Much of today’s crypto development work is focused on convertibility: making it easier to buy, trade and spend digital assets.
Today’s crypto is also going through a massive financialization surge.
Each day more apps offer new ways to “earn crypto” by encumbering your existing Hodl-ings.
Don’t just store your precious Bitcoin in a cold storage vault somewhere. Put your coin to work for you. Send it to us and we’ll pay you interest on the coin!
Far beyond margin trading, CryptoCredit/CryptoDebt offer a seemingly limitless money supply, all at affordable pay-as-you-can rates. Sound familiar? It should.
It’s the most common sales pitch in global credit markets, now applied to Crypto.
Thesis: By itself, there’s nothing inherently good or bad about CryptoCredit. However, everyone in crypto should be very careful about the consequences of so-called on-chain “self-enforcement” of CryptoDebt instruments.
Is CryptoCredit Inevitable?
Received wisdom suggests that debt is not only unavoidable, but that debt is a magnificent wealth creator. In the words of an eloquent Redditor, youni89,
[D]ebt is what allows people to build wealth […] Managed debt and credit is what has built civilization and the modern society.
Today, “access to credit” is now commonly considered a prerequisite for full-fledged participation in the global economy. If you have access to loans, you can pull yourself up by the bootstraps.
On the other hand, being “unbanked” = lack of meaningful access to finance = lack of opportunity.
Why? Here’s youni89 again:
Because you can’t do anything without debt. You can’t finance a house. You can’t finance a car. You can’t borrow money to start a business. You can’t build infrastructure and public utilities. Debt isn’t a bad thing. Only in excess does it become a problem.
Even though many crypto evangelists take open stances against “Wall Street” and/or “the State” and so on, a world without debt seems unthinkable.
Please note, a world without the U.S. dollar?
“Easy breezy. Bitcoin and Ether and Altcoins will supplant the dollar, and will serve as global reserve currencies and daily mediums of exchange.”
But a world without debt?
“Whoa, buddy, that’s just crazy talk!”
CryptoLender: an individual or institution that transfers rights to CryptoCapital to a borrower, at a contractually-agreed interest rate.
CryptoBorrower: an individual or institution that receives rights to CryptoCapital, following agreement to repay the principal loan amount (plus interest).
CryptoLoan: a fixed or variable amount of currency that is lent by a lender to a borrower (and borrowed by the borrower from the lender) (aka CryptoDebt, CryptoLien, CryptoFactoring, CryptoFinancing, CryptoMortgage, CryptoNote, etc.).
CryptoLaw: a system of norms, rules, and institutions for effectuating crypto transactions and enforcing parties’ rights.
You might know this already, but CryptoDebt was one of Nick Szabo’s earliest use cases and illustrations in his mid-90s Idea of Smart Contracts. Today, CryptoCredit is a booming slice of the crypto economy — and probably its largest.
In the next few years, CryptoCredit is primed for explosive growth.
As individuals with massive Hodl-ings of existing Tier A cryptocurrencies (Bitcoin, Ether, etc.) realize the robustness of existing crypto lending mechanisms, they will make debt collection even easier — lowering their enforcement costs, lowering overall risk, and raising their ROI.
Furthermore, the ease of creating one’s own cryptocurrency means that the number of cryptos will only continue to grow. In the next two years, it’s reasonable to expect the arrival of many new well-backed CryptoBanks whose main “utility” proposition will be offering “easy and secure” lending/borrowing.
Whether organized on centralized models (exchange margin lending), decentralized peer-to-peer (a la LendingTree), or any number of hybrid models, CryptoBanks will be one-stop-shops — taking novices from the street and plugging them into the crypto economy via loans.
Here Comes Wall Street!
Institutionally, the biggest news in the next few years will be the arrival of Wall Street retail lending to the crypto space (e.g., JP Morgan Chase or Bank of America making a bid for Coinbase, or some similar alignment of interests).
Retail banking’s play on crypto seems inevitable for the simple fact that today, liquidity is flowing out of traditional retail banking accounts and into crypto.
What’s the best way to stop the loss (from the perspective of traditional retail banking)? Buy the “crypto” towards which the funds are flowing.
Merger deals will be structured to give retail borrowers the semblance of crypto autonomy; but from the perspective of the banks, the Hodl-ings are still Hodl-ed on the given bank’s balance sheets.
In the near term, “ChaseCrypto,” “HSBCoin,” and “DBChain” will be the most profitable business units in those banks’ histories.
Profits are assured not only because of a bank’s ability to print money on demand; profits are assured because of those retail banks’ swelling ranks of retail customers who want even easier ways to “finance a house, finance a car, [and] borrow money to start a business.”
Importantly, it’s not just about matching high supply with increasing demand. Existing retail banks have one major advantage over all existing crypto players: existing retail banks control CryptoLaw and the levers of debt enforcement at the highest and lowest levels.
As inevitable as the rise of conventional CryptoCredit may seem, there are many alternative ways to use crypto to “finance a house, finance a car, [and] borrow money to start a business.”
One of the key innovations of crypto is that you are able to do each of these things without debt. First and foremost, each of these things was possible without debt prior to crypto.
- Long before crypto, you could “finance” a house, “finance” a car, “finance” a business in lots of different ways, aside from “managed debt and credit.” Securitization, partnership, and related forms come easily to mind. The transactional range of possibilities for raising capital that we had before crypto was already vast. Crypto expands the range of potential legal forms for complex capital transactions.
- Debt is not a prerequisite for growth. Individuals and firms raise vast sums of capital each day without debt (fractional ownership, securitization, private equitization, etc.).
- Crypto opens a far greater range of transactional permutations, across broader geographic and time scales. This greatly expands lending/borrowing transactions, which is precisely what we’re seeing today with the rabid financialization of crypto.
Thus far it should be clear that this isn’t some anti-debt/anti-bank crypto manifesto.
Being “against” CryptoCredit is like being against dogs barking. Lending/borrowing is the lifeblood of capitalism. It’s not evil; it is what it is.
Instead, what we’re against is a restricted range of possibilities for crypto.
When crypto enthusiasts restrict their hope for crypto to utterly conventional forms (property, contract, loan, etc.), and only those forms, this (a) stifles innovation, (b) breeds complacency, and (c) raises the risk of systemic crypto failure.
CryptoCredit Can Kill Crypto
In principle, a rapid expansion of CryptoCredit sounds very kewl and potentially radically emancipatory. It’s like micro-finance, except with a limitless supply side. The CryptoCredit ads practically write themselves:
Everyone with a smart phone can borrow crypto, easily, securely, cheaply! Just click here, and watch the crypto show up in your wallet.
In a conventional sense, this is a net positive outcome. By providing people with a decent crypto bank/debt system, lenders profit and the world’s “unbanked” and “underbanked” populations get the keys to economic opportunity.
But if cheap CryptoCredit is the main thing that crypto does, that’s all it will ever do.
If one’s hope for crypto is to make it easy to “borrow crypto,” the hope should also include easy ways to “earn crypto” in order to repay CryptoDebt. Extending borrowing opportunities without commensurate rise in crypto earning opportunities creates a top-heavy unsustainable system.
When anyone can easily borrow vast sums of ChaseCash (JP Morgan Chase Bank’s hypothetical in-house cryptocurrency) to repay an outstanding debt to Bank of China that was taken out in BoCBucks (a Bank of China hypothetical in-house cryptocurrency) the resulting system seems flush with liquidity and broadly dispersed risk, but it’s incredibly fragile.
Crypto makes refinancing, derivatives, insurance and reinsurance, swaps, and other FinTech wizardry much easier at much greater scales than anything the world has ever seen.
This means much greater opportunities, but also far greater risk.
If you need a reminder of this, please reflect on the downward spiral known as the Great Recession (2008–2011) and crypto’s origins from this mess.
Crypto was born in this bubbling cauldron of hyper-inflationary speculative finance.
The domain name bitcoin.org was registered on August 18, 2008, several months after the collapse of Bear Stearns. The Bitcoin Whitepaper was published on October 31, 2008, weeks after the collapse of Lehman Brothers.
Bitcoin expressly positioned itself as a solution to many of the excesses of 21st century FinTech, including fiat inflationary powers (by private banks and public governments), double-spending, lack of transparency, and so on.
The same excesses now suffuse and threaten crypto, especially in the juicy block of CryptoCredit at the intersection of Bitcoin Boulevard and Wall Street.
Whether off-chain or on-chain, a bubble is a bubble. It can burst from lack of structural integrity inside. Or it can be popped from the outside.
Rise of CryptoCredit “Attack Nodes”
A crypto economy built predominantly on CryptoCredit and cheap consumer-grade CryptoDebt is basically a replica of today’s model of “consumer finance” — except orders of magnitude worse.
- Because the chief innovation that crypto offers for CryptoLenders is automated “on-chain” debt collection (“smart contract” “self-enforcement”).
- Self-enforcement = bot enforcement = automated “repo” actions & automated “eviction” actions.
- Widescale automated repo/eviction = revolution.
That’s not FUD and that’s not conspiracy talk.
This is one of those instances where pictures and videos are worth a million words. To get a firsthand glimpse into this future, watch a dystopian film like In Time. Watch some 2-minute clips of ProletarianTV, like this RepoWar nugget from South Beach Tow.
Then re-read The Ascent of Money (published on November 13, 2008, two weeks after the Bitcoin Whitepaper), or re-watch the documentary.
Please pay special attention to coverage of consumer finance. Here’s a link to one of these scenes directly.
These visuals give great insight into the on-the-ground reality of consumer-grade finance, credit, and insurance. Even if you’ve read the books, seen the films, or “disagree with the politics,” these visualizations of global debt markets are worth revisiting.
Today’s crypto reality and tomorrow’s crypto potential make the most jarring scenes in The Ascent of Money, Repo Games, & In Time look quaint by comparison.
Autonomous “self-enforcement” of “smart contract debt instruments” (self-towing cars; self-locking apartments; self-disabling smart phones; etc.) means that when global crypto repo wars start heating up in earnest, they’ll be far more violent than anything humanity has seen yet. Why?
Because it means a war of humans against machines, and war of humans against humans who are aiding machines that oppress humans.
A Crypto Conspiracy?
Is citing a Harvard/Stanford-based social & monetary historian for the obvious proposition that runaway consumer debt has some dark sides too “conspiratorial” — ? Is emphasizing that crypto should focus on giving meaningful crypto earning opportunities instead of just quick and easy “crypto spending” and “crypto borrowing” opportunities too “conspiratorial” — ?
If so, hand us the tin hats, cause we’re all in on this “conspiracy.”
What more, everybody who understands how the current consumer debt “management” system works must be very careful about wholesale extension of CryptoTech to this space.
This extends to (1) lenders (who are salivating at on-chain debt collection opportunities), (2) borrowers (who will be functionally reduced to states of permanent and worsening indebtedness, without any of the limited bankruptcy and other legal protections they now “enjoy”), (3) non-financial sectors, because all out global “repo wars” between #1 & #2 = Global Economic Depression 101, (4) regulators, (5) crypto developers.
If you make it easy to “borrow crypto,” you must also offer easy ways to “earn crypto.”
The former without the latter is just bondage.