Crypto Faces Large Political Risk

Blockchain enthusiasts are motivated in part by the dream that a significant sphere of human activity that cannot be touched by the tools of the modern state. I have always thought this unlikely. From the beginning, the real question about crypto, Bitcoin, and all things DeFi has been whether the state in its modern form would allow them.

Until recently, there has not been heavy evidence either way. Crypto has expanded in the human imagination but not found its killer app, the use case that changes it from a hobby for a few million people to a life necessity for several billion. Recent I was driving through West Virginia and saw a “Buy Bitcoin Here” sign at a highway truck stop. It was right next to the sign that said “Buy Lotto Here” and I think that illustrates where blockchain is for most people. Like NFTs, it is at this point an interesting toy. It has not yet threatened anything.

We have seen in that past what the System does when it is threatened. Those of us old enough can remember that music was going to be free. Remember that? Music is a digital file, files are the property of the people who own them, owning a piece of property means you get to dispose of it as you wish. Right? Isn’t that how property rights work? So music by nature is something that can be freely copied and shared. And in 1998 we all thought we were going to have a future of free music. But the System would have none of it. Its agents set their buzzy brains to work on ways to prevent people from owning and having property rights over particular types of files with particular types of content. They got all the right-side-of-history people to go along; university administrations told students that if they copied music over the local wires they would be turned over to the police. There were a few headline-grabbing cases to demonstrate the state’s muscle. A few dead bodies were left where people could see them. And so, today, nobody thinks of music as anything but a streaming service that you pay for. From the standpoint of 1998, it was a breathtaking show of the System’s power: Yes, the bureaucrats and lawyers *can* take away free music. Yes they can. And they did. And now they profit quite handsomely from it.

Today, the 1998 mindset applies when we talk about DeFi. Surely, the bureaucrats and lawyers can’t take away Bitcoin, we say. Surely they can’t domesticate it to serve their ends the way they did with music. Surely not.

In the past few weeks, the phrase “frozen accounts” rose in prominence as Canada’s government sought to get all those 18-wheelers off its lawn. Freezing people out of their accounts is a pretty powerful state tool, isn’t it? Now that everything has gone into the cloud, we can only access our stuff through accounts. We get everything by logging in. Guess how easy it is to invalidate a login?

By the way, this does not only apply to digital goods and services. If you have a smart home, how do you control what it does? By logging in. If they shut down your login, can you still turn on your water heater? Today, yes. But for how long? Law scholar Joshua Fairfield is concerned about that.

We have handed over a huge part of our material well-being to companies who have put it behind a wall without giving us a permanent and inalienable key to the door. Those companies seem happy to approve government requests to close the door and lock it.

Now, if you have crypto, how do you get to it? By logging in. In my 2014 book Wildcat Currencies, I argued that the real money to be made was not with digital currencies but with digital currency exchanges. It was another correct prediction for me; it is now evident that Coinbase or something like it is going to be the winner here, not Bitcoin. And when Coinbase and the currencies it supports gets big enough to threaten the System, what do you think is going to happen?

We were fools to believe that information networks would somehow be impervious to officials, with their insatiable lust for control. If anything, the internet is a richer environment for upper-class control than meatspace. The laptoppers can’t see what’s happening in your back yard, but they can see the email you wrote to your brother. If they want to hurt you in the physical world, they have to come to your house and get you. But if they want to hurt you in the cloud, they only have to flag the right accounts. And our exposure to flagging rises daily.

The response – and it is underway already – is to remove ourselves into intentional flesh-and-blood communities. But that is an essay for another day.

If DeFi ever gets big enough to be a threat, it will be domesticated. That day of reckoning will come within 10 years. The winners and losers of that moment are impossible to predict. Therefore, any investments made today, before the reckoning between blockchain and the System, are exposed to an extreme level of political risk.