How to Start Disrupting Cryptocurrencies: “Mining” Is Money Transmission
lawfareblog.com
lawfareblog.com
Can't you say that about any other asset? If I sell my house for more than I paid for it, it's zero sum since someone simply provided me that money. But that's not how we determine value. It's positive sum because the buyer attributes a value higher than he had paid for it, otherwise he wouldn't have bought my home to begin with. You can say no one can reasonably "value" a crypto currency, but there's 100+ billion dollars that says otherwise.
> There is no silver bullet, but there are a lot of things that can throw sand in the gears, degrading Bitcoin and other systems into unusability.
Ironically, the author goes on to describe a way to attack the value of Bitcoin and presumably drive its price down (destroying value). So it doesn't seem zero sum after all
By your definition, every transaction ever made is zero sum.
So it's not the rising stock price that creates value when a company is successful, but is an indication that the company is creating value, since people are buying its product.
No transaction between rational individuals is ever zero-sum.
If Bob values a house at $300,000 and Alice values the house at $300,000, the house will __never__ be sold. Because by the time transaction fees come about, Bob would have lost money in the transaction.
In reality, Bob values the house at $250,000, and Alice is happy to buy at $350,000. Maybe some negotiations happen, and after transaction fees, Bob receives $270,000 while Alice pays $330,000 (both happy), with the Banks / Real Estate agents pocketing the $60,000 spread.
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This is called the Bid-Ask spread, and its always, always, always non-zero. Stocks have bid-ask spreads of a penny, but Pokemon Cards, Houses, Lumber, etc. etc. all have a spread in reality. There's never one price for things, there's a buyer's price vs a seller's price, the bid and the ask.
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The difference in the bid-ask spread gives you an idea of how much value any transaction created. If Bob was willing to sell the house for $270,000 and Alice was willing to buy the house for $330,000, then there was at LEAST $60,000 of value created by the transaction.
This also gets at the paradox behind a lot of our intuitive notions of "value creation". If a person buys high and sells low, taking a loss, they've lost value. Or have they? At the time they made the first transaction, they valued the new asset higher; at the time they made the second one, they valued it lower. As my therapist used to say, "The past and the future don't actually exist; there is only the present."
I've seen writers try to resolve the paradox by introducing the idea of "time preferences" or "future selves". You, right now, are not the same person you will be in the future. You can express compassion for your future self by taking action - like delaying gratification, investing in personal development, or saving money - that benefits your future self. The degree to which people preference their future self over their present self is culturally dependent, which is why certain ethnic groups and social classes tend to amass large amounts of wealth while others are perpetually living on the edge of subsistence. The rate of interest is a quantitative measure of how much people preference their future self over their present.
Right, it seemed like a good idea at the time. But they're experiencing regret because an alternate past action (just holding cash, or buying a better performing asset) would have given them more value now.
Of course you can regret any suboptimal action (anything less optimal than buying the best performing asset), but that's not most people's baseline. I think the baseline for most people is holding cash, hence they mostly feel regret when their assets' cash value decreases.
Unless interest rates stay low forever, at some point the asset inflation they cause has to deflate.
This is exactly the problem with inflation. It creates all sorts of distortion of what people value, by fucking with our concept of what cash is worth. Do keep in mind that "value" is not some sort of objective thing. Everyone values things differently. Someone who is allergic to peanuts, may have a negative value for peanuts, someone who thinks peanuts will give them immortality might have an unreasonably high value for peanuts. And capitalism just doesn't care. Live and let live. Important thing is that it's not just true for things, it's also true for money. (note that value is not price, though often times it's rhetorically convenient to conflate the two).
So the phrase "value creation" does not refer to some sort of intrinsic improvement in any given thing. What it means is, say the peanut allergy guy comes into posession of peanuts somehow, and he exchanges to peanut immortality gal for a wad of cash. This created VALUE for the allergy guy because he values cash more than the peanuts, and created value for immortality gal because she values peanuts more than (that amount) of cash.
Moreover, using amount denominated in money to track value creation is dangerous (note I didn't say necessarily wrong, I said dangerous), because it assumes that money is equally valued by everyone. That's not really true, and we probably shouldn't, in policy, implicitly judge people in one way or another for having different values for money.
If a bid-ask spread can be positive (as in a stock where the bid is lower than the ask) and can be negative (as in your house example where the bid is higher than the ask), why can't it be zero?
It seems like you're conflating the bid-ask spread with consumer/producer surplus that arises from being willing to buy/sell at prices higher/lower than the market clearing price.
It can be, and indeed the Micro 101 model is that in ideal conditions it will be for an infinitesimal slice of transactions that actually take place, as all potential transactions with a 0-or-higher bid-ask spread will occur, but that the average across the market of all voluntary transactions will always be positive.
bid-ask spread isn't a property of transactions, it's a property of markets. Transactions will occur when someone is willing to pay at least as much as a supplier is charging.
The bid-ask spread is how much less the highest bidder is willing to pay than the lowest seller is asking. It's a measure of how far apart buyers and sellers are from making a transaction, at a moment of time in a market.
The upthread poste by dragontamer which introduced it seemed to ascribe it specifically to particular transactions, and I responded to what waa described in that post, viewing terminological minutiae as less interesting than the concept being discussed for which there seemed adequate clarity in context.
It kind of is if its a transaction that both parties are considering because the buyer has no more attractive properties (considering asking price) to buy, and the seller has no better bids.
Its a different kind of market because houses aren't non-differentiated mass commodities, but from the perspective of either the buyer or seller the opposing offer is equivalent to the price on the opposite side of the market in stock trade, once things have been narrowed to the best alternative to either do the transaction or not.
If you treated them as true real numbers, the odds of bid and ask being exactly identical are zero. In reality we round the prices to some minimum unit of currency (or rational fraction thereof), so it's not impossible for the difference to be precisely zero.
Nonetheless, it demonstrates why it's not zero sum in general. If it happens to sum to zero, it's by coincidence, not a fundamental truth of the market.
Note that the bid-ask spread is a LOWER BOUND ESTIMATE on the amount of utility created by a trade, which is almost always nonzero.
Of course values are subjective, so you could press the "issue bid" or "issue ask" button and a fraction of a second later have your values shift, and then have the automated system execute trades... But I would say... that's life. Maybe don't click certain buttons if your preference schedule is so flighty?
Also, sure, someone could have a (metaphorical) gun to your head when you place the bid, which introduces external factors which could violate the platonic ideal that these trades must create positive value.
That is not value creation, that is wealth transfer from Alice to Bob. Alice has to earn that excess $60,000 through labor, or exploiting labor.
Value could have increased for many reasons having nothing to do with labor effectuated by either party.
The neighborhood might have changed, and now there are more restaurants. Or maybe it’s just considered more fashionable for intangible reasons.
The house could be on the beach, and Alice has decided to take up surfing, so values the location more than Bob ever did in the past.
And so on.
There can be an almost infinite combination of reasons why Alice may find more value in the property than Bob.
Edit: my previous version of this comment had Alice and Bob reversed.
New up-and-coming couple not only have 4-kids, but one more is on the way. They suddenly got an opportunity to work in... Chicago (or insert any other city here), and are looking for a new home to raise their kids in.
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The old-couple will likely be willing to sell the house below market value, while the younger couple may be stressed out and otherwise willing to pay above market value.
Clearly, value will be created as the new couple buys the home from the old couple. The majority of transactions between rational individuals are of this nature. The only detail remaining is how to proceed with negotiations, but assuming they're rational, the two sides will come to a price point that's favorable to both sides.
What you are describing is more like arbitrage, and it creates no value, but instead exploits inefficient markets, disparate regulatory environments, or unequal access to markets.
Where each participants marginal utility function is represented by their name, and P is the actual transaction price, there is exactly Bob(P-$270k) + Alice($330k-P) value created.
Calling this “at least $60k value” is wrong, and even calling it “$60k value” ignores the fact that value of $ is no more constant across different market participants than any other item, and that the benefits accrue in particular places.
And that is exactly the same for crypto, except there is no country/government behind but only a ledger. The money is being transferred for doing work, mining. And that is distributed again.
I think the point the author was trying to make is that you can participate in the housing market by building and selling houses, with the former being “positive sum” (since the land and building materials have a cumulative value less than that of a finished dwelling). The positive sum stuff seemed to be describing markets, not individual transactions
“Every time you have an exchange of goods and services between two parties, you have an agreement on price and a disagreement on value.”
i.e. Given an exchange between a seller and a buyer selling a widget for $100, the seller by definition values the $100 more than the widget while the buyer values the widget more than they value the $100.
Money laundering is despicable, specially when it happens at high level. And we have to admit that Bitcoin, ZCash, Ethereum (Tornado Cash) and other cryptocurrencies are facilitating that. But we're getting better at tracking that. After all, transactions are all public and once you can label one wallet address, you can perform all sorts of graph analysis and learn a lot. Contrast that with trying to subpoena banks to follow money trails.
The other aspect of this is that, like it or not, banks are not playing by the rules all the time. See HSBC laundering almost 1 billion for Mexican and Colombian cartels. See Austria’s Raiffeisen Bank enabling former Ukraine's president to steal money with offshore accounts (https://www.occrp.org/en/investigations/former-ukrainian-pre...)
We should absolutely deal with this, but the first place to start is the Bank -> Cryptocurrency (and vice versa) transfers, or as they call them, the fiat gateways. You still can't pay for stuff with cryptocurrencies so ultimately, whoever steals or launders using cryptocurrencies, will need to eventually convert back into fiat money.
Edit: correct typo in first paragraph
- Laundering money in poor countries directly hurt the citizens of those countries because the government doesn't collect the taxes it is entitled to
- Most of the money to be laundered comes from illicit activities: drugs, prostitution, human trafficking. I don't have any citations here for proportions, sorry.
Update: fix formatting
Minior nitpick: Poor countries typically have authoritarian, corrupt governments, so keeping money out of their hands is actually a good thing :)
But more to the point: the whole idea of money laundering is that criminals WANT and DO pay taxes on their illegal income by pretending it came from legal sources. If they just kept those money under the mattress they would never pay a penny of taxes, but they also wouldn't be able to actually spend the money. So, money laundering in poor countries actually increases the tax income of their governments.
The western national media has been effective at propagandizing you toward this end. The "typical poor country is corrupt" trope is circulated widely and is used to discredit any attempt at wresting control over a country's fiscal future away from a cohort of wealthy western nations.
Corruption in the west is normalized and simply labeled "lobbying." "Corruption" elsewhere is used as an excuse to overturn elections, topple governments and assassinate leaders.
And forgery laws state that you can't draw whatever you want on pieces of paper.
What a law states has nothing to do with its importance.
Many other laws (involving crimes that are very far from "white collar") are extremely difficult to enforce without the ability to trace money.
Money laundering is a crime because it enables other more serious crimes, not because of the act itself.
What do you mean? The article is arguing that crypto-currencies (as they are run today) are illegal under existing laws, therefore we don't need new laws.
Regardless of whether this is true or not, how is this a "bad faith" argument?
It sounds like you just didn't like the conclusion but couldn't find anything actually wrong with the logic...
Murderer: <kills a person with a hammer>
You: Let's introduce a new law to make killing people with hammers illegal.
Author: We don't need to introduce a new law, murder is already a crime.
You: That's a bad faith argument, because it means we can't kill people with any kind of implement, not just hammers!
There are two ways you can argue this:
1) Either you believe that the crime should not be illegal.
2) Or you disagree that the act falls under the definition of this crime.
In neither case is the author acting in bad faith, they're just disagreeing with you. It sounds like you would argue (2) but in that case you should provide some reasoning for that.
This is true for most cryptocurrencies, but not Monero.
The mainstream banking system has built up an infrastructure of laws and procedures designed to guarantee transaction and identity confidentiality (e.g., laws alone: RFPA, GLBA, FCRA, GDPR and many more.) These privacy protections aren't some quaint byproduct of another era, they're requirements for any working financial system. You can't have your private banking data oozing out all over the world: this is terrible for business and fundamentally unsafe for users. It's unsustainable in the cryptocurrency sphere as well, but crypto is mostly a toy that nobody uses for real applications so these weaknesses aren't a killer -- yet.
The traditional banking system squares the need for privacy and desire for AML by placing confidential banking data into closed systems which share it with law enforcement upon presentation of a subpeona. Most cryptocurrencies deal with it by, basically, YOLO. But none of that is sustainable.
Worse, it hurts the good guys and hides the bad ones. Traceable blockchains put you into a regime where the clever launderers will find ways to obfuscate their transactions, and everyone else ends up with an unusable system that dumps their business secrets into the hands of any competitor who can write a check to a tracing company.
(Full disclosure: Zcash scientist here. But we created the tech for a reason, and fear of a broken 'panopticon' banking system was a big part of that.)
Outlawing mining in the US would not disable cryptocurrency networks, because miners could still operate in other jurisdictions (and covertly in the US). It might cause a panic and disrupt some American-based crypto companies, but cryptocurrencies have already been shown to withstand panics and business upheavals. Crashing the price of Bitcoin doesn't actually reduce its usefulness to cybercriminals, as long as the market is still liquid.
Worse, banning US mining would ensure that no mining rewards can be taxed by the IRS, excluding the US from the growing cash stream coming from blockchain rewards.
Bitcoin cannot succeed past a certain level because then it competes with the USD and becomes a threat. One way or another its days are numbered.
Don't forget the US outlawed gold at one point. Competition with the fiat currency monopoly will not be permitted because it undermines the sovereign power wielded by the state.
It already is a threat to the USD and the game theory ensures anyone fighting against Bitcoin loses in the long run.
If the US wants to lose miners/nodes, large holders, and fintech innovation to other more free countries, they should take the view that you are sharing, but they will also lose the future in the process.
IMO we should be throwing sand in the gears of the government. Starting wars and killing hundreds of thousands of people is much worse than ransomware attacks.
If this is a path to applying more regulatory pressure on crypto, by all means, full steam ahead.
Government could eliminate the some of the needs for cryptocurrencies by removing regulatory barriers to transact.
As an example, compliance costs prohibit PayPal from efficiently processing 25 cent arcade or in game transactions.
>Instead of the standard 2.90% + 30p per transaction that PayPal charges, you’ll be charged a 5% + £0.05 fee on every transaction. This would mean that on a £1 transaction, you will pay 10p as transaction fees, rather than 59p, and you save 41p. Ordinarily, this does not look much, but if you sell very high volumes at low prices, it quickly adds up to become a significant saving. After all, it’s a small leak that sinks great ships.
Additionally, for electronic goods most processors require the merchant to offer a no questions asked refund policy.
IMHO, that describes maybe a tenth (maybe) of crypto buyers. Everyone else is just speculating on volatile new assets that are gaining value rapidly.
That is almost the last thing people want.
https://mises.org/wire/why-wild-swings-crypto-prices-are-not...
>Weston Nakamura in an interview with Real Vision’s Jack Farley made the trenchant point, “This is what markets look like when you don't have global central banks artificially suppressing volatility, intervention of central banks buying every dip, putting a safety net under every single slight tremor or taper tantrum or whatever it may be, this is what happens.”
>He explains, “Bitcoin is not a US asset, just like oil is not a US asset, just like gold is not a US asset. Now, those are denominated in USD.” Sure, Americans think in US dollars, but “it's BTC/fiat, and it's not an American asset. People need to get that in their head. If you actually look at BTC/JPY (Japanese yen), the levels make a hell of a lot more sense.”
By making mining illegal, maybe mining can be stopped in the US and in Europe. But it will continue in many other places, and the network will absolutely still function. Maybe the value of crypto will drop, but this doesn’t matter at all for its use in payment. It obvious to anyone that the course of action he is recommending will not have the effect he says it will.
To anticipate this author’s next article- I’m guessing that he will propose making buying and transacting in crypto illegal for US persons. This would also make the value of crypto drop, and might actually also stop a few companies from paying a ransom. But soon enough, overseas “security consultants” would pop up, who could unlock your files for a very hefty fee (really just hiring a non-us person to buy and send the crypto ransom). No simple prohibitions or attacks on crypto would actually stop this.
But this does point to the actual way to stop ransomware, without the ridiculous and unworkable overreaches that this author is flogging: Make paying ransoms illegal.
This would neatly solve the problem by stopping any ransoms from being paid. The fact that the author contorts himself into mental pretzels to avoid stating the obvious legal solution to ransomware shows how little he actually cares about ransomware, and how much he is just grinding an anti-crypto axe. It’s surprising that UC Berkeley allows him to put their name on such obviously facetious and ill-considered articles.
Where the author is correct is that the miners are the chosen ones for writing to the central ledger of bitcoin, but writing to a ledger including transactions, is not the definition of money transmission- the miner would have to take custody - which they do not.
Now where money transmission I believe is running rampant is any smart contract built on ethereum, like uniswap, that is taking custody of any token and holding that token- all of them are violating money transmission laws.
I guess you could try to go after the guy who wrote Uniswap's code but that has First Amendment issues according to US vs. Bernstein:
> the Ninth Circuit Court of Appeals ruled that software source code was speech protected by the First Amendment and that the government's regulations preventing its publication were unconstitutional.
My point on custody is that no human has the ability to do anything other than trade on uniswap as a regular user. You can trade one token for the other (in a given pair contract), and you can provide both tokens as liquidity and collect fees on the trades. The contract handles the rest according to its code, which is run by every Ethereum full node.
In the docs, Uniswap says they don't currently take a protocol fee, but might add it in the future. This fee would not go to liquidity providers, but to the smart contract itself. Who would receive the protocol fee I wonder, or would the smart contract itself keep the fees, never distributing it to any human.
I haven't even brought up the can of worms of governance tokens. The protocol seems to not need a protocol fee since they can make a fee by issuing themselves governance tokens that have some privileges with the protocol and have a price. It is interesting that you say the code is immutable, but the governance tokens claim to give its holder voting rights to make changes to the protocol code like changing fees. It is a major problem that investors of Uniswap the company received the uni governance token in proportion to the funding of the company which they tell us has nothing to do with the decentralized uniswap protocol. You can't have your cake and eat it too.
I haven't really kept up with V3 but earlier versions had no tokens or governance and were very successful. They're at least an existence proof that defi protocols can be completely autonomous.
The autonomous claim that you have made more than once, whether true or not, does not change the fact that the smart contract is doing money transmission.
If the argument is that is just an asset (which I believe was strongly argued against by bitcoin proponents, at least in early days), then what kind of asset is it? It has absolutely no value beyond it's monetary value.
(I’m speculating but this is how I interpret a lot of the defenses of Bitcoin I have heard.)
This wouldn't end BTC; it would simply constrain how much American citizens could be involved in the mining process (and, practically, basically cede ownership of the network mostly to Chinese nationals IIUC current distribution of mining hardware ownership).
The definition of a money transmitter is a person or company that receives money (or other measure of value) from one party and sends that money/value store (sans any charged fees) to a third party. (https://www.law.cornell.edu/cfr/text/31/1010.100#ff_5)
Miners verify transactions, but crucially don't take custody of the money/value store at any point. Paypal and Venmo are money transmitters, because they do take custody of money in transit. (Stubhub and Airbnb are not money transmitters because the regulations exclude companies that only act as payment processors to facilitate the exchange of goods and services, see (ff)(5)(ii)(B) and (F) of the exclusions in the linked regulation)
So this blog post is much ado about nothing and will generally be ignored by the people who actually matter, i.e., FinCEN and other regulatory agencies with jurisdiction, because they generally tune out people who can't get the basic foundational things right.
Further the idea that removing a transaction, which is functionally equivalent to moving funds back, is not a money transmission while the original movement of funds is a money transmission is absurd. Otherwise it would be trivial to create a cryptocurrency where initial payments are never validated and you simply rely on removing the superfluous transactions to achieve the same effect.
Isn't this just a detail, consistent with author's call for action? To him, participating in the bitcoin network means facilitating money transfers. If the gov. decides to adopt this viewpoint, calling bitcoin a foreign currency won't be difficult.
He mentions Ethereum offhand in the post, but I feel like that's a legally harder case to prove. Do the servers that transmit, say, wire transfer packets have to worry about KYC?
Thinking from the first principles: what PoW, if not an obfuscated way to buy tokens/coins? I.e. you exchange money for electricity, then electricity for compute power, then computer power for a right to play a lottery, then periodically you win tokens/coins.
Money bag → High voltage sign → Personal computer → Slot machine → Coin
You can see emojis here:
But in case of Bitcoin they're doing it with the expectation of trading these ledger entries (UTXOs) on the secondary markets.
That's what makes them money surrogates / money substitute.