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Global Cryptopolitics: What You Need to Know Before You Buy More Bitcoin

Published 2018-01-20 by StartUp Daemon
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“Grown-ups never understand anything by themselves and it’s tiresome for children always and forever to be explaining things to them.” – The Little Prince

Update: I originally published this piece in December 2017. At the time, I had slept about five hours over three days of hectic work on a number of projects. I wanted to publish and move on to the next thing, but my instincts told me to pull back out of concern that I could have missed something important. Experience has taught me to make sure I have done a satisfactory job of challenging my intuitions. Coming back to it some weeks later, I have changed little other than adding a brief section on Turkey.

Why Care about Cryptopolitcs?

One reason I ignored cryptocoins for a long time is their exposure to cyber threats. They are much easier to trace and disrupt than what the packaging says, and subject to security vulnerabilities just as your email or bank account. For the benefit of the most delirious Coin Fiends out there, I take this opportunity to congratulate the Bulgarian government on seizing $3bn in bitcoin and other cryptocoins, equivalent to about a quarter of the country’s national debt.

Please understand this, and understand it well. Cybercriminals aren’t anywhere near as dangerous to cryptocoins as governments are. A multipronged government crackdown has a much greater chance of disrupting cryptocoins than someone hacking an exchange from one’s grandma’s basement. A cyberattack can defile your hard drive; the government can defile your body too. That’s why the smart kids at school care about cryptopolitics at least as much as they do about cybersecurity.

Monetary systems are the main instrument of domestic control for political and economic establishments in the industrialized world. The global monetary system centered on the IMF and the petrodollar is the most important geopolitical battlefront. A child could tell you that no-one would cede one’s position at the top of the social pyramid without a fight.

Governments can disrupt crypto in two big ways:
1) Cyber ops (covertly).
2) Netblocking and legal bans (overtly and legally).

The recognized leaders in cyberwarfare are the US, Russia, China, Iran, Turkey and North Korea. With Japan having legalized cryptocoins, only China, the US and the EU could possibly have enough critical mass to affect cryptocoin transactions in a big way by banning or otherwise regulating them out of existence.

There seems to be a lot of uncertainty about government intervention. But that’s a muddled view of the situation. An international Iron Coalition has already cast its dark shadow over the future of bitcoin and distributed payments. I will explain the incentives and capabilities of each of the global players, so you can easily see what’s happening for yourself. The Iron Coalition is already at war.

EU: No Game

I put the EU first because it’s the most irrelevant of the top players. While it will remain the largest economy in the world even after Brexit, its member-states have their hands full with domestic issues. The migration crisis, decaying political establishments, Brexit, the continuing economic stagnation and the EU’s general disunity render it impotent despite its economic and technological advantages. Great is Europe’s moral decline.

The only EU power center which could mount meaningful resistance to crypto disruption is the Commission with its bureaucracy in Brussels. The Commission has broad regulatory powers not just within the Eurozone. However, the Eurocrats are already bogged down in a confrontation with Poland, Czechia, Slovakia and Hungary (the “Visegrad Four”) over immigration. The Four have the tacit support of the other eastern member-states.

If Brussels tries something radical against cryptos, the Four would have an opportunity to undermine and embarrass the Commission publicly. They would also have the firm support of Bulgaria and Romania, whose vibrant tech sectors stand to benefit greatly from the growth of distributed computing. That’s more than enough to put the fear in the Eurocrats. For these reasons, government response in the EU will likely remain anemic and mostly contained to the national level. If anything, regulatory action will make crypto trading more transparent, secure and mainstream, fueling demand.

US: Big Game

The US, where many high-profile Coin Fiends reside, is the most likely to try and restrict cryptocoins. Domestically, crypto is a serious threat to the banking cartel that controls USD issuance and extracts rents from the largest financial markets in the world. The US financial industry accounts for 7-9% of GDP, depending on how you cut it. And its political power is disproportionately greater than any other lobbying group, comfortably surpassing that of the MIC.

Conversations from the last few days [early December 2017] suggest that the higher echelons on Wall Street don’t quite realize how suddenly things are going to happen, but many know that cryptocoins are just the opening salvo of total financial disintermediation and the dismantling of their business model. The reaction so far has been of “deer in the headlights”, but panic is setting in and a crackdown by the “regulators” requires no special authorization from Congress. Existing law gives the SEC, the banking cartel and the surveillance agencies broad powers to monitor, restrict and conduct “enforcement activities” on financial transactions. IRS subpoenas and intimidation are a mosquito bite in comparison. And do we have any takers for civil forfeiture?

However, there is a powerful counterbalance that strongly favors the Coin Fiends. First, the financial industry has been reeling in the double deadlock of pseudo-compliance and collapsing spreads. The monetary tsunami loosed upon the markets has wrecked the hedge-fund industry and active management more generally. Even the money-center banks are looking for an out from the hell they created, as their margins are squeezed ever tighter.

Meanwhile, the financial sector is technologically backward relative to both the SV set and the type of people who frequent reddit, GitHub and hacking forums. Of course, there also are plenty of capable finance types and innovators who would welcome the opportunity to compete in the crypto world (and get rid of their incompetent bosses). All this makes it very difficult for Wall Street no-coiners to present a united front against the Coin Fiends. An important component here is Wall Street greed, which is headed for a blow-off top, unbridled by fear (because the banks own the pols). Many are already breaking off the herd to start selling crypto products: futures, ETFs, hedge funds etc.

Second, social media have pushed aside the corporate mainstream serving the financial sector. We will never know whether Twitter elected Trump president or Trump got the presidency by winning Twitter. In either case, everyone with a brain realizes that the balance of power has shifted away from traditional media outlets. And Coin Fiends on social media will fight tooth-and-nail to counter a swamp-creature attack on their bitcoin. History shows that the blue checkmarks stand no chance. And many of them will be joining the Coin Fiends for any such fight.

Third, D. J. Trump is president of the United States. He probably wants to be seen as unpredictable, but we have a lot to work with on the crypto issue. The president almost certainly has no hard view on bitcoin and no specific reason to try and disrupt it. (I wouldn’t be surprised one bit if the Trumps own coin.) He has also shown that he can take feedback on non-security issues, and adjust course. And did you hear that the Pentagon is being audited for the first time in history?

The real wildcard is national security. American power and the entire framework of US national security is built around the petrodollar. If you are wondering why the US have had military bases in the Middle East for decades (since long before Islamic terrorism became a thing), stop wondering. Petroleum is still the most valuable commodity on the planet, and it happens to be concentrated in a particular area. The US protect many regimes there and the regimes maintain the dollar monopoly. Most oil contracts are settled in USD, which effectively requires everyone to hold large amounts of dollar-denominated assets.

The petrodollar is the single most important reason why the US government has been able to rack up mountains of debt without losing its superpower status. All USD holders pay an annual currency-debasement tax (often called inflation). The growth of distributed payment systems is a major threat to the existing monetary order, so swamp creatures and the surveillance agencies may fight to defend it. On the other hand, cryptocoins offer new avenues for mass surveillance of financial transactions.

China’s Long Game

Cryptopolitics is critically affected by the US-China rivalry. The PRC’s key battleground with the US is not the Western Pacific, let alone Korea. China wants to dominate the South China Sea not just out of national pride and for a few cubic kilometers of natural gas buried at the bottom. The South China Sea is the route to the Persian Gulf and China’s main oil supplier – Saudi Arabia. Hegemony in the area is essential to China’s national security and ability to compete with the US in the Middle East. The Central Committee understands the importance of the petrodollar for America’s ability to project power around the world.

The Chinese – the world’s top oil importer – are launching a yuan-denominated delivery contract, which Russia and Iran can use to avoid sanctions imposed by the US. China has already made a deal with Russia to make the petroyuan convertible into gold, making it attractive for gold-hogging Putin, alongside more pipelines and deliveries from Russia. The growth of cryptocoins only adds fuel to the fire of petrodollars, with the added benefit of not antagonizing the US. Crypto is a backdoor for China to euthanize the petrodollar without a direct confrontation with the US on the monetary front. Anything that undermines USD dominance in international settlements is good for China.

But you have heard about the massive Chinese crackdown on cryptocurrencies, haven’t you? China struck bitcoin so hard that the epicenter of the crypto bubble shifted from the mainland to Japan. Well, that crackdown never really happened. The Chinese blocked the frothing wave of fraudulent domestic ICOs, which was threatening to engulf mom-and-pop speculators’ savings and cause social unrest. You can still purchase bitcoin in China and use it to skirt the country’s capital controls. If anything, the “crackdown” has made transactions safer and more reliable, although pricier. Eliminating competition from alt-coins only puts more upside optionality on bitcoin’s price.

Russia’s Game

If Russia launched a gold-backed ruble tomorrow, do you think most Russians would prefer to keep their savings in some digital hocus-pocus?

President Putin has probably quadrupled Russia’s gold reserves in the past decade and shows no sign of stopping that effort. While he has jawboned cryptocoin exchanges and urged the central bank to clamp down, the Russian Ministry of Finance designated bitcoin miners in the country as the Russian equivalent of sole proprietors and they remain unregulated until a cryptocoin bill is passed in July 2018. The bill takes a “soft touch” approach to crypto regulation: digital assets will be classified as “other property”, ICOs are designated as crowdfunding, and their size and participation by unqualified investors limited. The Russian government itself has been planning to issue its own cryptoruble since 2015, which is now slated to launch in 2019. Putin would surely like to see the petrodollar dethroned and replaced by a rebalanced SDR or another global payments system. Overall, Russia’s approach has been the friendliest of all the major players, with a clear legal framework set to come into force, and its own national cryptocurrency.

Russia’s agenda is very different from China’s though. Putin seems inclined to work with the US in fixing the mess they created in the Middle East, containing China and defeating Islamic jihadists. These are common problems and common interests. Closer relations with Washington would solve a lot of (potential) problems for Putin and act as a buffer against US attempts to topple him. He is likely desperate for a partner who does not act like a petulant child or threaten to take over Russia economically and politically.

Ironically, one big way to speed up a rapprochement is to undermine US power indirectly. Undercutting the petrodollar works for Russia even better than it does for China. The greater the flight from dollar-denominated assets to cryptocoins, the weaker the global monetary system which has enabled bungling US interventionism to continue way past its expiration date. Both China and Russia have a lot more to gain from undermining this system than they have to lose from viable crypto.

Iran’s Troll Game

After the most jihadist enclaves in Syria were defeated, the US shifted attention back to their rivalry with Iran. Its hands freed from the fighting in Syria, Iran and its special forces can focus on dealing with the American threat. The Iranians issued an ultimatum for American forces to withdraw from Syria and will be more than content to join the currency war against the petrodollar. This effort is already at the point of trolling the Americans with an extended promo for bitcoin on Iranian state TV. Since cryptocoins are a great way to evade US sanctions, it is highly unlikely that Iran’s hacker corps launch attacks against cryptocoin platforms.

North Korea’s Game

North Korea’s cost-benefit analysis is even easier than that of the Iranians. Because of Pyongyang’s total control over telecommunications, Little Rocket Man has nothing to lose from the growth of crypto. And he would surely support anything that could undermine US influence in East Asia and globally. It’s highly unlikely that DPRK cybercorps will attack crypto channels, except to steal coin for the regime, which some have speculated has already happened in large-scale heists from exchanges. The DPRK might even try to use crypto to skirt sanctions. So Dotcom is not the only Kim on side with cryptocoins.

The Turkey Problem

Among the major cyberops players, Turkey is the only one which could attempt to restrict cryptocoins more severely, but global government-sanctioned attacks seem unlikely given legalization and regulation in Japan, Russia and the US. However, the country itself may impose more draconian restrictions internally. The religious authority in Turkey came out with a cryptocoin fatwa in December 2017, but bitcoin exchanges in the country continue to work and some businesses even accept $BTC as payment. The ruling Islamist party may be inclined to restrict cryptocoins in order to prevent their use for funding its domestic opponents such as secularists and Kurdish insurgents, but a ban on cryptocoins appears far-fetched. The working group assembled by the authorities probably will recommend something akin to the framework implemented in Russia.

Summary

The Iron Coalition of China, Russia, Iran and North Korea against the petrodollar is a fact. While the coalition members have conflicting interests on other geopolitical matters, they align together perfectly on cryptocoins. Even better, they have to do exactly nothing to get the geopolitical benefits of bitcoin and its ilk. With Russia and Iran having effectively endorsed cryptocoins, North Korea with no incentive to do otherwise, and China allowing free exchange of cryptocoins on its OTC markets, to say that global cryptopolitics is bullish for bitcoin would be an understatement.

StartUp Daemon

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