The Next Phase

CBDCs are entering the public consciousness. What the powers that be can and can't do to stop competing cryptocurrencies from a technological perspective and how I think it plays out from here.

Now that the world is waking up to the dangers of financial weaponization, I’d like to make a few fresh predictions and clarify some critical misconceptions about cryptocurrencies that I’ve seen perpetuated online in recent days. In making my predictions, I will reference comparable precedent in US monetary history. And I will try to explain how much power the federal government really has over crypto as simply as I can.

First though, regardless of how we may feel about what is really happening in Ukraine, I think it’s very obvious that war is terrible. Death is terrible. And the financial oppression of the innocent Russian citizens who oppose the conflict is also terrible. America, everyone’s favorite world police officer, and the rest of the western world order are now punishing Russian citizens for Putin’s aggression over a sovereign nation. The amount of foreign policy ethics credits the United States still retains to warrant taking a morally superior position in the current Russia/Ukraine situation is up to interpretation, but from where I sit the balance appears neutral at best. Regardless, we are where we are and the best we can do in our own homes is learn from what is happening and try to position ourselves in a way that insulates us from financial weaponization as much as possible.

We’ve probably all seen the images from both sides of the fight. The bombs in Ukraine are catastrophic. The currency destruction and bank runs in Russia are as well but only from the ripple effect they are sure to create. How many innocent Russian families are going to starve so Washington and Silicon Valley oligopolies can pretend they care about Ukrainians? I won’t attempt to guess but the number is likely disturbingly high.

The Setup

In early 2020, we had a debt-based fiat Ponzi economy that was ready to completely implode all on its own. Before that could happen it was stopped dead in its tracks by a virus that probably came from a lab. Now, we see a war in Ukraine that is pushing a world power and key energy supplier out of the global financial system. What comes next? If some headlines are to be believed, a nuclear war. Though I’d argue a cyber attack at a global scale is far more likely.

Targeting the global financial system with the afore mentioned cyber attack would seem to make sense in an eye for an eye sense. What would that look like in real time? Online banking access would be down. Branch users would have no cash withdrawal ability. Credit cards wouldn’t be working. Just a few days of which would likely bring about substantial economic pain domestically and abroad. What might the other side of that cyber attack show? Maybe zeroed out bank balances and no record of ownership of any kind? Who can guess? But what is probably less conspiracy theory as each day goes on is the notion that we are inching closer to the global CBDC that will enable so many of Klaus Schwab’s Bond villain-like plans.

“You will own nothing and be happy."

I know many will disagree, but for me the left vs right political paradigm has become mostly irrelevant at this point. Nearly the entire establishment apparatus is cooked, with a handful of exceptions. To me, it’s more about authority vs free from here on out. How this goes geopolitically speaking, I won’t speculate. But pertaining to CBDCs and cryptocurrency, I’ll try to make some prognostications.

Crypto Fallacies

“Bitcoin is incredibly polarizing and the people espousing the most extreme positions on BTC are generally the least qualified to do so.”

That was me a little over a week ago in Russia, SWIFT, and the Urgent Need For Privacy Coins. I was talking about how I rarely read the comments on my Bitcoin articles published to Seeking Alpha because it’s a troll trap. As it turns out, under-qualified statements aren’t limited to just the Seeking Alpha comments section. Shocker, I know.

Over the last few days I’ve engaged with people online who don’t seem to understand the big picture regarding cryptocurrency. There seems to be very little understanding of the difference between crypto held by a custodian and crypto held on-chain. There seems to be almost no understanding of the financial and technical computing power that would be required to truly eliminate decentralized cryptocurrencies through a 51% attack (acquiring the majority of a coin’s hashrate).

So let’s clarify what the world governments are capable of doing to stop the use of crypto and what they are probably not capable of doing from a technological standpoint:

• Can the government make crypto illegal by decree? Yes.

• Can the government order private companies to stop facilitating crypto transactions? Yes.

• Can the government use the legacy system to target individuals and businesses that have a known history of using cryptocurrency? Yes.

• Can the government forcibly shut down the large, well known mining operations that have published physical addresses? Yes.

• Can the government shut down every single individual mining rig on the planet? In theory, yes. Practically speaking, it would be almost impossible.

• Can the government take control of the Bitcoin hashrate? Again, yes in theory. Practically speaking, it would be almost impossible.

• Can the government confiscate your Bitcoin held on-chain in a self-custodial wallet? No.

• Can the government stop funds from moving in or out of your self-custodial wallet without turning off the internet? No.

All of the things the government can actually do from a technological standpoint are terrifying. But they are more behavioral nudges than true control measures. The government can’t actually stop real person to person exchange on the Bitcoin blockchain. It can just make you really scared to do it. Those in power can turn off centralized exchanges and regulate crypto by decree all they want. What they don’t really have the power to do overnight is stop value exchange for those of us who choose to be ungovernable so long as the miners are part of the ungovernable. As I’ve covered before, the idea that a crypto on-ramp requires an off-ramp is a fallacy. Crypto can just become the exchange mechanism. And yes this kind of barter mechanism would absolutely create black markets and a parallel economy and it would be brutal at the beginning.

But the point is, to truly shutdown cryptocurrencies, governments would have to forcibly destroy every single mining rig on the planet. That’s easy for some cryptos, but not for all of them. Its incredibly difficult to pull that off. To really destroy crypto they’d have to turn off the internet. But they can’t do that because their surveillance state relies on it too.

There is no putting the genie back in the bottle. Decentralized currencies are here. Like stealing from one’s next door neighbor, the government can decree it illegal but can’t practically enforce such a law if the citizens choose to defy it at scale. There are, however, some very creative things the government can do to try to squash cryptocurrency usage and we’ll explore a historical analog to assess the feasibility today.

Executive Order 6102

Many Bitcoiners have been saying Bitcoin is the new Gold. While I personally don’t think Bitcoin can ever truly replace Gold, let’s treat them similarly as monetary instruments in the eyes of the government in today’s economy as neither are currently used to back USD. They both appeal to a similar person, after all. Back in 1933, FDR signed EO 6102. In that executive order, Americans were told to turn in their gold coins and bullion.

Section 2. All persons are hereby required to deliver on or before May 1, 1933, to a Federal Reserve Bank or a branch or agency thereof or to any member bank of the Federal Reserve System all gold coin, gold bullion and gold certificates now owned by them or coming into their ownership on or before April 28, 1933

While many have said FDR confiscated the citizens’ Gold, the word “confiscation” isn’t totally fair. There was an exchange of dollars for Gold as part of EO 6102. People who turned in their Gold were paid for it.

Section 4. Upon receipt of gold coin, gold bullion or gold certificates delivered to it in accordance with Sections 2 or 3, the Federal Reserve Bank or member bank will pay therefor an equivalent amount of any other form of coin or currency coined or issued under the laws of the United States.

What is more fair to point out is the fact that FDR re-priced Gold to $35 from $20.67 through the Gold Reserve Act almost immediately after the Gold for dollars redemption program ended. Was that literally confiscating wealth? I won’t say. I can say it was a massive overnight devaluation of the dollars used to buy the Gold through EO 6102. Pretty shady stuff any way you look at it.

Crypto Redemption Program?

EO 6102 serves as an interesting potential precedent for how the government could minimize CBDC escape valves. When the Fed’s digital currency is ready to launch, what I think we are probably going to see is some sort of Bitcoin redemption program.

An example of which would be to send Bitcoin to a Federal Reserve BTC address in exchange for CBDC at a special conversion rate. We’ve seen similar campaigns with drugs and guns. What complicates this theory is that when FDR asked for the Gold, the metal still had a presence in the monetary system that Bitcoin does not have. So it isn’t a perfect analog in that sense.

It makes sense from a practicality perspective in my eyes. The alternative is the federal government will either have to just accept that crypto is out there or it will have to spend significant resources organizing 51% hashrate attacks on hundreds of different blockchains. It would likely have to confiscate miner rigs and prevent people from buying or making new ones. It’s much easier to just kindly ask for the coins with CBDC redemption codes.

And this brings us to thinking globally as opposed to just domestically. Just because the Federal Reserve may have a CBDC for Americans, it does not mean other powerful nations will be involved. As I argued in Crazy Like a Fox, at least to some degree, what we’re seeing from a global macro perspective with countries like China and Russia is intentional de-dollarization. These are not regimes that are getting in line to use the Fed’s CBDC just so it can be weaponized against them again. It would behoove the US government to offer a redemption program for Bitcoin because Bitcoin really is decentralized and borderless. It is a very well constructed cross-border settlement asset for trade partners if the economic powers of the world can’t agree on a different global standard post petrodollar.

That Doesn’t Mean They’ll Get The Coins

And that’s the critical part of all of this. FDR did a Gold redemption program in the 1930’s. But he didn’t get all of the Gold. Some people can and will just choose to not comply. 90 years ago, those who quietly held their Gold and waited were better off. The Gold price measured in dollars is now just under $2,000. It isn’t illegal to own anymore either. The same could be true for a crypto redemption program.

I can’t possibly turn over all of the crypto that I’ve acquired even if I wanted to. Why? Because I have wallets that I don’t have access to anymore. This is not rare. It’s part of the growing pains of crypto. Read this horror story as an example. While that might appear to strengthen the argument that the government will try to crush everything through a series of 51% attacks, the reality is if I can’t access the crypto, I can’t use it. And using it is the entire point.

As always, nothing I say here is a solicitation for you to do something. I just share what I do and try to best detail why I do it. I have several cryptos. I think they will continue to be regulated but I’m not convinced they’ll be made outright illegal. If they are made illegal to own, I would expect prices nominally to suffer. The overwhelming majority of the coins would probably cease to exist under the pressure. But some of the OG proof-of-work coins would likely thrive long term. In a weird way, I think making them illegal would actually increase user adoption over time as a government run money escape valve. It will be fascinating to see play out. I like Gold better. I like Silver better. But crypto is not as killable as many think it is and it actually might make more sense for the Fed to buy it from citizens with CBDCs rather than try to eliminate it. Take my amateur view for what it is worth.