stands for Yeni Turk Lira. Yeni means “new.” It’s new, because the old one was inflated into the millions, so the government simply lopped off six zeros and, presto: Yeni Turk Lira. Old timers in Turkey still speak in terms of milyon–e.g., “that coffee is three milyon,” not three lira.
Madison famously warned against paper currency as an example of the dangers of faction in Federalist 10. He writes:
The influence of factious leaders may kindle a flame within their particular States, but will be unable to spread a general conflagration through the other States . . . A rage for paper money, for an abolition of debts, for an equal division of property, or for any other improper or wicked project, will be less apt to pervade the whole body of the Union than a particular member of it; in the same proportion as such a malady is more likely to taint a particular county or district, than an entire State.
Of course, Madison was rich and a creditor; thus, he feared inflation (or worse the abolition of debts entirely) with the ancient fervor of the aristocracy. We have been taught through learned experience that central banking is necessary, and that inflation is, or at least can be, a tool. That it is to some degree desirable. The Fed has a dual mandate–employment and stabilizing prices, and to this end has a long term inflation target of 2%. They call it the dual mandate bullseye. We clearly think central banking plus controlled inflation is the way to go with the dollar. Proponents of Bitcoin will remind you that there are 21 million and that’s it. It is deflationary, or at least anti-inflationary by design, and most importantly no central authority controls its issuance.
The CFTC has said, at least for now, it will not ban Bitcoin. Accordingly, there will be a competition between cryptocurrencies, private currencies, and nation-backed, centrally managed fiat. There are many entrants. Bitcoin Cash and Litecoin make a scaling argument–their currency is immutable too but you can do more onchain transactions. Bitcoin has responded with the lightning network, which allows offchain but immutable transactions. Then there are the privacy tokens (Monero and Zcash). Ethereum makes a use case argument–it is a store of value, perhaps a currency, and definitely something that can be used, like salt. The world is beginning to look like the one Hayek wrote about, maybe the one he wanted to see, in 1976. Back then, the very concept of currency not backed by a government was foreign verging on exotic. Now it’s a reality. What will win is of course anyone’s guess but if Hayek’s central thesis is correct, it won’t be the dollar.
For the Bears
If the CFTC was the “good cop,” the SEC in the form of Chairman Clayton was the “bad cop.” Clayton stated, unequivocally, that “I believe every ICO I’ve seen is a security.” He went on to add that none had registered to his knowledge. Here is a nice summary of Clayton’s testimony.
Facebook Releases GDPR Tool
The most compelling use case for distributed ledger technology might not be money. It might be identity.I call this the Recentralization of Identity. If you paused everything, right now, and allowed people to collect and restrict access to their data–not just their name, DOB, SSN, but their preferences, their friends, their viewing histories, their medical histories, their photos and passwords–the world would be an incredibly different place.
It would indeed be a scary place for some. Advertisers are an example. Nobody would know what to sell you while you read the paper online. Are you into hunting or tennis or barbies? My wife gave birth in April. All I see these days are diaper ads and stuff about cryptocurrency. I don’t have Facebook or Instagram, yet they know I’m into diapers and Bitcoin. Imagine if it could all be taken back. Imagine if these advertisers knew only what you consciously agreed to share, presumably for compensation. Answer honestly: Would you prefer this world?
The General Data Protection Regulation or “GDPR” is a step in this direction, and in a certain way, asks this very question. It applies to personal data of EU residents and grants individuals certain rights even after data is collected. For example, individuals can request that data be deleted or modified under certain circumstances. They can ask for a record of which entities have seen their data. And they have a “right to be forgotten.”
Implementing compliance is a tall task, and because the fines for noncompliance are quite high, GDPR is receiving a lot of attention, including from Facebook. The law is set to take effect in May. As such, pronouncements of regulatory doom remain premature, but the law clearly represents pushback on the steady erosion of individual control over data. Whether this is welcomed and desired remains to be seen. Most people want their data to be private, but they also want a free email account with unlimited storage.