What Canada Means for Crypto
“I sincerely believe that banking establishments are more dangerous than standing armies.” – Thomas Jefferson
In 1949, Frank McNamara was entertaining clients at Majors Cabin Grill restaurant in New York when he realized he left his wallet in a different suit. For our younger readers, a suit was a uniform men wore to project importance and, in this context, a wallet was a physical thing that carried important paper. Luckily for McNamara, his wife swung by the restaurant to pay his tab, but history was forever changed by that bit of forgetfulness.
Motivated by the embarrassing episode, McNamara and his partners co-founded Diners Club and launched the world’s first multipurpose charge card. In February of 1950, he returned to the same restaurant and became the first person to pay for a meal using a “credit identification card,” and the rest is history. According to data compiled by Statista, there are an estimated 725 million Visa, Mastercard, and American Express cards in circulation today in the US alone – almost four for every adult.
With the proliferation of credit cards and other forms of digital payment, consumers have slowly lost their visceral connection with money. A classic recommendation of budgeting gurus – one that now seems as outmoded as the answering machine – is to only pay for things using physical cash, since it somehow feels more real to part with four $20 bills from your purse or wallet than it does to swipe a credit card or tap your phone for an $80 purchase. Nowadays, such a recommendation would be virtually impossible to implement. The practicality of both accessing and using physical cash in our society is becoming increasingly difficult and rife with stigma.
The standard definition of money is any item or verifiable record that can function as a store of value, a unit of account, and a medium of exchange. When Richard Nixon took the US dollar off the gold standard in 1971, many were concerned the move would greatly diminish its function as a store of value. Judging by the debasement of the dollar’s purchasing power in the intervening 50 years, those concerns were well-founded.
Until recently, the dollar’s durability as a medium of exchange was never in doubt. Every piece of physical US currency was (and still is) adorned with the phrase “THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE.”
The digitization of currency ties each individual directly – transparently – to their money and empowers the state with decision power on whether any particular citizen is allowed to transact in modern society. Your money no longer represents stored wealth that can be exchanged for goods and services. Rather, it represents stored wealth that can be exchanged for goods and services as permitted by the state. Mostly gone is the anonymity that comes with transacting in physical cash – the ultimate manifestation of a decentralized currency. (Just try booking a hotel room with nothing but cash and a valid passport.) In its place we find myriad extrajudicial procedures and complex regulations that strip away our freedoms and, if left unchecked, will ultimately make way for the displacement of our representative democracies with totalitarian states.
In a staggering 56-part Twitter thread that recently went viral, an anonymous account by the name of @punk6529 drives home this point brilliantly. A link to the full thread is here. The core thesis is that one cannot have freedom of speech, freedom of assembly, or freedom of religion without the freedom to transact. Robbing a citizen of his or her ability to transact is a devastating punishment, and for the government to claim it has the ability to do so without judicial review or any reasonable recourse is the functional equivalent of totalitarianism. The 18th and 19th tweets in the thread are particularly compelling:
As we described in our last piece, Justin Trudeau has crossed the Rubicon in this regard, and if his actions become normalized, the entire edifice of Western democracy will undoubtedly collapse. Lest our readers think this is hyperbole or that Trudeau’s behavior will be contained to Canada, we point you to an excellent piece called In Praise of Bitcoin written by Dr. Ben Hunt (the article can be found here, and you can follow Hunt’s Twitter account here). In it, Hunt correctly likens the US Treasury to the Eye of Sauron. Here’s a critical passage (emphasis added):
“If there’s a Western governmental institution that is more unclouded by conscience, remorse, or delusions of morality than the US Treasury, I am unaware of what that institution might be. But unlike Wall Street, which is motivated by Flow, the US Treasury has an entirely different (but highly compatible!) goal.
The goal of the US Treasury is to see all of the money in the world.
That’s really all it is. That’s what Anti-Money Laundering (AML) regulations are all about. That’s what Know Your Client (KYC) regulations are all about. That’s what Report of Foreign Bank and Financial Accounts (FBAR) regulations are all about. That’s what the Treasury-led Society for Worldwide Interbank Financial Telecommunications (SWIFT) is all about. That’s what the Bank Secrecy Act (BSA) is all about. None of these programs are really about taxes. None of these programs are really about catching crooks or fighting terrorists. All of these programs are really about information for information’s sake regarding the greatest source of power in the world and the raison d’etre of every government on Earth: money.”
It is through a related lens that we have written skeptically about crypto in the past. We’ve marveled as US regulators allowed the crypto ecosystem to evolve, warned crypto participants that a crackdown is inevitable, and questioned how the “value” of one’s crypto holdings could be effectively transmitted back to the fiat world. Many have filled our Twitter feed and Substack comments section expressing the view that Trudeau’s descent into totalitarianism validates the need for cryptocurrencies. While we don’t doubt the demand for such exposure will increase because of his actions, we draw a more sobering conclusion. Trudeau’s actions destroy the concept that cryptocurrencies will ever be an effective medium of exchange. We recently summarized this view on Twitter:
Imagine you donated C$50 to the Freedom Convoy before it arrived in Ottawa, an action Trudeau has retroactively decided disqualifies you from participating in modern society. (This is not a hypothetical, at least if this Canadian Member of Parliament’s tweet is to be believed). Your bank accounts have been frozen, credit cards canceled, and access to your brokerage account denied. Further, imagine you have accumulated some Bitcoin in a cold storage wallet (i.e., on a flash drive in your possession), carefully ensuring that it is outside Trudeau’s reach. How are you going to pay your mortgage, car payment, tuition expenses, or buy groceries with it? The answer is you can’t. Does that wallet represent a store of value that might be reactivated in the future should the government change its stance towards you, or is itself changed altogether? Absolutely. Does it represent a practical medium of exchange, one that is useful during this personal crisis? Absolutely not.
At a time of utmost need, cryptocurrencies have proven they are not money. If they can’t be used to transact in the main, they’re just bits of data on a flash drive. Crypto proponents will argue that off-exchange peer-to-peer transfers are still possible and this enables bartering, or that you could move to a country that more widely accepts cryptocurrencies as payment. To these critics, we say thank you for highlighting the exceptions that prove our thesis. If that is all you have left, it is clear how much the government has taken away from you and how feeble cryptocurrencies are as a hedge. This recent Twitter exchange sums up our view nicely:
Unfortunately, we must also admit the same analysis holds true for gold, a conclusion that runs opposite to our previous thinking on the topic. However effective gold might be as a store of value, if the only available functions during a time of personal crisis are to facilitate bartering or fleeing, it isn’t money. Gold bugs and crypto advocates alike should be aghast at what Trudeau has done and at what those in the US Treasury undoubtedly have in store for Americans.
And therein lies the critical conundrum: alternative forms of money require a benign government to allow for their proliferation, but a benign government negates the need for alternative forms of money. This is a political problem, and no amount of Bitcoin or Gold Eagles will help when the political eye turns against you. Money is what the government says it is, and we just got a glimpse that our views – political, cultural…personal – form a relevant condition to being allowed to spend it.
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As always, great article. I work within the traditional finance sphere and have been buying Bitcoin for 2-3 years. I agree with your comments re: legality of the sector, which is why I sat on the sidelines for a number of years prior to buying.
I entered the sector as a trade around the Bitcoin halving cycle - aka my purpose was to buy Bitcoin legally, AML/KYC included, with legal US tender. And then the plan was to sell the Bitcoin at a higher price. The thesis played out, yet I am still adding. Here is why I remain involved.
First, a legal framework started to evolve throughout 2020; the OCC published a framework for banks to custody Bitcoin in July 2020. This was followed immediately by the “wall of institutional money”, which led to the frenzy of winter ‘20/’21. Legal/regulatory framework improved seemingly when it needed to. With an eye for these developments, and not laser eyes, I continue to hold and add opportunistically. Even before the Trudeau Rubicon was crossed, I was very aware that Bitcoin is far more trackable than traditional financial assets, given the multiples of rehypothecation that occur behind closed-doors in custody. Jeff Snider and Caitlin Long speak extensively about this, and we have seen into the belly of this beast with Lehman, MF Global, and others. I believe blockchain will disrupt the operations of every industry in time, and thus I am speculating the genesis protocol for this technology will increase in value over the long term, whether it be in the form of a currency or property.
Secondly, if you look at the construction of Bitcoin, from SHA-256 securing the network (developed by NSA), to the satellites and global computing network that allows for decentralized communication (developed by NASA), to the mysterious creator who has seemingly never moved any coins … I conclude that the chance that Bitcoin was invented, or blessed, by the US Government is not 0.0000%. Tracking technology was used to take down Silk Road in 2013. Rather than kill Bitcoin then, the IRS instead created a legal framework for taxing Bitcoin by 2014. Recently, US Space Force Engineer Jason Lowry has advocated for Bitcoin and described it as ‘military grade money’, though in no way asserted any US involvement. Even Gary Gensler has blessed Bitcoin given its genuinely decentralized evolution.
So say, hypothetically, there is a 1% chance an arm of the US Government was involved in the development of Bitcoin. With that stipulation, would your evaluation of the space be the same? You pointed out Dr. Hunt’s assessment that “The goal of the US Treasury is to see all of the money in the world”. Bitcoin is not money, its property; but its about as trackable as they come were it to be considered money sometime in the future. Accordingly, I have sized my position for this unknown.
Lastly, thinking about future, we don’t know what it holds. There very well could be a new government based on the desires of the constituency. Or who knows what else. The Strauss-Howe Generational Theory is playing out essentially to script. I concede that my journey in the space may have me thinking like a ‘maxi’; however, I find the tone of your pieces regarding crypto/Bitcoin to be more black & white than you’re other pieces. Typically, you explore a current situation and then build an assessment of the future which is directional, but dynamic. Yet your pieces involving Bitcoin read absolute, in my opinion. Curious to understand whether Doomberg views the space in a static light, or if the team is reevaluating the space as it matures. Given the years of experience in a vast array of fields represented by the Doomberg team, it surprises me that the unanimous view on this revolutionary technology can be so resolute.
In all sincerity, thank you again for the great work you publish and I hope my comments don’t read as combative. I’m at the point where I am trying to find ‘FUD’ that can’t be busted – so I invite any and all criticism of the sector. And I greatly respect the work your team & Mike Green have put out in the face of a vitriol laser-eyed army. Its commendable and I look forward to your coverage, both positive and negative.
The world order is changing (crumbling) before our very eyes today, exposing the all-seeing Saurons as having no clothes as the tanks roll in, rhetoric and promises (even nuclear treaties) as hollow at their core, sanctions as futile, long-standing policies as having failed and succumbed to entropy as all human systems inevitably do -- instituting an era of tectonic change, historic geopolitical realignment, and increased degrees of uncertainty and chaos.
And yet on this very day Doom has chosen to write to us on the fatalistic inevitability of the same all-powerful technocrats to be able to dictate and control the daily, minute behavior of 8 billion people on the planet simultaneously. Regardless of the odiousness of this view, for it to even be possible it would require competence as a necessary condition, and anyone with two eyes can see for themselves today that such competence is in very short supply. Anyone who is too afraid of what is coming can buy their respective sovereign bonds and fatalistically allow the same Saurons to softly default on them on the order of -3-5% or so a year.
What is happening today is a lesson in real economic power, a lesson Wall Street has shorted for decades and has no fundamental understanding of. At the end of the day, the Boomers and prior generations that have led the world into this historic debt default, and the decline of an empire and a world order, need the young people to actually do the work, pay the taxes, fight the wars, and effectively bail out all of their bankrupt programs and assets. The real economic power lies with the young. They need only to seize it.