"A grandes problemas,
~ Nicolás Maduro
One area where proponents of technology customarily get trounced concerns the consideration of unintended consequences. (This is also regrettably true for most commentators.) It's not that people don't take them into account, but rather that when they do, those consequences are extrapolated out to such hyperbolic extremes as to make these scenarios essentially useless. It's much more appealing and click-friendly to sound the alarm that artificial intelligence will turn the entire planet into an ocean of paper clips than it is to think deeply about how AI already influences decisionmaking within our existing social systems. By the same token, it's easier to be terrified of sudden, wholesale unemployment wrought by automation, when, as I noted recently, the far likelier outcome is that we will coexist with technology for a good while yet, with automation eroding work in a gradual, almost invisible fashion. And this is notwithstanding the fact that that there is plenty of room for a well-informed skepticism that questions whether technological unemployment is happening in any appreciable way at all.
Similarly, when proponents of bitcoin, blockchain and distributed technologies advocate for a wave of technologically-driven decentralization, it's rarely described in terms less than messianic. Unintended consequences seem to have gotten only so far as admitting an overenthusiastic consumption of electricity. Now, one of the principal targets of this revolution is the perceived tyranny of the nation-state itself. Janina Lowisz, the (alleged) first holder of an ID that is written into the blockchain, said in an interview with Vice that:
The technology allows for a lot of new possibilities for replacing what the state provides—like, one option would be to offer government services in packages so people can pay for whatever services they're going to use. That's how government should work: Instead of paying taxes that get wasted on things you don't even want, this way you can have a free choice and see exactly where your money is going.
I'll graciously pass over the heartstopping naïveté of this sentiment, but it's worth noting that this model of 'government as a cable TV package subscription' has deep roots. It is a direct ideological descendant of the ur-text of techno-libertarianism, John Perry Barlow's A Declaration of the Independence of Cyberspace, the charismatic and hopelessly romantic 1996 manifesto that Barlow delivered in Davos, of all places. For the purposes of this essay, I have pulled out the following bits:
Governments derive their just powers from the consent of the governed. You have neither solicited nor received ours…You have not engaged in our great and gathering conversation, nor did you create the wealth of our marketplaces…We will create a civilization of the Mind in Cyberspace. May it be more humane and fair than the world your governments have made before.
Blockchain technologies pretty much take dead aim at fulfilling this mandate. Bitcoin's fair face, and the 1,518 ships that it has thus far launched, revel in the notion of decentralized authority. Political vicissitudes cannot devalue these aspiring currencies, and, in their purest forms, transacting in them means immunity from censorship or any other regulatory or even geopolitical restrictions. Except, no one has really thought to ask the nation-states what they think about this.
Unsurprisingly, regulatory forces have begun massing at the frontiers of Cryptolandia. During 2016 and especially 2017, the blockchain sector was seized by the fever-dream known as Initial Coin Offerings (ICOs). Functioning as a nudge-nudge-wink-wink imitation of the more staid Initial Public Offering, an ICO involves a startup issuing 'tokens' that award participation in that venture's activities. You can think of it as a form of scrip: just as passengers receive frequent flier miles that then allow them to purchase discounted tickets for that airline (but not, for example, towards groceries), tokens quantify the possibility of transacting within the network of that particular blockchain. Such activities may involve governance (voting with your tokens), trading services (the number of tokens I have may advertise the amount of hard drive space I can rent out), or pretty much anything else you can think of. This may or may not turn out to be fantastically useful, but in 2016 and 2017 the primary driver of interest in ICOs was rampant speculation, and there was plenty of it.
Following the catastrophic 2016 hack of the DAO, a virtual investment organization whose decisions were meant to be driven entirely by blockchain technology, the US government's Securities and Exchange Commission decided it was time to throw down some law. According to the SEC, any token issued by a blockchain venture must be subjected to the Howey Test, to determine whether the token is in fact a security. Contrary to popular belief, the Howey Test exemplifies the axiom that brevity is the soul of regulation (see also the original text of the Glass-Steagall Act). Thus, an instrument is a security if:
- It is an investment of money;
- There is an expectation of profits from the investment;
- The investment of money is in a common enterprise; and
- Any profit comes from the efforts of a promoter or third party
That's pretty much it. The genius of the Howey Test is that it's concerned with what an instrument does, and not how it describes itself. It also means that most tokens will fall under this rubric. This is, all in all, a very good thing, as there has been quite a lot of snake-oil selling going on, and punters have been regularly fleeced, BitConnect being a recent and typical example. Thus, an ICO whose token is deemed a security must be registered as such with the SEC, or be granted an exemption; otherwise it is not available to US investors. On the other hand, it sets up an immediate opportunity for regulatory arbitrage, where other nation-states can seek to take advantage of the SEC's rectitude, and allow ICOs to proceed in their jurisdictions with little or no oversight. Thus begins another grand game of capital versus regulation, but very much along the lines of all the other grand games that have preceded it.
Of course, this is not the entire story. The code that underpins the blockchain is the result of a massively collective effort, which seems somewhat at odds with the libertarian ethos. Nevertheless, this availability is a major factor in its success so far, at least from the point of view of generating massive network effects with breathtaking speed. The notion that anyone can improve or stress-test code and contribute to its security and speed is key to ensuring the integrity and ongoing innovativeness of the entire ecosystem. At the same time, this radical openness has led to instances where entire platforms such as Ethereum have been cloned (or ‘forked') by banks for use in private blockchains. It's important to note that this doesn't contravene any of the principles set out by purists, but is perhaps less salutary than they might prefer. Still, as Mao taught us, we ought to let a thousand flowers bloom, if only for a short while.
More interestingly, state actors themselves have taken notice. If any two-bit hack with a white paper can raise millions of dollars in the blink of an eye, why shouldn't they? Unsurprisingly, it's the states who find themselves at the margins of the global capital community that have found the notion of cryptocurrency most irresistible. Of that cohort, Venezuela is first out the gate, floating the petro, a cryptocurrency that is putatively tied to its oil reserves. Immediately following the start of the pre-sale on Tuesday, Venezuelan President Nicolás Maduro triumphantly tweeted that the state had raised "4.77 billion yuan, or 735 million dollars" (due to sanctions, Venezuela denominates its oil in yuan, but it's still a nice little dig, putting the dollar in second place like that).
Still, a little digging into this sale reveals some uncomfortable questions. One of the characteristics of nearly all blockchains is that transactions are visible. You may not know the names of parties, but you will see that X tokens were bought with Y currency, and went from account A to account B. It seems that there hasn't been much movement in this particular chain. In fact, according to this article, there hasn't been any at all, and all the tokens are still sitting in the original pre-sale account. That's like saying you sold out your entire inventory while it's still stacked up right behind the counter. An ambiguous process for purchasing – as detailed in this thread – has also contributed to a rotten smell, but perhaps the most damning detail is about the asset itself.
As noted above, the core idea behind the sale was to tie each token to a barrel of Venezuelan oil, but this is not a futures contract. One does not stroll up to an exchange and redeem a token for said commodity. Rather, the token can be redeemed for the value of a barrel, and furthermore that value is in bolivares, a currency so whipped by hyperinflation that 18 months ago it passed the in-game gold of World of Warcraft on its way down and hasn't stopped cratering since. So it shouldn't come as a surprise to Venezuelans that if they only have bolivares, they can't buy petros.
This is perhaps the first case, but certainly not the last, of a nation-state using crypto in a desperate attempt to raise capital in the face of robust international sanctions; indeed, a fully subscribed sale would only raise about 10% of what Venezuela owes its creditors. Thus Maduro has also announced that the government would soon be launching another cryptocurrency: this one will be gold-backed, although he didn't specify whose gold would be doing the backing. The pattern of state-sponsored chicanery is only reinforced by news that Venezuela is forcing local bitcoin miners to register with the state, and extorting and/or arresting those citizens who attempt to run mining rigs on the sly. In a country where the currency is worthless, mining bitcoin is for some people the only way to feed their families. For some libertarians this is perhaps proof positive that the state is in its death throes, but it's also clear that it's sure not going out without a fight.
As tragic as it may be for its citizenry, Venezuela's incompetence and/or cynicism would be easier to dismiss if it wasn't for another detail that points to a much larger panorama. Exchanges are another feature of the blockchain landscape; after all, once you manage to buy tokens, you need to be able to trade them for other tokens or even (gasp) fiat currency. So far, hundreds of exchanges have sprouted up all around the world. This has led to a fragmented landscape, with a dearth of liquidity and all sorts of hacks and other malarkey as accounts get compromised. In the case of the petro, rumor has it that exchange services will be provided by Zeus Exchange. Who are these guys?
Russian startup Zeus Exchange, has registered in Singapore and become licensed in Cyprus to trade shares using the smart asset blockchain—the world's first—developed by Singapore-based foundation, NEM. The not-for-profit foundation is developing its systems in China. The framework that Zeus Exchange will use could be particularly successful in China due to it allowing access to exchanges all around the world via Cyprus. Plus anonymously, and at small scale. [sic]
So: a dodgy Venezuelan cryptocurrency is set to trade on a Russian-run exchange licensed in Cyprus, targeting the retail Chinese market. The hubs that we are accustomed to hearing about when we talk about global capital flows – New York, London, Frankfurt – are nowhere in sight, and the regulatory hammer has yet to drop in any substantial way. The implication is that cryptocurrency and its underlying technology is on the verge of enabling a global shadow financial system.
There are two reasons why this is a big deal. Consider that nation-based capital controls have been largely removed from the global economy since the 1990s. Much like climate change has led to more frequent and more intense hurricanes, removing these capital controls has seen a corresponding increase in the frequency and intensity of financial crises. Would crypto – traded 24 hours a day, across a mosaic of incompatible regulatory regimes – do anything but catalyze even faster capital flight from crisis situations, or capital influx into speculative bubbles?
Secondly, this article in Foreign Policy asks us to consider the implications of blockchain on sanctions as a tool for foreign policy:
Since Sept. 11, 2001, the United States has relied heavily on financial sanctions to rein in bad actors. Whether targeting terrorists, Iran's and North Korea's quest for nuclear weapons, Russia's annexation of the Crimean peninsula, or Venezuela's rights abuses, financial sanctions are often the first resort for U.S. policymakers. And while other actors often help reinforce U.S. financial sanctions — the European Union leaned on Iran, and China is pressuring North Korea — the fact that New York and the U.S. dollar sit at the epicenter of global finance gives the United States outsized leverage.
Even if cryptocurrencies like bitcoin don't replace dollars, the 'trustless' aspect of blockchain technology allows actors who do not know or trust one another to still engage in transactions with each other. It's one of the keys that makes a truly decentralized platform viable. At the same time, obviating a trusted third party removes the choke point that makes much enforcement of regulation possible. So it's not difficult to envision the nations mentioned above using this to cobble together a system of payments that would be not just independent of the current regime (known as SWIFT) but also be essentially inaccessible to US and European financial authorities.
Within the context of radical decentralization, money laundering and financing of terrorism, etc, become that much more difficult to track and stop. Already, it's quite likely that North Korea has been mining bitcoin in an attempt to bolster its access hard currency. And just last week Iran announced that its central bank was exploring the possibility of launching a 'cloud-based cryptocurrency'. Looking back on the interview with Janina Lowisz, when she says "I really can't think of a good government anywhere," the only response I can come up with is, "Yeah, and?"