Crypto — The Escape Hatch For The Broken Global Financial System
In this blog, we’ll take a look at how cryptocurrency is changing the way we think about money and financial transactions. With governments facing tough financial challenges and the rollout of Central Bank Digital Currencies (CBDCs), cryptocurrency stands out as a promising alternative to the traditional financial system. We’ll explore the unique benefits of cryptocurrency, such as:
- Its ability to make financial systems more transparent (OpenFi).
- Creating a separate, decentralized banking system (DeFi).
- Introducing more efficient financial technology (CoFi).
We’ll also discuss how crypto will help balance out potential government overreach and ensure that people’s freedom and financial privacy are protected in the digital world. We’ll focus on:
- Why we need crypto to protect us from CBDCs.
- How US regulators are missing a big opportunity for innovation in the West.
This blog is written for someone with a beginner’s understanding of crypto. Once you’ve read this blog, you’ll have a solid grasp of why cryptocurrency is so important and why we urgently need it as an escape hatch from our current financial system.
Let’s now take a look at the many issues we’re dealing with in our flawed financial systems.
The Last 15 Years of Global Finance — A Short History
There are significant issues with the global financial system. Central banks worldwide have followed the US Federal Reserve’s decision to maintain low interest rates and print money since the 2008 financial crisis. The Federal Reserve kept the interest rate near zero for 7 years, until November 2015. Five years later, the Fed reduced the rate to 0% for almost two years during COVID.
The prolonged low interest rates for the past 15 years have encouraged money printing and facilitated easy credit, fueling a surge in risky ventures and creating an everything bubble across various asset classes, including stocks, real estate, and cryptocurrency. This environment disproportionately benefited the wealthy, increasing the gap between the rich and the poor, and exacerbating social and economic differences.
In response, central banks around the world implemented quantitative easing measures, involving large-scale money printing to buy government bonds and other financial assets to stabilize the financial system. The money printing resulted in a 40% increase in the M2 Money Supply, which led to the highest inflation in 40 years, catching the Fed completely off guard.
In March 2023, we were welcomed with a new Global Banking Crisis. In short:
- The Fed publicly stated their intention to hold rates near 0% until 2023.
- Then inflation got way too high (9.1%) due to the excessive money printing, and it caught the Fed off guard.
- The Fed proceeded to raise the interest rate at an extremely fast pace not seen in 4 decades.
- This led to the insolvency of many small and medium-sized US banks that had purchased low-yielding US Treasuries in 2020–2021. (This is because as rates go up, bonds decrease in value.)
This forced the banks to mark-to-market their treasury bonds, a legal accounting loophole enabling banks to appear solvent. It works, except when a bank run occurs.
And then, bank runs did occur. Silvergate Bank voluntarily put itself into liquidation. Silicon Valley Bank experienced a full bank run and was put into receivership. And the regulators forced Signature Bank into receivership, before it could experience a bank run.
These bank runs caused a loss of faith in small and mid-sized US banks, forcing the government to create the Bank Term Funding Program (BTFP). BTFP is a low-key way of bailing out banks with trillions of dollars.
They also announced an increase in the swap line frequency with the other 5 major western central banks (Japan, Canada, EU, Swiss, and England), which is another low-key way of bailing out their western allies.
Summing up the history lesson
The US and other Western governments have shown their playbook repeatedly — to print money to solve their problems, which leads to inflation, volatility, and wealth transfer to the rich. They will continue to inflate money to solve problems, which will decrease the savings of their citizens.
Luckily, cryptocurrency technology is now mature enough, and we can use it to escape the burden of the Western Financial Overlords.
Crypto — The Escape Hatch
We’ll now dive into the high-level details on cryptocurrency technology, and provide some examples of how we can use it as an escape hatch from the traditional financial system.
Programmable Money & Permissionless Innovation
Cryptocurrencies are programmable, enabling us to quickly test, iterate, and improve money instead of relying on outdated government technology managed by hand-picked bureaucrats. Traditional finance, plagued with middlemen, inefficiencies, and antiquated technologies, is destined to be outperformed by crypto, just as the internet was destined to revolutionize media, education, and communication.
Programmability fosters permissionless innovation. In crypto, different teams collaborate on open-source software across the world. We rapidly iterate in public together, and the pace of innovation cannot be matched by governments, banks, or FinTech.
With this rapid innovation and permissionless nature, we are seeing cryptocurrency flourish in countries with poorly managed economies or lousy banking infrastructure. Such as Argentina, where the inflation rate today is over 100% annually, due to excessive government money printing and mismanagement of the economy.
For countries with no banking infrastructure, it will leap from them into modern finance, just as many countries skipped landlines and went straight to cell phones.
Bitcoin — Truth, Transparency, and Fairness
Bitcoin runs on pure energy, and there is a direct connection between energy consumption and network security. We can trust the ledger’s accuracy and economic security based on the energy expended to mine the blocks. As the US and the West engage in economic battles with Russia and China, trust between countries is scarce. Especially after the US froze Russian assets because of the Ukraine War. It served as a stark reminder that assets not in your custody are not yours. Today, you can be sure many Russian billionaires with frozen assets in the US would trust Bitcoin over a US bank.
As an open network, every transaction is transparent and auditable on chain. The openness allows users to trust many different data providers on the state of the network and their own Bitcoin wallet. If necessary, a user can run their own node, so they can remove any reliance on a third-party.
Additionally, Bitcoin is fair, allowing anyone with an internet connection and the necessary capital to access the network and mine Bitcoin. It’s also easy for anyone to hold Bitcoin. Other self-custodied assets such as real estate and gold are difficult to transport and conceal. In contrast, Bitcoin is easily hidden, transported, and divisible down to 0.00000001, enabling small transactions.
Beyond Bitcoin
It’s been 14 years since Bitcoin started, and yet we’re still in the early days of crypto adoption. It took Amazon 25 years to transform from a small online book seller, to become the world’s most valuable company in 2019. If we give cryptocurrency another 11 years, I believe it will be the most widely adopted financial technology in the world.
Bitcoin is the simplest and most economically secure cryptocurrency. However, there is more exciting and complex work happening elsewhere, especially on Ethereum. Several emerging sectors within crypto have the potential to revolutionize finance. In my opinion, Decentralized Finance presents the most significant opportunity, but we will also discuss Open Finance and Collaborative Finance.
Decentralized Finance
DeFi is the most exciting technology in crypto today. It is groundbreaking because it leverages blockchain technology to facilitate peer-to-peer transactions without third parties.
Decentralized Finance (DeFi) is a set of permissionless, public, peer-to-peer financial protocols that are open-source, have no owners, and involve no third parties.
To better illustrate DeFi, I will provide a few examples of how a DeFi protocol would operate:
- The protocol cannot be sanctioned to cease functioning, as there is no protocol owner with that authority.
- The protocol cannot be upgraded to a new version.
- The code cannot be altered if a bug is discovered.
- There is no Governance Token, or the Governance token can only adjust a few small protocol parameters.
In essence, the protocol should operate independently and in perpetuity. This concept might seem unusual to someone unfamiliar with crypto, but it creates protocols with remarkable features:
- You can use the protocol, knowing your assets cannot be seized or stolen.
- The protocol will never shut down, as opposed to banks which can shut down, or remove services.
- It enables money to travel as freely over the internet without government intervention.
- It is entirely permissionless, allowing anyone to use it to obtain a loan, , facilitate a trade or some other service. It cannot discriminate between a billionaire and a poor person, providing the same service to all.
- It supports private/anonymous transactions, empowering users to exercise their right to privacy.
However, DeFi has its drawbacks. If you make a mistake and send your assets to the wrong account, you’ll never recover them. This is where Open Finance shines.
Open Finance
What I refer to as OpenFi aligns with the broader definition of what the crypto industry calls DeFi.
OpenFi defines companies that offer private financial services built entirely upon permissionless, public, peer-to-peer financial protocols.
OpenFi and DeFi may appear similar externally, but their details reveal significant differences. An OpenFi company only uses open financial protocols, allowing for full public audit-ability of user accounts. Full public audit-ability helps prevent mismanagement of funds, fraud, and bankruptcy, like we saw with the FTX bankruptcy. Regulators should encourage more financial businesses to operate as OpenFi companies, as it would significantly reduce fraud and negligence.
Moreover, this would simplify tax filing for both citizens and governments. The complexity and difficulty of filing taxes burdens tax authorities and causes stress on citizens. OpenFi, combined with Artificial Intelligence, could enable fully automated, foolproof tax filing. Individuals could complete their taxes within minutes each year, only needing to double-check the results for accuracy.
Crypto critics often overlook the technology’s true potential. They fail to recognize that Bitcoin paves the way for a proliferation of OpenFi protocols, ultimately leading to reduced fraud and saving millions of auditing hours.
Delving deeper into crypto reveals its capacity to enhance the financial infrastructure we use today. Furthermore, it can offer us entirely new financial infrastructure, which is where Collaborative Finance comes into play.
Collaborative Finance
There is a lesser-known opportunity that crypto presents, which is known as Collaborative Finance (CoFi). Backed by the team that created the Cosmos Network, they are completely rethinking payments infrastructure. Some quick facts:
- It is based on the structure of the payments graph in a network. It maps money that flows in closed-loops, which is higher quality money.
- It takes advantage of existing credit networks to save liquidity — by clearing credit internally between companies through “Obligation Clearing” and “Mutual Credit”.
- Obligation clearing — allows invoices in closed loops to be cleared against one another.
- Mutual Credit — allows firms to take out loans in a local currency pegged to a common unit of account, where the loans are collateralized by the firm’s future production.
- The CoFi paper suggests there could be a net internal debt reduction of up to 50% with these two techniques.
The idea that we can completely rethink how our financial systems work is the most underrated and under-discussed idea in crypto. CoFi is in it’s early stages, but in the next 5 years I believe it will become integral technology for improving global finance.
Crypto vs. Central Bank Digital Currencies
The arrival of Central Bank Digital Currencies (CBDCs) marks a new chapter in digital finance. However, cryptocurrencies and CBDCs are two sides of the same coin, each having opposite effects on financial freedom and privacy.
While CBDCs promise improved efficiency and faster transactions, they also carry significant risks to personal liberties. CBDCs would give governments total power over citizens’ spending, leading to a full surveillance state. For example, China’s digital currency has already raised concerns about its potential for authoritarian control.
However, it’s not just China that is overreaching in financial control. The Canadian trucker convoy protests in 2022 serve as a clear warning of the dangers linked to centralized finance. During the protests, the Canadian government enacted the Emergencies Act under controversial circumstances in order to freeze the bank accounts of protestors. Some important facts from the Public Inquiry:
- The Emergencies Act was rushed and put under very little scrutiny during the protests. For example, there was no legal plan in place to unfreeze protesters’ accounts.
- The government stoked fear by announcing a vague description that implied all protesters would have their accounts frozen when they only intended to freeze the top organizers.
- The lead investigator of the Public Inquiry is appointed by the ruling party government. It’s unlikely the lead investigator would go against the government that appointed him, so the conclusion of the inquiry must be taken with a grain of salt.
No matter your opinion on the protests, this action sets a dangerous example, showing the potential for governments to financially target any group they don’t like.
With a CBDC in place, freezing assets without due process would become even simpler, requiring a single order from the ruling party to the central bank.
You may think this will never happen in your country or to you. But a desperate government will take desperate measures. They may decide to rush a tax hike, such as a wealth tax, and then order the central bank to tax you directly from your CBDC account. It might sound crazy today, but if you talk to an Argentinian, they will tell you how fast these things can change.
In contrast, cryptocurrencies offer an escape hatch from the growing threat of CBDCs. They provide an alternative financial system that operates beyond government control, protecting individual freedom and privacy. Without them, we risk sliding towards a financial surveillance state where governments control what people can and cannot buy.
Crypto vs. Regulators
In recent months, regulators around the world, especially in the United States, have been cracking down on cryptocurrencies following the collapse of FTX. This increased attention isn’t surprising, considering that the traditional US financial system has controlled the global economy through the US Dollar since leaving the gold standard in 1971, and now sees cryptocurrencies as a threat.
Well-known figures in traditional finance, such as Nassim Taleb, Warren Buffet, Charlie Munger, and Jamie Dimon, have criticized cryptocurrencies. Since they made their money and reputations within the traditional financial system, it’s not surprising they would resist the rise of decentralized networks. However, their limited understanding of computer science and the potential of this technology often leads them to focus too much on scams and issues related to cryptocurrencies, and not on the potential.
This pushback from regulators has significant consequences for American entrepreneurs and citizens. By trying to hold back the growth of cryptocurrencies, regulators risk limiting the opportunities for US-based innovators in this fast-growing field. As a result, talented individuals may move to more welcoming places, where they can build billion-dollar companies without worrying about restrictive regulations.
If regulators and traditional finance experts took a step back and genuinely looked into the potential of cryptocurrencies and blockchain technology, they might see the incredible possibilities it offers. They don’t have to support Bitcoin, Ethereum, or any specific token, but they should recognize the incredible potential of the technology and the fact that it’s impossible to stop its growth and adoption.
By acknowledging the value of decentralized networks and cryptocurrencies, regulators can shift their focus from threats and opposition to collaboration and support. This approach would encourage a productive partnership between regulators and entrepreneurs, benefiting the economy and society as a whole while maintaining a balanced and innovative financial ecosystem.
Conclusion
Cryptocurrency is simultaneously providing us with an upgrade to traditional financial infrastructure transparency (OpenFi), a parallel, decentralized banking system (DeFi), and brand-new financial technology that is more efficient by design (CoFi). This trifecta offers protection against reckless fiscal and monetary policies enacted by governments and gives us an escape hatch from their increasingly authoritarian financial measures.
Cryptocurrency will also prevent central bank digital currencies (CBDCs) from granting governments total financial control over their citizens. Wherever a country enforces stricter restrictions with their CBDC, cryptocurrency will thrive as people exercise their freedom to transact.
Regulators will fail to restrict cryptocurrency adoption. Bitcoin and Ethereum have already reached escape velocity, making it impossible for any nation-state to halt them on their own. Meanwhile, many smaller nation-states have already welcomed cryptocurrencies. Even if the US, China, and other countries become more aggressive, there will always be safe havens for cryptocurrency. It would be nearly impossible to prevent cryptocurrency usage within countries without total censorship of the internet or making it outright illegal to own cryptocurrency. Such draconian measures may work in China, but they would surely backfire in the West.
The rise of cryptocurrency is undeniable and will become the primary financial system for transactions, asset storage, and trading in the future. It may take another decade, but there is no doubt in my mind that we will get there.
