Ari Paul, chief financial officer, managing partner and co-founder of crypto hedge fund BlockTower Capital, just dropped his vision of financial dystopia in an epic tweetstorm. Surveillance on steroids is coming to a society near you, courtesy of governments around the world that will try to brand, issue and operate their own highly trackable and traceable digital currencies.
Their most damaging feature will be a freeze-and-seize function that will allow a government to cut off your purchasing power and revoke your ownership rights at the flip of a bureaucratic switch.
Crypto fiat (i.e. government controlled permissioned cryptocurrencies) will be the biggest battleground globally for human rights over the next decade. China is leading the way, many other countries, including some big western democracies, will follow. https://t.co/8BqfmBJ2mP
— Ari Paul ⛓️ (@AriDavidPaul) February 13, 2019
“Governments have a powerful incentive to require exclusive usage of crypto fiat. It makes tax enforcement easy, lets governments ‘turn off’ the money of criminals and political dissidents, and central banks love it for the real-time transparency and tighter monetary control.
I expect China and some others to first roll out crypto fiat, and then quickly thereafter to ban anything that competes with it: cash, non-crypto fiat, and if they enjoy significant usage, gold and public cryptocurrencies like Bitcoin.
Most money is already electronic. Going from electronic Yuan to crypto Yuan is pretty easy technologically but gives the government an entirely different level of transparency and control.
Imagine if an algorithm or bureaucrat could easily ‘turn off’ the money of 100,000 citizens with social media links to political dissidents. Not only would their money be frozen, but no one would be able to give them money. They’d be functionally cut off from society.
Currently we have privacy through obscurity. The Chinese (and US governments) can already track and freeze electronic money, but it’s very ‘expensive’ and manual. It requires patching together transactions across a long list of heterogeneous databases.
And freezing the money requires the involvement of numerous third parties (like brokerage firms) that obey government directives, but again, a lot of manual work for every freeze. With crypto fiat, it’s a click of a button across all platforms to freeze or confiscate money.
The people who are going to be most in need of cryptocurrency? My guess is the ~200m people in China out of favor with the government, and people in similar situations globally. It’s a staggeringly large pool of people.
Engineers sometimes argue with me about the distinction between crypto fiat and electronic fiat, since there’s little (if any) engineering difference. Probably the best way to frame it is in boring bureaucratic terms.
Currently when the SEC wants to investigate suspicious activity in equity markets, they have to go through a crazy process to track down the source of the trades, sometimes resulting in dead ends, because the trades go through a half dozen intermediaries.
It’s not that crypto fiat technologically enables anything that’s currently impossible with fiat, it’s that it removes the bureaucratic friction to such a degree as to enable qualitative, not just incremental, increase in government control.
One last example – imagine if Beijing law enforcement rolled out an algorithm that acted kind of like your credit card company – freezing your credit card on suspicious activity automatically. Now imagine if that applied to *all* money you have across any platform.
And if the algorithm was looking not just for outright criminal activity as we think of it, but of activity that an algorithm deemed possibly unpatriotic. And if to get access to your money again, you then had to confront a faceless bureaucracy, like the US no-fly list.
As with China’s social credit score, a great deal of the impact of such a policy is likely to come from ‘voluntary’ behavior changes among the population. If you have to be worried about an algorithm arbitrarily freezing all of your assets, may you avoid being friends.
With someone who occasionally criticizes the government. You might censor yourself and those around you to keep things easy. This creates a sharply bifurcated society, a separate underground economy and underground civil society fully divorced from mainstream.”