Austin Vernon on crypto (from my email)

by Tyler Cowen January 7, 2021 at 1:04 am in

I think your column agrees with my mental model in that the actual crypto networks may not be regulated, but the on-ramps and off-ramps will be heavily regulated (and already are).

If you are an exporter being paid in crypto assets by a Nigerian importer, the obvious thing to do is hedge that crypto against your currency of choice. Because of the volatility, this is maybe most analogous to oil companies hedging oil sales. It is a common practice that most energy lenders provide as part of their menu.

If you tried to set up a service to do this without following the current regulations, I’m sure you’d end up in prison. Just like Coinbase or USDC is already regulated under current rules, hedging crypto against the dollar would easily fall under CFTC rules. Your bank that already provides a line of credit and knows your order book would be the one to offer the service.

I think this is a good outcome in that for those so inclined, the crypto networks provide high risk but low regulation pathways to do business. Everybody else that wants to straddle the dollar and crypto world to get some benefits of crypto will still use the same institutions that manage the massive amounts of regulation that exists in the dollar world.

Maybe the best way to look at the future of crypto, especially outside of bitcoin, is that it is the perfect open-source software ecosystem. Everything is easily interoperable, security is high, and there is a business model for paying developers. Linux and Unix never became consumer operating systems, but they underly every website you use, every popular phone operating system, and now both macOS and Windows. Crypto can do that for financial systems and other applications by providing the infrastructure for advanced (and regulated) consumer and enterprise apps to be built on. It is more like Marc Andreessen’s "software is eating the world" than crypto anarchy. The crypto-anarchists will always have Monero!



2021-01-07 01:50:10 #

This seems to me telling me that BTC isn't going to hit delusional levels of $400K/BTC like Cryptofreaks have told us, but it's certainly going to keep rising a lot.


2021-01-07 02:11:53 #

"Linux and Unix never became consumer operating systems, but they underly every website you use, every popular phone operating system, and now both macOS and Windows."

Hate to nitpick this but Linux and Unix are literally consumer operating systems by their own example. And Windows isn't built on Linux but rather has an option to integrate with it.


2021-01-07 02:13:41 Hide Replies #

Seems like many words to me.

Et Cetera

2021-01-07 03:11:23 #

Because they haven't said anything new. We already know the Feds regulate the off-ramps. We already know crypto can do this and that. We've even heard that crypto will takeover the financial system from the hodl fanatics.


2021-01-07 02:51:20 Hide Replies #

Linux and Unix never became consumer operating systems, but Android did.


2021-01-07 04:05:46 #

Mac too and long before. BSD is close enough.


2021-01-07 02:53:57 Hide Replies #

There are a bunch of characteristics of electronic coins. If I understand correctly, they are crypto, distributed ledger and specifically blockchain. I also understand that my bank account is none of these, and that breaking some cipher will not enable someone to arbitrarily dip into any bank account they want. (Even though obviously getting my password will give them access to mine.) Are distributed ledgers necessarily cryptographic? Is my bank account really more protected from some clever codebreaker than Bitcoin is, or do banks also basically rely on crypto?


2021-01-07 10:45:36 Hide Replies #

Your bank account balance is likely insured to some degree, and fraudulent transactions are reversible given the regulations on the payment rails into and out of your account.

There are a handful of "crypto" elements in Bitcoin, as well as many in use at your bank. Safe exchange of passwords is cryptographically underpinned. HTTPS is based on cryptography.

Bitcoin and other 'cryptocurrencies' use different 'crypto' technologies for security purposes, for determination of ownership and certifying transfers, etc.

Bitcoin is a bearer asset, analogous to physical gold in a watch on your wrist. Property rights protect your right to own the watch, but a thief can take it and there's no watch regulator who will simply reverse the theft and return it to your wrist. The person with the 'keys' (think password) to a Bitcoin account has the ability to transfer it to a different account, and this cannot be reversed as there's no central regulator, insurer, etc. However, if your Bitcoin is in the custody of a 3rd party (think a gold watch in a safe deposit box, not on your wrist), then that 3rd party may be insured, in which case the value of your Bitcoin may be covered.


2021-01-07 12:03:55 #

That was helpful. If I understand correctly, the bottom line is that my bank account is a lot safer than Bitcoin, but what makes it safer is not technology but regulation. A clever codebreaker may be able to hack my bitcoin wallet or my bank account, but the remedies at my disposal in each case are quite different. That makes sense - the reason you put your money in the bank in the pre-computer era was not that their safe was better protected from safe crackers than the one in your house, but rather your personal exposure from a bank robbery is minimal and from a break in to your house (if you keep all your money there) is a lot.


2021-01-07 04:09:04 Hide Replies #

When can we actually buy, useful stuff with it?


2021-01-07 05:14:46 #

You can pay for Microsoft software, your AT&T bill, a Subway sandwich, goods shipped from Overstock, tickets to the Miami Dolphins or Dallas Mavericks games, and many others. There was an NFL player the other day that took his salary in Bitcoin.

But the fact that you can exchange them for US greenbacks or any world currency is good enough.


2021-01-07 10:43:58 #

In Venezuela, you can buy food with it. In nice, stable countries, they will use the local currency. Depends on the situation, what do you consider useful?

It's nice that Venezuelans and people in other failing states have options.


2021-01-07 10:50:22 #

The primary narrative right now is 'digital gold.' What you're buying is (according to this belief) the preservation of your purchasing power over time. People buy gold for much the same reason. The ownership of gold or Bitcoin IS the "useful stuff" you're referring to.

Rarely do you hear of realtors or car dealers accepting gold bullion in transactions, much less Apple stock. When can we actually buy useful stuff with Apple stock? (perhaps a comfortable retirement in 30 years would be considered useful to some)


2021-01-07 04:30:12 Hide Replies #

For every crypto transaction there has to be a counterparty who has to pay back in crypto, or cover a future obligation that has to be paid back in crypto.

Crypto is volatile.

So, let's say you are a buyer, and obligated to pay back in crypto (let's say, 3 Bitcoin) when the goods are cleared at the port, using standard bills of lading upon presentment, or a computerized contract (more later).

Let's say that during the good's trip on the high seas, the price of Bitcoin goes up 10%. Saying you can cover today buy buying Bitcoin today has a price of tying up your cash, and there is no certainty that the Bitcoin will be roughly the same value in the future, meaning if you do not buy the Bitcoin today, it may be higher tomorrow, or if you buy it today, you have just tied up your money in some currency,

If you have to pay someone to take that risk, you are paying money; if you have to cover that risk, you are trying up your cash.

There is something that is called freely traded currency which has few of those risks, and one's that can be covered for much less, and doesn't tie up your cash to cover the currency's volatility. It's called freely traded currency with low volatility, like the dollar, and I hear there is even a low cost futures market for it.

I am buying futures in Quantum computers which will unravel the chain and make it worthless. Let's see how long this currency fairytale lasts.

As for non-currency tasks, blockchain definitely has a future, particularly in the space called computerized contracting.

Also, if you go bankrupt, or bankrupt a bank, don't expect you or the bank to give you assistance. You took the risk, as did your bank.


2021-01-07 04:36:09 #

Last line should read: don't expect you or the bank to receive federal assistance. Of course, the regulated bank won't need it because the Fed or Treasury will be auditing their books and won't let them take that risk.

(By the way, if you get up at night to see what is happening in Congress, I do not recommend going on this site to write a comment. Your composition is not as good.) But, I am interested in how people seem to be ignoring currency volatility without thinking they don't have to pay for it, or thinking that people in sales transactions want to assume that risk.

Raoul N'duh

2021-01-07 10:45:32 #

Quantum computing is useless today but has a bright future. And it always will.


2021-01-07 05:54:12 #

The number of bitcoin transactions has capped since 2017. For a high-growth promising technology, I am unimpressed.


2021-01-07 09:25:52 #

Believers. Ugh.

If the on ramps are tightly controlled, the need for cryptocurrency in the middle shrinks so dramatically as to make it the wrong set of technologies. What you need is so much simpler that if you decide to call that a cryptocurrency, you might as well be calling git a blockchain.

And it absolutely isn't the perfect open source ecosystem when you take out bitcoin: On the contrary! Networks are still going to be controlled by some people, who happen to have the largest economic stake. It's not about the best solution, but about who controls the mining/proof of stake. They are the only people that matter, and this is why you can find, today, a variety of cryptocurrency-like systems that come pre-mined, or where the "right" group of people start with enough stake to be, in practice, dictators for as long as they want.

This is the equivalent of Tyler giving us a post about the superiority of the cost theory of value.


2021-01-07 18:38:43 #

Crypto blockchains with proof-of-work systems can't underly the infrastructure because it is inefficient. The inefficiency is a feature and the reason why you can have a public ledger in the first place. It would never be scalable to handle transactions. Proof-of-stake is weird, because right now with a central bank ledger, we essentially have proof-of-stake with one entity having all the stake. I don't see any advantages of adding more people with stake and cannot comprehend what problems that that would solve. A lot of infrastructure problems in the financial world can be solved with crypto, but it can be equally solved with non-crypto in a far better way. The advantage of crypto seems to be it has the oomph to get the ball rolling because it is "catchy".

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2021-01-07 22:57:42 #

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