Ethereum Eschatology and Bitcoin Bankruptcy

Regulatory Arbitrage and Governmental Support For Cryptocurrency Alternatives

So I’ve been thinking a bit about cryptocurrencies lately and I don’t think the future is very promising for Bitcoin, Ethereum and other pure cryptocurrencies. I’ve always been a big fan of these currencies (though don’t get me started on the idiocy of companies using blockchain everywhere) but I think they are doomed in the not to distant future. However, this is only because I am convinced it won’t be long before we have the option to realize all (or at least most of) the major benefits of cryptocurrencies without the kludge and overhead of the blockchain, the dangerous price volatility and the unreliability/general sleaziness of many cryptocurrency exchanges.

Now lots of cryptocurrency value is currently the result of pure speculative interest. People are making a big bet that Bitcoin or Ethereum will take off and surge in value. While I highly recommend this Last Week Tonight episode mocking the HODL gang and other idiocy in cryptocurrency investing it’s not a fundamentally unreasonable bet. Just an extremely high risk bet that eventually non-speculators1 will buy out the speculators at well above (enough balance the risk) the current market price. It’s a bet that the currency will prove to be (at least) so useful/desirable that normal economic actors will see fit to hold far more value in the cryptocurrency than it’s current market capitalization of $151 billion BTC/$63 billion ETH. Given that $5 trillion is being held in physical currency and $60 trillion is held in bank accounts if you think there is a decent chance that Bitcoin or Ethereum will be adopted as the global currency then it’s valuation might not be absurd.

However, let’s ask what it is that cryptocurrencies offer the non-speculator. It seems to me there are several attributes that make them desirable.

  1. Cryptocurrencies offer finality in payments, e.g., unlike credit cards you don’t need to worry the payment you received will be cancelled by the payor or reversed as fraudulent.
  2. Cryptocurrencies let you pay people who wouldn’t (or can’t be bothered) be get paypal merchant accounts or US bank accounts.
  3. Relative freedom from government monitoring.
  4. Smart contracts. I can enter into cryptocurrency contracts that are enforced regardless of what a court thinks and even if local law enforcement is non-existent.
  5. Cryptocurrency schemes don’t require any kind of trust in government currency or a government system.

Frankly, 5 isn’t a serious consideration. It matters to a few people who want to show off their crypto-anarchists credentials but generally having a central bank behind one’s money is an advantage (stability etc..). So much so that other cryptocurrencies are trying to build in similar systems. If your concern is a hedge against inflation or governmental collapse you are better buying gold which a desperate government can’t try and attack (a combination legal and technical attack by a motivated government would seriously threaten any cryptocurrency). Besides, you can still use it if the internet fails.

But notice that, excepting 5, really all these advantages are really just avoidance of regulation. I don’t think there would be much demand for cryptocurrencies if it was legal to make a version of paypal where payments were completely final (even if they later turned out to be fraudulent), all records of transfers were immediately deleted, no one was turned away (marijuana growers, people in countries with sanctions and even conmen all got to keep their accounts) and the government couldn’t easily monitor accounts or determine whose account was whose.

Now some of this is just about enabling illegal activity (which also has value insofar as it lets individuals replace organized crime in the drug trade) however, strange as it might seem there is really substantial value in monetary exchanges with less protections against fraud and theft. In high-trust, relatively low value transactions in countries with strong legal systems such protections are a bonus but they make it virtually impossible to do make deals in low trust situations or when the seller can’t absorb a loss. For instance, as a tourist I couldn’t buy a high value good (say a found meteorite) from a villager I encounter because even if he could accept credit card payments he doesn’t have the means to contest a claim of fraud I might later make so, without cash, we can’t reach a mutually beneficial deal.

What puts current cryptocurrencies at risk is the fact that at any point any of the hundreds of sovereign governments on Earth could choose to offer an alternative digital payment system capturing most of these benefits. At any time Montenegro could sit down with Goldman-Sachs and some IT guys and launch Montenegro digital cash. Individuals from around the world could open up numbered accounts on the MontCash website and transfer money in or out of these accounts using credit cards or bank transfers. The MontCash app (or api) would then function exactly as paypal does today except that it would have numbered accounts (instead or as well as accounts in individual names), wouldn’t allow chargebacks or canceled transactions (absent a final court judgement) or require troublesome certifications to accept money at scale. In other words MontCash would just be a trusted bookkeeper maintaining a list of account balances.

Of course, diplomatic pressure would ensure that no government offered a completely untraceable totally anonymous system like this but for 99% of users it would be just as good (indeed better in some respects than Bitcoin’s publicly trackable transactions) if MontCash only released the accounts linked to certain payments, deposits etc.. only in response to a subpeona/warrant or for use in terrorism cases. While many governments might not particularly like the fact that accounts are simply numbered and can be used by whoever has the right credentials if it appears that real cryptocurrencies are gaining serious adoption (as necessary to vindicate their current valuation) then a system like MontCash would start to seem like an appealing alternative. After all, unlike Bitcoin, MontCash would still allow accounts to be seized with valid court orders, be more convenient to subpoena for transfers to/from given credit cards/bank accounts than the fluctuating legion of cryptocurrency exchanges and, most importantly, offer the carrot of secret counterterrorism access. After all, 99% of users wouldn’t care that much if the NSA/GCHQ etc.. got some degree of secret access to the financial data feed provided it wasn’t shared with tax collectors or drug dealers while the counterterrorism/intel benefits of having not only all transactions and accounts used to purchase or sell MontCash but also log details of where the app/api was used on what kind of device etc.. would be invaluable.

Even though it might not be universally loved the potential for massive profit by whichever country decides to give this a go is a very strong incentive. Not only could they collect a tiny percent of each transaction but they would earn huge amounts of interest on their total deposits. Also, they would have a compelling reason to allow numbered accounts not associated with any individual since they would get to keep all funds in such accounts when the owner losses their password (or cryptographic key or whatever). It’s hard to imagine that no country would take up this opportunity if they already see a true cryptocurrency gaining legitimacy. A system like MontCash would be far more attractive to most normal users as it could offer accounts denominated in various stable currencies (dollars, Euros etc..), greater user friendliness and more flexibility (you could potentially set daily transaction limits for your account, give up some degree of anonymity for password recovery options etc..) not to mention solving the long transaction times and high overhead costs (paid for in fees rewarded to miners) in cryptocurrencies.

In short, it’s hard to imagine that cryptocurrencies will win the day when for everyone but the hardcore technoanarchist their needs can be better met by a system that governments would see as less bad and can bring into being at any time.


  1. It’s not possible to maintain a rate of return substantially outpacing global economic growth indefinitely and eventually even the most irrational speculators will realize the good times are over and either liquidate their investments to speculate elsewhere or store their value in a safe asset. If, at this point, there isn’t sufficient non-speculative investment in the cryptocurrency to support it’s price the price will crash as speculators race to sell. 

Bitcoin Arbitrage

So doesn’t this suggest that you can just hang around on Bitcoin forums/chats/etc and use that info to arbitrage your way into substantial sums (by using your info about likely resolution of bitcoin forking/update discussions to predict prices in ways that are already occupied in developed markets)?

I mean I suppose there is the limitation on leverage. You can borrow for stock trades using your stocks as collateral but I don’t believe you can do the same yet with bitcoin. But still seems like a good deal. Is there any other reason this won’t work/