Here’s one way to paint a picture of the world.
An economic world, but a world, nonetheless.
This world took shape more than 70 years ago as it coalesced around fiat currencies.
The Bretton Woods Agreement in 1944 was the spark. This postwar agreement pegged other currencies to the U.S. Dollar and made all dollars convertible to gold at a fixed rate of $35 per troy ounce.
Onwards this system marched until 1971 when Nixon accelerated that shift by abandoning the dollar’s convertibility to gold. The U.S. soon thereafter got Saudi Arabia to sell all their oil for dollars and the Petrodollar was born. The SWIFT global payment system came online at that time, and Bob’s Your Uncle, the US Dollar soon denominated almost all trade.
Since 1971, fiat has truly rose ascendant. It dominates all economic activity. And while everyone felt free to move from one fiat currency to another, and conduct business however they want, everything was still in fiat.
This fiat world is heavily gated. And at the gates stand banks, brokerages, and custodians. Unless you’re talking briefcases and smuggling in cash, there was no way to move money without working through gatekeepers.
But a decade ago Bitcoin came to be. It birthed a decentralized universe beyond the existing order.
And that forced me to paint a new picture.
Dawn of the CryptoVerse
In this new picture, Fiat World still exists, of course.
In fact, it lies at the center of everything, with political influence pulling all social power towards its center. It’s a difficult force to counter. Almost all money and wealth in the world is caught in the grip of its orbit.
Before Bitcoin, this was “All that Is” – at least from a global economic perspective.
But Bitcoin made possible a CryptoVerse that could expand around Fiat World. A decentralized universe beyond Fiat World’s centralizing political gravity. One populated by open source, permissionless, cryptographically secure technology.
This technology could be based on blockchains. It could be built on DAGs. It could be built on other distributed leger technologies. It doesn’t matter. It only matters that they be open source, permissionless, and cryptographically secure.
This expanded reality offered an avenue for Social Entropy to channel itself. It provided a pull of social power from the center and served as a counter to the overwhelming political gravity.
Because of the CryptoVerse’s potential, a zone opened between Fiat World and CryptoVerse. Call this the “Offramp Zone.” It is centralized and includes your popular crypto exchanges and currency-backed crypto like Tether. Companies in this zone help move your dollars into crypto.
And, importantly, the Offramp Zone is the only place that centralizers can attempt to manage and control the migration of power from Fiat World to the CryptoVerse.
Now, once you reach CryptoVerse, you’re free to move about as you wish.
This is my mental model of the economic universe today. And my primary thesis is that the Social Entropy force acts to push assets and activity outward into the CryptoVerse.
How fast that transition happens depends on how quickly Fiat World destabilizes. But companies operating in the Offramp Zone will facilitate that movement.
Biden’s recent executive order on crypto is all about discovering how effectively they can bring Off Ramp Zone into the gravity well of Fiat World.
And if the SEC’s history with crypto is any guide, that gravity has reached its limits.
The Limit of Centralization’s Reach
Back in 2017, ICOs (Initial Coin Offerings) boomed.
Smart contracts provided a way to fund new projects entirely with crypto. And the crypto community thought they had found the perfect path around the SEC.
But, at the end of the day, the SEC stands between all American Citizens with capital to invest and anyone wanting to invest it. It doesn’t matter how much or from whom, you can’t legally raise any substantial amount of money without at least notifying the SEC of your intent.
That’s it.
ICOs were never differentiated in the law, so simply raising capital by calling it an ICO has no meaning. The real issue was whether to call crypto capital.
And from the perspective of regulating finance at all, what the SEC has done with crypto is sufficient in my view. It’s also about as far as they can take it.
Ultimately, the SEC or any centralized regulatory body is powerless to wrap its arms around a truly decentralized universe.
To do more, they will have to constrict freedom further. They could either prevent Americans’ ability to reach these networks selectively or build a closed system. But, more likely, their ineffectiveness will leave them with outlawry as the only option. Simply deem decentralized applications illegal thereby deeming all that use them a criminal – and then the hunt will be afoot.
Such a move would only accelerate Social Entropy in part because it would acknowledge their limits. But it would be all they have.
The very nature of crypto makes enforcement difficult. Actions that ease enforcement of decentralized systems necessarily increases that system’s centralization. In short, there’s nothing the SEC can do to increase its ability to enforce without undermining the very thing that gives decentralized processes their power.
And that’s what the SEC or any other agency will conclude once they discover how ineffectively they counter social entropy.
At least if they’re honest.
Who knows, we might all one day be labeled criminals. But only in the eyes of an authority that no longer wields power.
