This is a lightly edited version of my tweetstorm on ICOs which went viral. Mostly I just added links.
The long anticipated ICO freeze is coming.
The recent Munchee ICO shutdown is a good example of what’s here now, and what’s to come.
I have three thoughts on this phenomena and how it’s going to shape the markets as we go forwards into the regulated portion of the blockchain’s future.
The first thing is that the smart money has always known the regulators were coming. Here’s what President Obama had to say on the matter in 2016 when he visited SXSW and discussed encryption in a Q&A.
THE PRESIDENT: And the question we now have to ask is, if technologically, it is possible to make an impenetrable device or system where the encryption is so strong that there’s no key, there’s no door at all, then how do we apprehend the child pornographer? How do we solve or disrupt a terrorist plot? What mechanisms do we have available to even do simple things like tax enforcement? Because, if, in fact, you can’t crack that at all, government can’t get in, then everybody is walking around with a Swiss bank account in their pocket — right?
Obama made it clear nearly two years ago. Look at the length of this Reddit thread: people knew what was said, and reacted. The President told us the way this was going to go. Don’t be surprised now.
The second thing is that the regulators have an amazing array of tools at their disposal because people have been fleecing the public for centuries. Law evolves. Securities law, insider trading, anti money laundering etc. “Token” isn’t a legal category, so the courts gets to define what it means case by case.
The third thing is now that the regulators are in motion, they aren’t going to stop moving. They’ll keep going until they’ve created a world pretty much like the one we have. They are the forces of the status quo: not of evil but of stasis. BTC represents nearly violent change.
We now enter the special kind of hell reserved for innovators that must negotiate with The Great Leviathan. The old order wants many things, some good, some evil. But it holds all the cards that the innovators don’t, and that’s 95% of the economy and all the power. Mice and dinos. The internet goes through the Napster years, then a winter, then the bittorrent years, then a winter, then Netflix and Spotify. That equilibrium holds: DRM in some areas, open formats in others, a sort of messy middle ground detent between future and past forms: a new balance.
So let’s examine the Full Vision around BTC:
- The economy goes 100% dark.
- Government can’t tax.
- Welfare collapses.
- The military collapses.
- The supposed upside? Property rights define society.
- The nerds inherit the earth.
In this scenario we have 99 million new enemies, some with nuclear weapons. Everybody who loses out, and that’s most people and nearly all of the structurally powerful institutions, fights every step of the way to this outcome. It’s unlikely the plucky resistance, however right they may seem, win against those kinds of odds.
So that’s not happening. Instead, we co-opt forces. Big Tech starts selling braindamaged blockchain-lite. Banking flirts with it all. A lot of traders make a lot of money. The lawyers warm. Some of the trade people go hmm. That’s a power base. Not much of one but we have friends.
$500bn is a lot of money.
$500bn the kind of money that can buy things like lobbyists and maybe fund some election campaigns. It’s enough to be a sector, an industry with a voice and political influence. We start to buy our way into the negotiations of the real powers. What do we offer at those tables? Well, here’s how you get a seat at those tables: you solve a problem everybody wants solved, and that nobody else can solve. Supply chain financing (2h video with transcript of a very detailed discussion on SCF) is a really good fit for that problem. So is provenance of goods. So are remittance payments.
But the great grandaddy of horrible problems blockchain can solve is terrorist and criminal financing. They might ID people before they let them trade on the blockchain, and then they have a totally transparent payment map of the entire society. That’s really what The Powers That Be want from blockchain.
AH! You say, but BTC is anonymous or pseudonymous, and zcash can blind transactions in any system with a gateway. Yep, you bet, right on. So there’s the battle lines for the next five years: zeroprivacy vs. zcash. Use and abuse of zksnarks. Authoritarian vs. libertarian, all on very similar tech base. That’s a very complex future political situation, for sure. If we were smart, right about now, somebody would put $100m in a bucket and start buying influence using DC lobbying firms, and whoever does that job at the UN, particularly the ITU. Those are the fights we have to win not to wind up as dead as Napster and The Pirate Bay by 2020.
Is too big to fail just for banks?
The dotcom bubble peaked around 3 trillion of value, 6x the BTC bubble. Consumer spending online wasn’t enough to support a bubble of that size. BTC has to get industrial uses in supply chain to survive: it has to become a trade instrument. I don’t mean this tiny consumer spending B2C or darkweb applications. I mean people have to be buying and selling oil and aeroplanes for BTC. You say “but price volatility” and I say “I KNOW!” Because if nobody’s selling anything for BTC except dollars? Big trouble. Let me explain.
Right now BTC works like a foreign currency. The enormous sell off of dollars to buy BTC is best understood as a currency bubble. It’s not shares in a company: companies make things. As I’ve said before, the future is a foreign country, and it is also our largest trading partner. BTC is the national currency of The Future, and people are shorting the Present to buy the FutureCoin. (Throughout I’ll refer to BTC. I really mean “and all the other currencies.”) People buying bitcoin are shorting status quo.
But The Future shares a geography with The Present. The governments own The Present, and you can’t just open “The Future” right in the middle of their turf without a dialogue. But a lot of people with a lot of money are performing a great hedge against a dollar price collapse brought on by political factors — you can imagine what a Trump impeachment followed by insurrection in the South would do to bitcoin prices, can’t you? Well, so can other people: that’s part of the risk everybody is hedging by buying Bitcoin. But, right now, nothing is for sale in BTC other than other currencies, and a few share-like instruments in companies that aren’t actually doing any real trade yet. We have a huge slab of unhedged political risk tied up in our Future Coin holdings. This is very unstable If America’s governance recovers from the strain Trump has put on it then the Machinery of State kicks in, trims BTC down to something it can manage (probably with KYC regulations) and you get a safe Present/Future mix, 80%/20% or maybe a bit less. Life goes on: no revolution!
If things stay harsh, however, there isn’t enough Will in Team Present to rein in Team Future. And this, my dearest friends, is where the crap truly hits the fan. Because Team Future don’t have a plan. They have brutal tactics, but no sense of what world they are building.
The naive Libertarian dream has precisely zero chance of working. The simplest argument against it is that an unprepared and heavily indoctrinated population (with alleged generations of programming by the allegedly left wing media) will simply refuse to play ball. Monopoly regulation and environmental law are worse theoretical problems: it’s easy to start Libertarian and wind up with corporations becoming de facto government, as happened in America around the railroad companies. Without much more sophisticated approaches to these issues, naive Libertarianism not ready to run. Sophisticated Libertarians can argue against all of these cases, but in most cases they are not the ones running the movements!
Of course, electoral democracy has also broken down — target advertising house-by-house has made money so terribly, terribly good at buying elections that even the Russians could spend a dime and buy a whole passel of trouble in America. So we’ve got Broken Present (unstable governance and bad decision making), and No Future (because the tech-Libertarian political model is not yet ready, because it isn’t complete enough to run a society.)
So what do we do?
Well, let me propose a philosophy you might want to master: Progressive Utilization Theory aka PROUT, a highly unconventional Indian alternative to capitalism from the 1960s the goal is a society without waste, including of human potential. Now I am not recommending PROUT. It’s old, it hasn’t seen much in the way of updates since the man who invented it died, and it’s socialist in some very unhelpful ways. But there’s the seed of an idea there: blockchains could enable a nearly zero-waste society. What’s that worth? 10% of GDP? 25% of GDP? 50% of GDP? It’s certainly a very big number. And that’s a saving on top of the procedural savings involved in more routine blockchain use cases like auditable accountability systems.
A very low waste society is a fascinating place: I imagine that everything has a price and an owner. In that sense, I expect it to be Libertarian-like and efficient. On the other hand, unlike Libertarian visions of the future, a zero waste society must admit market failures need to be fixed by non-market mechanisms. But everything improves as you reduce waste: waste is entropy, and is not life the constant process of order winning against entropy, of pattern’s victory over mere chaos?
The sea container is sometimes said to have put 7% on global GDP just by putting things in metal boxes to move them around (the actual picture is more complicated). Tell me, as you look around the world, there isn’t at least that much slack waiting to be taken out of the system. It’s filled with unpriced waste you can’t buy to extract value from, because the transaction costs are too high. A zero waste society isn’t the only game in town. There are probably four or five other big plays out there: banking the unbanked, global identity w. crypto to protect your biometrics, microtransactions, currencies backed by natural resources, and C2C versions of fintech normally used for businesses (i.e. hedging a flight or insuring your car from breaking down on a family road trip.) These big play projects are at the same general level of ambition as “let’s map the entire world using satellites and drones” or “let’s connect people to everybody they’ve ever met” or “let’s digitize all human knowledge.” The dotcom era got several more of these things done (hello, mobile phones!) and I don’t see any reason the blockhchain era should not have at least as much impact.
You put all this stuff together, in an age of increasing and accelerating global change, and you break down some dumb structure around health, education, social care (i.e. medical records portability, transparent service pricing in hospitals) and the blockchain is soon indispensable to everyday life. If we play our cards right, we might even get there in a semi-regulated or only lightly regulated state.
What does half a trillion dollars of cryptocurrency mean?
So I wrote a piece when the Ether price passed $100, called “What does $100 Ether mean?” Comedically I had to keep revising the price every few days, until I just gave up and left it at $100. This argument I made in that piece is now roughly 10 times as true. We could, in theory, finance Elon Musk’s Mars mission many times over (video, and a good one!) and still be left with more cash than Apple.
At $500bn of assets, the crypto community is a real new global force, with phenomenal technical skills: we have twice the cash pile that Apple has. To secure our place at the table, and our ability to negotiate with the SEC and similar bodies we better be solving some real global problems. We have to actually have something to offer to society in return for society continuing to support us and put up with our occasional oversights.
I’m doing my part here. Mattereum.com (@Mattereum) is my bid to get the necessary legal frameworks in place to make direct control of physical property using the blockchain recognized in 150+ countries. I want to break the door open to the material world so you can change the status of a smart contract, and have a real-world court recognize that legal ownership of a fiat asset has changed hands. Fiddly, but it’s necessary infrastructure for all of our next steps together.
If a year from now we’re going to see the crypto space at $1tn of assets (rather than less than five hundred million), it’s going to have to be like Apple: used by a billion people every day, and loved by most of them. Otherwise, it really will have been a bubble, and the wealth will drain away as quickly as it arrived. Build like hell, it’s the only thing that gives us a right to exist.
Maintaining our political viability as we grow is going to need massive investments in public facing apps that solve real problems. We will need to show people things that really make people feel they are living in a better future to maintain these valuations. It’s going to require proof that we are the future, not just carpetbagging promisers.
What legitimizes our claim to be the future is that society needs us. If we can make that claim, and stand by it, the forces that police the present reality will leave us alone to build the future: they will also implicitly invest in the power and validity of our future vision. We need a bigger, better vision of the Bitcoin Future (and, yes, the Ethereum and general crypto future) if we are going to hold together the ship against pressure. I really believe that the Ethereum community has a ton of the pieces of that puzzle: smart contracts give us the reach to really interact with the real world. But we aren’t going to get to houses and cars on the blockchain without some real effort to find social utility in addition to the straight financial play.
Anyway, these are my thoughts. I’m trying to frame the zone of aspirations, the things we should be fighting for as we go forwards into 2018 — the year that the blockchain is recognized as a global power, and has to learn to act like one. Godspeed you maniacs, and all success!
If you want to learn more, here are some of my thoughts and predictions on the upcoming ICO market back in 2015 (!). Most of them hold up pretty well.
Finally, my most recent presentation talks about Mattereum and smart contracts: