Worry About Humans Not Laws

In last month’s issue, I looked at the shifting paradigm as we potentially end the mildest bear market (statistically) in crypto’s history.

In this month’s issue, I offer my commentary on the US’s reaction to cryptocurrency.

If you want to hear an auto-narration instead of my voice, head over to the Medium version of this post.

Lest ye think otherwise, I am a fan of US Federal Reserve Chairman Jay Powell. He does the best he can with the cards he’s dealt and the tools he has at his disposal.

No human creation can serve every need of every person all the time. The fact that the legacy financial system works well enough is a worthy accomplishment.

My problem?

For all the good that system does, it too often fails to meet the needs of too many people—and whenever somebody from outside of that system presents any alternative, improvement, or contribution that can meet those unmet needs, they’re treated like an idiot or an enemy.

Expertise is not necessarily authority

For thousands of years before the advent of modern economics and central banks, humans were able to build functional economies that worked at scale.

These economies delivered goods and services across long and short distances, to people who spoke different languages, followed different customs, and lived under different rulers. They spawned trade and financial networks that created global prosperity (though, like ours, not everywhere all the time).

Is it possible that humans are resilient and sensible enough that they can take care of themselves without the supposed wisdom of our financial leaders?

Our modern financial system was created in response to a series of crises. After the first crisis, somebody discovered a solution that worked well enough. Because it worked well enough, people accepted it as the truth and developed expertise around its design and implementation.

Until the next crisis forced somebody to find another solution, new truths, and new expertise.

Then another crisis forced somebody to find another solution, new truths, and new expertise.

Until the next crisis, and so on.

That’s a lot of truth and expertise. Also, a lot of crises, too.

With all that truth and expertise, why does the modern financial system still lurch from one crisis to another, from one country to the next, across space and time? Why does it have so many problems?

Why are all the solutions so complicated, costly, expensive, and fragile? Why do they always seem to favor the wealthy and well-connected?

If our financial leaders really know as much as they say they do about how these things should run, and those solutions are as good as they think they are, then why does it seem like something’s always breaking? Why do they always have to fix something? By now, shouldn’t it just work?

Maybe we’re not idiots or enemies for suggesting new ideas.

Is it ‘truth’ or ‘close enough’?

We can all agree on economic basics.

Supply and demand, premiums and discounts, behavioral economics, the Pareto principle, etc. Very compelling stuff. As close to empirically proven as you'll get in economics.

What about the rest of it?

“A little inflation is healthy.” “You need an elastic monetary supply.” “Inflation is always a monetary phenomenon.” The Cantillon effect. The Phillips curve and its variations. Other economic truths that the “experts” are allowed to disagree with, but we’re forced to accept.

What if these are not fundamental principles? What if they’re simply the things we need to make our contemporary financial system work?

Solutions, not truths. Approaches, not principles. Something we can use until somebody comes along with something better.

Once you go beyond some basic concepts and general frameworks, isn’t it possible that modern economics is not a set of universal rules, but rather, a set of system requirements?

When you change the system, you change the requirements and get a different outcome.

Physics was considered a settled matter until Einstein published his theory of relativity. Human flight was considered impossible until people discovered the concepts of thrust and lift.

Some ancient cultures believed all things consisted of a mix of elements: dirt, wind, fire, and water. Later, scientists discovered all things consisted of a mix of different elements: atoms.

Is it so bizarre to think that you can run economies on computer protocols? When you subject financial concepts to market forces, test them in controlled environments, and expose them to real-world usage before they reach “adoption”, isn’t it possible you can get a more robust, resilient, and durable outcome than whatever’s worked in the past?

How do they know we can’t create vibrant, functional markets with something other than our government’s money?

Challenge assumptions

As we move through the legislation and litigation phase of crypto’s development, you will hear a lot of people say crypto has no value. It’s useless. We’re doing everything wrong! The market will never go up again. Governments will crush, curtail, or curb the speculative enthusiasm that drove prices to previous all-time highs. The technology will fail.

Too many people assume today's prices are bad because they’re lower than they were in 2021.

I’d argue 2021’s prices were bad because they were excessively high. Today’s prices are good because they’re much lower.

Of course, no altcoin is worth its price today, but eventually, the good ones will be worth so much, you’ll laugh about ever having any doubts.

For now, some of your favorite altcoins will languish, seemingly dead, despite tremendous efforts to build, grow, develop, and improve.

You can choose to get mad that the previous all-time high seems out of reach or you can choose to accept that you’re getting a 90% discount on the same investment opportunity you had in 2021.

If you stake, contribute to liquidity pools, and participate in the protocols, you can grow the value of your investment when prices don’t go up. For one example of that, check out the March 24, 2023 update.

As long as your altcoin is legitimate, people still work on it, and its community cares about it, you have the same upside now as you had before. I report on these types of altcoins in my Altcoin Reports.

These altcoins are legit and building something durable. Some have gone up a lot since November, others continue to fall. As a result, people write them off as “dead” or “bad.”

Once altseason comes or YouTube confirms “the bull market’s here,” their prices will be 200-500% higher than today.

Until then, their prices will go in whatever direction bitcoin’s price goes. For that reason, you only need to watch bitcoin.

A plan for all

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On average, you have 30% more bitcoin than you would have gotten from dollar cost averaging and you almost certainly beat most traders. You sat out most of 2021, bought for most of 2022, and caught the first part of 2023. You’re waiting for the next opportunity, which could come at any time.

Premium subscribers, I’ll tell you when that time comes.

As the US loses, the crypto market wins

Mark, US regulators will kill crypto and shut off the banks! The recession is about to start. Where’s the money going to come from?

Everywhere else.

There are 7 billion people who don’t need to care about the US or its regulators. They won’t necessarily suffer if the US goes into a recession.

Many of those countries are building regulatory frameworks that embrace crypto. Even China’s letting Hong Kong get into the business.

Money’s already moving overseas. You can see this in many ways—for example, in the big drop of crypto in the custody of known US entities compared to crypto in entities located in the rest of the world.

Even if US regulators crush US crypto companies, Wall Street will figure out how to get US money into the market in “safe, compliant” ways (or else DEXs will beat them to it).

Traditional firms aren’t getting zapped (yet), only some of the crypto-native ones.

And nobody’s going after bitcoin.

All law is semantics

That doesn't excuse the US for its bad laws and nonsensical enforcement of anachronistic regulations.

People dump on Securities and Exchange Commission Chairman Gensler for treating every crypto like a security, but he’s right, legally speaking. Under US law, securities have four elements:

1. An investment of money

2. A common enterprise

3. A reasonable expectation of profits

4. Profits derived from the efforts of others

Every cryptocurrency has all of those elements.

Ok… sooo… let’s put this to the test.

Pokémon cards.

• An investment of money? Yes.

• A common enterprise? Yes, you have Game Freak, Nintendo, and millions of unpaid aficionados who put time and effort into Pokémon and its various business properties (movies, conventions, chat groups, fan fiction and such).

• A reasonable expectation of profits? Yes, in fact, many people buy Pokémon merchandise solely for the purpose of selling to others. They have entire stores and websites dedicated to making money from Pokémon cards and related business properties. Lots of eBay listings, too (including fraudulent and fake items). We all know people who buy packs of Pokémon cards just so they can get the rare ones to sell online.

• Profits derived from the efforts of others? Yes, without the common enterprise’s efforts to promote Pokémon and develop its related business properties, the cards would be worthless.

Certificates of Deposit

• An investment of money? Yes, you literally give money to the bank.

• A common enterprise? Yes, by definition.

• A reasonable expectation of profits? Yes, the bank promises you will make money.

• Profits derived from the efforts of others? Yes, the bank does all the work.

Compact Disc bootlegs of a new, undiscovered band?

• An investment of money? Yes, you have to buy the discs.

• A common enterprise? Yes, it’s a band.

• A reasonable expectation of profits? Yes, the band says you can burn a copy for yourself and sell the rest to others.

• Profits derived from the efforts of others? Yes, the band does all the work.

Robux?

• An investment of money? Yes, probably my son’s biggest expense. In fact, Roblox earns most of its revenue from selling Robux.

• A common enterprise? Yes, Roblox and everybody who builds, plays, and buys things in the Roblox metaverse.

• A reasonable expectation of profits? Yes, many people build experiences and play Roblox games to make more Robux, like we do with crypto.

• Profits derived from the efforts of others? Yes, Roblox creates the platform, hosts the servers, and does lots of other things to make Robux valuable. Also, Roblox creators develop games and experiences while Roblox users put time and effort into playing them.

Do those examples seem convoluted and nonsensical?

Yes.

Is that a double standard?

No. It’s semantics. The law means whatever you want it to mean.

When you can’t defend the merits of your argument, debate the meaning of your words.

It’s clear, but is it correct?

We’ll see how the courts respond to what the US regulators are doing. Sometimes, common sense matters more than clarity.

For example, on the Jewish holiday of Sukkot, Jews build huts called sukkahs close or connected to their main house. They eat and sleep in those structures for a week.

Do they need building permits? They’re literally building new structures. And dwelling in them, nonetheless!

No, they don’t need building permits at all. They don’t even need to update their plot plans.

Sometimes, people fly remote control planes outside of my house. Do they need to contact the Federal Aviation Administration or the nearest flight control tower?

No, they don’t even need a flight plan, even though they’re literally flying a plane in a residential neighborhood!

Riding mowers are literally motor vehicles but you don’t need a driver’s license or registration to drive them. Those are dangerous contraptions!

Why don’t we apply the laws to those things?

Because that would be unworkable, counterproductive, and needlessly burdensome.

Just because we have the best building codes, aviation regulations, and vehicle laws doesn’t mean we need to treat every structure, flying device, and self-driven machine the same as every other, even if the regulators themselves say that we should.

What would happen if local governments forced Jews to buy permits to put up four posts in a square with some branches as a roof? If the FAA to required plane IDs and flight plans for remote-control flyers? If the local DMV made you register your lawnmower and get a driver's license before you operate it?

I don’t know, but I don’t think anybody would say Jews, plane enthusiasts, and landscapers are scofflaws with a culture of noncompliance if they objected or asked for clarification.

Who’s in charge?

If you take the US government's position on crypto to its literal extreme, we should put the Federal Aviation Administration in charge of toy planes, the US postal service in charge of email, and the Commerce Department in charge of online newsletters.

Should the Department of Defense regulate the internet because people use it for espionage and warfare?

Why do we assume the SEC is the proper regulatory authority here? They don’t regulate Pokémon, Roblox, or CDs. They also don’t regulate other assets that fit the Howey test, like baseball cards and bankruptcy claims, even though they have the legal authority to do so.

Maybe the US needs a new regulatory regime.

Did anybody consult the Federal Trade Commission?

The FTC has authority over consumer protection from fraud and deception. Seems like a great fit for NFTs, stablecoin issuers, and crypto exchanges.

What about the Consumer Financial Protection Bureau? CFPB protects consumers against bad faith and abusive activities of financial entities. Why can’t we let them supervise crypto exchanges and new token creators? Go after the actual abusers rather than the cryptocurrencies themselves.

Why not bring in the Federal Communications Commission? FCC regulates the internet. Crypto is sent and received on the internet. Some call it “the Internet of Money.” Does the FCC have a role here?

Can we talk about more obscure areas of law?

For example, regulation E forces money transmitters to protect your funds against hacks, theft, and fraud. Securities and commodities are not “funds” under federal law.

So, if you force nodes and smart contract developers to follow regulation E for crypto transactions, does that mean crypto is no longer a security or commodity? Or is this an exception? Given how cryptocurrency networks function, can any government enforce regulation E in the first place?

What about free speech?

Cryptocurrencies are money that runs on computer protocols. Should we give cryptocurrency the same protections we give other forms of money? Should we give the same protections to crypto that we give to computer code?

That would make securities laws unconstitutional as a restraint on free speech (and possibly violate fourth amendment protections of personal property) when applied to cryptocurrency.

Absurd standards

If the US insists on interpreting its laws so literally, it will soon not have to worry about what its cryptocurrency businesses are doing. Those cryptocurrency businesses will leave.

The US will still have to confront all the problems cryptocurrency presents, except without the jurisdiction or administrative reach to do anything about it.

Could you imagine what would’ve happened if, when the internet came along, US regulators said email must follow all the rules of regular mail and email providers must follow all the rules of the postage service?

Was CompuServe supposed to register each of its servers as letter carriers? Did it need to create unions for its workers? Charge a fee for each email?

Would CompuServe be held liable for emails that didn’t go through—even though it had nothing to do with the protocols that deliver the email to where it’s supposed to go?

Did CompuServe need to buy insurance to protect against lost emails or mistakes by its servers?

When CompuServe raised a fuss, I’m sure somebody would’ve said “obviously, you’re delivering mail, just because it’s electronic doesn’t mean you get different rules. The rules are clear—or maybe you’re just trying to hide all the messages going to TERRORISTS, SCAMMERS, AND MONEY LAUNDERERS. The problem isn’t ambiguity, it’s a culture of mass non-compliance with existing laws, and email can’t be let off the hook!”

You can bet CompuServe would’ve gone somewhere else, as would AOL, Yahoo!, and all the other early internet companies. We’d still have a robust internet (some would argue a better one), but the US would not matter much.

Mark, the Internet is not crypto!

True, the US didn't have a massive, entrenched regulatory regime for protecting and delivering mail, like it does for finance. It didn’t dominate the global postage industry to the point where everybody who wanted to send parcels and packages needed to interface with the US postal system as they do for the settlement of most of the world’s financial transactions.

The Internet didn’t threaten the supremacy of the legacy financial system.

Cryptocurrency does.

Signs of grief

Some people say that’s why cryptocurrency will never succeed. Without the US and its money, crypto is doomed.

They might be overlooking how much time and effort goes into the legacy financial system.

Layers of complex and expensive regulations. Bureaucracy and oversight. Treaties and machinations. Legal burdens and administrative costs—all hidden from the customer and packaged into spreads, service fees, commissions, and government budgets (somebody needs to pay for courts, lawyers, regulators, and their staff).

Cryptocurrency promises to deliver those same results with less complexity and none of the hidden costs. So, you can understand why the US regulators want to bring the technology to heel. One Senator even promised to raise an anti-crypto army.

The crypto community sees them as financial warmongers. Enemies. Persecutors.

Do you know what I see?

Normal humans who are working through the five stages of grief: denial, anger, bargaining, depression, and acceptance.

We like to think of our leaders and institutions as stoic, thoughtful, and intentional.

In reality, they’re human, and, like all of us, they experience the emotions that come with being human.

If the IMF report and US regulatory actions say anything about the mental state of those who lead our legacy financial institutions, they seem to be in the beginning stages of the grief cycle: denial, anger, and bargaining.

Put yourself in their shoes.

Somebody created a monetary technology that undoes decades of your work and renders your job obsolete.

It's not very good yet, but a growing number of people put time and money into systems built on this technology rather than your own. In three out of every four years, the value of this technology grows faster than the value of your technology. It’s innovating at a much faster pace and attracting many more developers and engineers.

You might deny it. “It’s only for criminals.” “It’s too slow and volatile.” “It can’t scale.” “Nobody uses it for anything.”

You might get angry. “They’re all frauds, they’re destroying people’s lives, we need to put them in jail and regulate them away.”

Or you might bargain. “If we cut them out of our banking system, then we’ll be safe.” “Let’s make some rules first.” “You guys can gamble on cryptocurrency, but you can't deduct losses from your taxes.”

Maybe we can think of it this way:

• 2009 to 2019: denial

• 2020 to today: anger and bargaining

When will we see depression and acceptance?

Maybe after one or two more market cycles.

Worry about humans, not laws

No government can control the financial activities of the entire human population. No single financial system has yet captured all the value that humans create.

With cryptocurrency, both of those things are possible.

In this new world, our financial elites must give up their closed systems of control. They must accept the capital flight, regulatory arbitrage, and flow of tools, money, and talent to anybody, anywhere, without restraint.

They must learn to navigate a system where the benefits go back into the hands of the people who use it and the networks they build with it.

Scary thought, that.

Give our leaders the space and time to sort out their feelings and come to terms with the world they’ll have to live in.

Many of them share our concern about the welfare of people who worry they will never reach their financial hopes and dreams.

They simply see crypto as an expensive, slow, clunky technology full of criminals, hostile entities, and buggy, complicated protocols.

To them, the legacy system is better.

Mockers don’t listen to rebukes

Mark, stop comparing crypto with the legacy financial system! At least it does something good. Crypto has ruined millions of people’s lives! 

I’m not sure you want to compare the number of people hurt by crypto to the number of people hurt by the legacy financial system, but I get your point.

What you’re really saying is, “crypto has ruined millions of people's lives without contributing anything in return.”

On that point, it’s tough to argue against you.

I’d hate to snuff out all the potential good that this technology can do just because it’s gotten off to a bad start.

Maybe there’s a consolation.

Other technologies seem great or harmless in the beginning, then cause problems later. Who would have thought that toy drones would destroy the environment and kill thousands of people?

Crypto can flip the script—get the bad things out of the way first, then solve problems later. Iterate away the flaws and harden the technology against scams and frauds, then revolutionize the way people move money, property, and rights from one to another.

I suppose we’ll have to see how it goes.

Before we can have constructive conversations around these topics, our financial leaders need to process their emotions. As they work through their feelings, they will say bad things about crypto and maybe about you, too.

Take their words to heart and reflect on the substance of what they’re saying, not the hatred with which they deliver it.

Some of them don’t actually care about us or crypto, they see some social or political advantage in fighting us. They’re using us for their own selfish aims.

Open the conversation anyway. Many will not like what you say. Some will listen.

In any event, there’s no point in arguing. Mockers don’t listen to rebukes. Leave the fighting for lobbyists, lawyers, and legislators. Keep building, investing, contributing, and learning.

If cryptocurrency does what we think it should do, we will never have to worry about the actions of our financial elites. They will have to worry about ours.

Keep your feet moving

Crypto is a non-violent movement. Politics is not.

Politics is for fighting, punishing, insulting, demeaning, and destroying others. Let’s not mix the two together.

In the US, you can already see the contours shifting as crypto gets more partisan. Too often, it’s no longer about the merits of any proposal, but about protecting “our guys” or attacking “their guys.”

Some people will give votes and money to politicians who say good things about crypto or advocate for things that the crypto industry wants. They have no idea whether those politicians will deliver on any of those promises. They feel compelled to do something anyway.

Fortunately for us, we don’t need to get involved in that. Cryptocurrency doesn't need entities, institutions, or governments.

Every bit of time and money you spend getting the legacy financial system to “adopt” cryptocurrency is time and money you take away from some developer, entrepreneur, engineer, or financial expert who has a vision for cryptocurrency and the tenacity to turn it into a reality.

On top of that, you’re tying your fate to a corporation, entity, or regulator who cares far more about its own welfare than it cares about yours.

The legacy financial system does great things. So does crypto. Let’s see where crypto can do things better and where the legacy financial system can do things better. The markets can sort everything else out.

If you're not already on the premium plan, now is a great time to sign up. You get:

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Hopefully, you already have a good allocation to bitcoin.

Once you have that, look at altcoins, preferably small ones. Market bottoms are the only chance you get to buy altcoins and expect to outperform bitcoin as the market goes up.

Otherwise, you have to hope for altseason, get in before that altseason starts, and sell before it ends (it’s hard to get the timing right).

Also, 90% of altcoins in the top 100 will not stay in the top 100. See my review of the Top 100 (hurry, because the commentary is already getting stale).

Many large altcoins will continue to lose market share. Small ones give you the best chance at huge multiples, not because they're more likely to succeed, but because when they do, the growth is massive even if we never get another altseason.

Your winners will make up for the ones that go to $0.

As for the overall market, if you’re on the premium plan, you know what to expect. So far, everything is going to plan.

Let's hope that continues.

Relax and enjoy the ride!