Tether Back in the News; Distributed Counsel 12

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Tether Back in the News

Tether is back in the news.  When we last visited this topic, Tether and Bitfinex were being subpoenaed by the CFTC.  Certain reporters have since attempted to get their filthy fake-news paws on the actual subpoenas, to no avail, and the status of the investigation is very much unknown.  This is actually fairly important, because a recent study by James Griffin and Amin Shams, both of the University of Texas at Austin, would surely add fuel to the fire, if a fire was still burning that is. Otherwise, all you have is a wet log.  

The report concludes that a significant portion of the price increase in Bitcoin last year was attributable to Tether; in particular, purchases of Bitcoin with newly minted tether during dips in the price, mainly on the Bitfinex exchange.  there are two main outcomes here: (i) the CFTC commences a formal and public enforcement action against Bitfinex and Tether; or (ii) nothing.  If history is any indication, option (ii) is more likely.

More fuel was added (to the log or the fire we cannot be sure) by Bloomberg.  Its report, which quotes extensively two purported experts in trading technology, strongly suggests that the entire Kraken order book (which let us remember is the only exchange that pairs Tether with actual US dollars) is basically a washtraded fiction.  Take a look yourself if you like (navigate to USDT/USD). Kraken has responded vociferously, complete with a Ron Jeremy meme (so you know it’s good) and Tether has hired one of the best law firms in the country to do an audit, even though a law firm can’t do audits, and no auditor will do an audit. And Bitfinexed is back.

Here’s a promise: I’m not going to write about this again until something actually happens.  This “issue” has had more false starts than an Olympic 100-yard dash before they did the thing where the first false start counts against everyone and anybody, even someone who never false started to begin with, gets disqualified if they go early after that.  That rule makes zero sense by the way. The result is to render the first “on your marks” totally perfunctory since someone always false starts. 

Complexity Harming Innovation

According to an E&Y survey of 83 finance and technology professionals, 61% say regulatory complexity is impeding blockchain adoption.  I don’t buy it and let me tell you why with a story about shoe salesmen.

A long time ago, two salesmen were sent on a grand ship to a faraway land.  The first salesman arrived, took one look at the land and the people, and got right back on the ship.  He cabled home: You idiots.  Nobody here wears shoes, they all walk around barefoot.  This is a total waste of time.

The second salesman sent a different cable:  This is GREAT.  Nobody here wears shoes, they all walk around barefoot.  We are going to make a killing. Send me a whole boat full of shoes.

You can think about why regulatory complexity prevents blockchain adoption, or you can think about how blockchain adoption can ease pain points brought on by regulatory complexity.  

Will Blockchain End the Internet? 

I sure hope so!  This way I can reinvent it and earn millions 🙂  In any case, a consortium of central banks who clear international transactions are claiming that using a blockchain to settle all such payments will end the internet as we know it. This smacks of a carriage company warning that cars will kill us all (when in fact they only kill a small percentage of us), but they actually make a couple of decent points, namely:

The paper subscribes to the credit theory of money, which probably receives its most thorough treatment in Graeber’s Debt: The First 5,000 Years.  This theory subverts the old chestnut that before money there was barter, and holds that credit in various forms was the first mode of settlement.  The paper provides a neat summary of the position and its problems: “Money plays a crucial role in facilitating economic exchange. Before its advent millennia ago, goods were primarily exchanged for the promise to return the favour in the future (ie trading of IOUs). However, as societies grew larger and economic activity expanded, it became harder to keep a record of ever more complex IOUs, and default and settlement risks became concerns. Money and the institutions issuing it came into existence to address this growing complexity and the associated difficulty in maintaining trust.”  So far, so good.

The paper admits to counterexamples to its central thesis.  Specifically, the paper concedes that “Sustained episodes of stable money are historically much more of an exception than the norm. In fact, trust has failed so frequently that history is a graveyard of currencies. Museums around the world devote entire sections to this graveyard – for example, room 68 of the British Museum displays stones, shells, tobacco, countless coins and pieces of paper, along with many other objects that lost their acceptability as exchange and found their way to this room.”  This time of course it’s different.

And it introduces (at least to me) the concept of the “money flower.”  This alone makes the paper worth a read, and underscores the complexity of the concept.

But it also generally falls back on the same arguments that we typically see against Bitcoin.  To wit, “[t]he shortcomings of cryptocurrencies in this respect lie in three areas: scalability, stability of value and trust in the finality of payments.”  The paper argues first that extant systems can’t scale to meet the retail reality, and uses some convincing charts and graphs to show why. See Graph V.4 at p. 99.  The point concludes in dramatic fashion “[t]he associated communication volumes could bring the internet to a halt, as millions of users exchanged files on the order of magnitude of a terabyte.”  Perhaps predictably, this quote got all the press.

But this is not new.  It’s almost a cliche at this point.  I don’t really know anyone who disputes the truth of this (not the internet part, the scaling part).  The proof-of-work chains the paper analyzed don’t scale all that well, no question.  But that is why Ethereum founder Vitalic Buterin is working on a proof-of-stake system.  That is why the lots of really smart people are working on the lightning network and off-chain transactions.  It is too early for a lot of things in this arena, including declarations that cryptocurrency will never scale.

Constitutions Are Hard, Just Ask EOS

One of my favorite quotes of all time is Zhou Enlai’s response to an American diplomat during the Nixon visit in 1972.  When asked about the impact of the French Revolution, he said that it “was too early to say.” This was seized upon immediately by the Western press as evidence of the farseeing wisdom and deep patience of the Chinese.  Of course, the whole thing was a misunderstanding, but the idea of the quote lived on because, in the words of one commentator, the mistake was “too delicious to correct.” [https://www.historytoday.com/dean-nicholas/zhou-enlais-famous-saying-debunked]

The point here is that ramifications of an event may have very long tails, and consequences can be hard to see. This is what Zhou was observing (or at least what we wanted to imagine he was observing). It is also the reason writing a constitution is so damn hard.  That ours has survived, all this time, not as a piece of history but as an instrument of governance is virtually without precedent.

So we should not be surprised by the current EOS debacle.  An excellent summary of the situation can be found here. In short, a grand billion dollar experiment is not working right away.  You know what: big deal.  There will be adjustments, new problems, and hopefully (for the investors) new solutions found. We should, in my view, understand this for what it is: a first attempt that was perhaps too ambitious.  Writing a constitution is hard. Finding all the right laws, rules or Platonic guardians (which is exactly what these block producers are) ex ante is an impossibility. Learned Hand, one of the greatest jurists of all time, once wrote of Platonic Guardians that “[f]or myself it would be most irksome to be ruled by a bevy of Platonic Guardians, even if I knew how to choose them, which I assuredly do not.” Well, iff Ol’ Learned can’t pick ’em, I doubt anybody else has much chance.  The Guardians in Hand’s quote, by the way, were the justices of the Supreme Court.

And Finally . . . This is All Pointless

I think it is high time for a recurring, non-Tether theme.  My favorite one (from my youth) was Sports Illustrated’s This Week’s Sign That the Apocalypse is Upon Us.”  Invariably, the magazine would unearth some ridiculous yet plausible fact or practice, each week, like clockwork.  Well, I’m doing the same thing for pronouncements about the death of cryptocurrency. This week’s edition is terrific.

Not only does it assume that Bitcoin is faddish idiocy heading to zero, it speculates that the underlying mining infrastructure might be used for data centers for “areas like deep learning applications for self-driving cars or automatic translators.”  

As always, thank you for reading.

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