Think back through Bitcoin’s history. I guarantee you a handful of events just popped into your mind first, like landmarks. If you kept thinking your mind probably started filling in from there with those landmark events as anchors.
Don’t take these as hard predictions, ignore the coating of hyperbole I can’t stop myself from adding everywhere, and note these don’t come with dates. I’m going to run through a list of “watershed moments” or macro-scale shifts in things that I think are practically guaranteed to happen or begin in the next decade.
— A Visit To The US Supreme Court —
Bitcoin creates an inherent contradiction within the current regulatory and legal framework, at least in the US and everywhere the US effectively dictates things, relating to how Bitcoin itself inherently works and two major themes in regulations and law.
- KYC/AML Laws: These exist to ensure that financial institutions know the individuals they are dealing with for the purposes of preventing criminal operations, money laundering, or terrorist financing occurs through the use of their services. This requires incredibly invasive information collection, tracking, and communication of said information between different institutions. It requires throwing privacy out the window. Or does it?
- Financial Privacy Laws: The reason things like KYC/AML exist in a country like the United States with the 4th Amendment to our Constitution is because of things like the Right to Financial Privacy Act. There are laws that restrict the situations and conditions under which the government can obtain financial records on its citizens. These laws were implemented after a Supreme Court case challenging KYC/AML law (ironically called the Bank Secrecy Act) held that financial records are the property of the institution and not customer.
See the contradiction? All of this is based on the notion that the record of financial activity is privately held in privileged silos not visible to the general public. That the government access doesn’t equate to the public’s access. That is not how Bitcoin works. Everything is right there on the blockchain for everyone to see. So while financial institutions are required to enforce KYC/AML laws and identify their customers, are they also not required to protect the privacy of their customers financial activity short a legal order to divulge it?
We’re at the point where privacy tools are actually starting to make real developments in the Bitcoin ecosystem, and we’re already starting to see behavior indicating a trend of this being marked as “bad behavior” by Bitcoin exchanges that leads to account scrutiny(and possible closure and/or seizure down the line) in response to use of privacy tools. Now, I don’t see anything in the near future in the United States smashing down all KYC/AML laws in the land, but I do see an incredibly strong argument to make against this type of reaction by exchanges and institutions to their customers using privacy tools.
The argument is this simple: they have a right to protect their privacy from the point of view of the general public at large. This system doesn’t keep all the records private by default, only revealing selectively to authority. Everything is in the open and publicly verified, by architectural requirement. So if I have a Constitutional right to privacy in the old model, do I not have one in this new model?
Now again: this is in no way a strong enough basis to smash down all KYC/AML and requirements to identify customers. But I do think this is a strong enough basis to potentially cement by Supreme Court ruling that businesses are not allowed to censor or target customers simply on the basis of using privacy preserving tools in activities not related to those businesses. If things continue in the direction they seem to be going, I think this type of legal challenge to such practices is inevitable. How will it turn out if I am right? I guess we’ll find out if I am right.
— Inevitable Mining Landscape Evolution —
Mining is probably the easiest thing to point at besides the price to really demonstrate to a normal person how far Bitcoin has come in the last decade. Consumer desktops to data centers in a decade. That change will continue to happen at a rapid pace, and part of the next shift is already underway. Vertical integration. Things went from desktop CPUs, to GPUs, to special ASICs. But those ASICs were still something easily accessible to retail consumers, small group buyers, smaller professional operations. It was still easy to get efficient and current hardware at different scales (though different prices depending on your scale).
That is going to change, and the starting signs of it are already here. Mining is going to become less and less accessible profitably to the retail and smaller market (ignoring professional hosting arrangements) participants as companies start battening down the hatches. This market is still incredibly volatile, and miners all the way from producers to equipment operators have very large capital investments that can be very risky during market downswings. Things tend to get into a frenzy when the market swings up, and go very badly for unprepared people on the swing down. This time around things are going to get serious in terms of minimizing and managing risk.
Bitmain’s finances becoming public during their IPO attempt in Hong Kong showed how they took massive profits and turned right around and lost them continuing to take massive risks that just happened to work out in a bull market. It hit them very hard, and the HKEX looking at that general pattern due to overall market volatility playing out with all the manufacturers attempting IPOs to differing degrees denied all of them. The overall market these companies compete in was deemed too risky for listing a business that directly exposed on the HKEX. This cuts them off from the capital necessary to continue expansion as Bitcoin grows by orders of magnitude. That is very bad.
The response from Bitmain in terms of adapting (ignoring the recent “coup” attempt internally) has been to make moves to restructure their business to adapt to this harsh lesson. They have numerous farms they operate themselves in China to both self-operate mining equipment and host other peoples’. These types of operations have expanded internationally to Texas and Washington state in the US and Quebec in Canada. The strategic value in operating these farms is creating predictable power costs, and having the dual option of deploying hardware you produce to mine yourself or sell capacity to other miners. Now if you put this together…they’ve positioned themselves to 1) make and sell the metaphorical shovel, 2) dig with it themselves, 3) sell the shovel to someone else and also try to sell them a place to dig. That’s exactly what Bitmain is doing with a new service.
Jihan has also established new financial services and tools Bitmain is offering to help customers hedge some of their risk by taking it on themselves, as well as other more granular arrangements in Bitmain’s favor. It’s unclear whether this specific strategy will stick given drama resulting from the internal struggle between Micree Zhan and Jihan Wu, but it shows an acknowledgement of and a strategy to deal with the risk inherent with this level of market volatility. This is absolutely necessary to survive in the long term in this sector of the ecosystem.
This is the direction this is going, with massive momentum behind it. Actors playing different roles in the mining sector will slowly start to try to sprawl out and handle every layer of the stack they can internally: Production | Research & Design | Hosting | Operation | Electricity Sourcing | Financial Risk Hedging | Lobbying. As economies of scale continue applying pressure to actors in the mining sector and trimming them down to the leanest and most efficient, they will start attempting to internally integrate as much of the entire stack to be able to control and hedge the financial risks.
A second order effect will result from this economy of scale effect playing out Darwinianly amongst all of the miners. Governments will start to creep in at a foundational layer and begin realizing they have influence to exert. To really get across my thinking here, I want to go back in the past for a second and look at some of the mining dynamics in China to my understanding from both “official” reporting and personal sources of mine. Mining exploded in China because of two factors: 1) there is surplus power in many places, 2) the finances of local governments being pretty rekt and lots of local governments being totally fine with mining because they can shave something off the top and see revenue. This dynamic might even be why we haven’t seen the Communist Party crack down on mining despite all the statements and hints to that end except in criminal cases such as power theft.
That dynamic is already playing out everywhere that mining operations are growing to scale. Step one: appease the local government. We’ve seen how things can get with the situation in Quebec with Hydro-Quebec attempting to block and auction power after seeing a huge increase in demand for electricity to mine Bitcoin. Numerous projects across the United States have been established in partnership or cooperation with the local government, in Texas, Washington, Georgia, etc. This is just how it works, you put boots on the ground and that most immediately local government at the very least is sinking their hooks in. Then the one above that can sink in. Then the one above that. The hierarchy of parasites.
We need to be very, VERY conscious of this dynamic. Unless you find Harry Potter’s wand and the magic spell that instantly whisks away every government in the whole world, they’re there and we have to deal with them. There’s only two real strategies to deal with this, and one isn’t really viable.
The non-viable strategy is attempt to take things completely off the grid and into the black market. That’s not happening. You are talking about hiding data centers, with the cumulative network energy consumption being on the scale of whole countries. Non option, and if you want to try and solve this with a POW change fork, good luck. You know where the door is.
The viable strategy is to simultaneously: 1) push at the most local levels for non-restrictive and non-draconian policies where these operations are located (and Bitcoin in general where you live) if you can while 2) pushing at the non-local levels in general for policies that leave sovereignty and power as localized as possible. If Bitcoiners and other interested groups do not stay vigilant and active in this area, then those initial local hooks will lead to State hooks which lead to Federal hooks from the national government of your country in the foundation of the mining sector: power availability. These hooks are undeniably already there in some places. If action at the social layer is not effective in dealing with this issue, then we fall down a very slippery slope:
- Eventual slide to national level regulation and direct hands poking around in how mining operations are run.
- If Bitcoin continues growing and expanding in value and market relevance exponentially, the situation works out to whichever nation has the cheapest energy reserves to burn through dominates mining.
- This could easily devolve into a super power like dynamic in terms of mining distribution, which if a stable (or “stable enough”) equilibrium, could wind up leading to a base layer in a much more centralized and restricted access state not conducive to Bitcoin’s full potential.
This aspect of the Bitcoin network/system is the weakest in terms of defensibility from real world “meatspace” threats. Ultimately if the population of a nation empowers its government to do so, they can show up and seize your mining equipment. It would have to be an amazingly resource strapped government or a very unique geographic area for that to be impractical. The only way to deal with this is socially.
And coercion is not the only mechanism for interfering at this layer of Bitcoin. Distorting incentives is another means. Chain Anchor was a protocol proposal out of MIT to effectively bribe miners into initially preferentially, and then exclusively mining KYCed transactions. The end goal was orphan non-compliant blocks. (This out of all citations, READ YOURSELF when you are done with this). These issues of economic incentive distortions can ultimately be resolved only through economic incentive corrections.
This is the “shift” I am most confident on in this piece. I would not call it short-term “OMG we’re fucked!” urgent, but this is not an issue Bitcoiners can afford to be complacent about.
— Neo-Switzerland —
I spoke above of Binks, and the technology possible to “port” subsets of Bitcoin’s properties to them, and the incentives to do so. It’s a jurisdictional arbitrage play with massive potential profits. But there is one interesting potential twist to how that could play out given it is the 21st century and all: cyberspace could itself arguably constitute a jurisdiction. Does anyone remember Darknet Markets? So there are two ways “Neo-Switzerland” could play out: an actual physical jurisdiction legalizing KYC-less or KYC-lite financial businesses and safe havening such operations, or an “extra-jurisdictional” (quotation marks because servers get hosted somewhere) dark net business.
Meatspace Neo-Switzerland
Let’s go through the possibility of a real world nation-state deciding to become a haven jurisdiction for KYC-less or KYC-lite binks. Well to start, Bitcoin is a borderless global currency/settlement network that anyone with internet access can interact with. So the potential customer base that can deposit and withdraw Bitcoin at one of these binks is anyone in the world with an internet connection that can get their hands on Bitcoin. That’s the potential capital inflow that could be attracted in the most insanely optimistic scenario. That’s what you can collect taxes on. Secondly, given a host jurisdiction, these binks can be legally incorporated and accountable entities. Even with no KYC cryptography offers a basis of both assertions of fraud, and refutations of these assertions, at least in terms of a foundation or initial filter from which to start legal disputes. These binks can offer anonymous accounts denominated in BTC, anonymous untraceable cybercash denominated in BTC, loans, escrow services, oracle services for complex smart contracts enforced by the Bink. All the financial services of the legacy world become accessible with a smartphone and either no KYC or so little it feels like 2013 again, and then some with a cherry on top.
This is a giant pile of potential profit for a jurisdiction to seize. And being a jurisdiction, an actual nation-state with a legal system, there is the potential to create enough trust to actually make this workable for international customers. Okay, so from a customers point of view how do you handle something going wrong between you and your bink? If you’re a citizen of that nation simple: you take legal recourse. If you aren’t a citizen? Well…taking legal action across international jurisdictions can be complicated to say the least. And expensive. But if we’re at the point where this bink is operating then we assume the government of this nation wants this to work and attract business right? So the government can account for this asymmetry between citizens bink customers and non-citizens bink customers and craft legislation easing the complexity of non-citizens dealing with disputes between them and their bink. And more importantly, the government can actually enforce this legislation evenly with regards to citizens versus non-citizens.
The other end of the stick is how do the other nations of the world react? The US in particular likes to tell the world how to run their affairs. Especially their financial affairs. How far can you really push things before the US drone-strikes your country into the ground? No one will know unless someone tries this.
That said, I think the type of jurisdiction where this could practically happen would be one of a very few unique profiles. Potentially somewhere such as North Korea, Iran, Venezuela, somewhere that is being heavily sanctioned and shut out from the global financial situation. Desperation is a powerful motivator. Or maybe a Spanish or Italian secession movement is successful, or France slow boils until we see a 21st century French Revolution. Big changes happen after big political upheaval. What if the King of Thailand decided to host KYC-less(or KYC-lite) binks? Thailand is already massively economically dependent on foreign tourism dollars. Why not foreign Bitcoin deposits? Tourism has had many negative consequences for the country…Bitcoin binking wouldn’t unless you thought you would be invaded by China or the US.
This is not something I’m saying is a very likely thing to occur in such a relatively short time period as the next decade, but I’m saying it’s absolutely not crazy to think it might.
Cyberspace Neo-Switzerland
Alright, let’s look at the “darknet, no known jurisdiction, totally pseudonymous” scenario. Things are the exact same as the previous scenario as far as deposits and customers, they can process BTC withdrawals and deposits for anyone in the world. But a bink that operates extra-legally cannot legally incorporate in any jurisdiction, or establish any legally accountable entity. That is a major difference in terms of trade offs versus a bink being hosted by a complicit jurisdiction. This is a much more difficult place to attempt bootstrapping a network effect as a bink, in terms of acceptance of your cybercash and deposits rather than direct BTC settlement. A bink’s network effect is rooted entirely on trust in the operator(s) of the bink. That is much easier to build as a legally incorporated and accountable entity of a known jurisdiction. The landscape your relationship with that bink takes place in is established crystal clearly. That is the opposite of how a darknet bink would work.
There would be no legal accountability for a darknet bink, no government to go to, no legal processes to take, nothing. You get the guarantees you can enforce purely with cryptography, and everything else is enforced through blind trust with no recourse. That’s it. This presents a major bootstrapping problem for this variety of bink. How do you get customers to trust you with their deposits when they have no recourse to take if you defraud them? This quandary in my opinion guarantees that this type of bink would never be able to grow to the size of one that had a legal identity in a safe haven jurisdiction.
A darknet bink would likely never be something used by mainstream users, they would be businesses patronized solely by users in very constrained circumstances. People engaged in risky illegal activity. Scammers. People who have been censored and completely walled out of the legacy financial system. I just don’t see normal people being willing to take the risk of depositing BTC with a bink against which they have no legal recourse, and which is associated only with pseudonyms. There is the potential of creating stronger guarantees than possible now through cryptography, but that starts getting into a strange area. Like I said above when talking about the possible technical developments in the next decade, there is potential for constructs that totally blur the line between service and protocol. If things work out well enough, maybe a darknet bink could make up for the difficulties in establishing trust by building stronger cryptographic safeguards.
I think there is a very good chance things like this start operating in the next decade (especially a simple trust based darknet bink), the only question is how rampant will the exit scams be?
— Birth Of A New Market —
Bitcoin is evolving into money, that’s what we’re all witnessing and participating in. Speculation, to value transmission, to unit of account. A core and absolutely required dynamic for this evolution to be completed is a massive and liquid arbitrage between Bitcoin, fiat, and goods & services. This arbitrage is what will allow businesses to actually accept and use Bitcoin. Once Bitcoin is large and relatively stable enough, a business can accept it and pay suppliers without the kind of volatility risk that exists currently. The closer Bitcoin’s stability gets to a respective fiat currency, the safer it is to accept and use Bitcoin directly rather than immediately sell for fiat. Arbitrage traders will trade these gaps, businesses will probably arbitrage these pairs themselves! Is it a better return for you to accept Bitcoin or fiat for something? Incentivize with discounts. Is it a better return for you to pay your supplier in Bitcoin or fiat? That’s what you’ll make your decision on. This dynamic is what will truly launch Bitcoin into the realm of money.
Now, the world is shifting rather rapidly in terms of geopolitical balance. The US has spent the last 20 years playing Empire in the wake of 9/11, destroying numerous countries, pressuring the world to isolate others. We are clearly starting to see the reaction to this in the form of other nations beginning to develop alternative settlement systems and moving to lessen dependence on the USD. China and Russia have begun building their own SWIFT alternatives to settle payments. They’re also even trading oil against non-USD currencies. Venezuela is even trying to foster an oil trade in its own centralized “cryptocurrency” the Petro. The world is sick of American over-reach, and they are starting to take action to create platforms and systems not subject to American control and censorship.
This trend will undeniably continue, and inevitably begin to envelop Bitcoin itself. There is no reason why the arbitrage dynamic between Bitcoin <> fiat <> good & services has to start in the retail market. In fact, I think it very likely won’t. Within the next decade I am very confident that a coalition of nations in alignment against the United States will begin trading and settling oil against Bitcoin. If Bitcoin’s market capitalization, liquidity, and price continue growing at the rates they have historically then it is inevitable. The protocol and network can handle it, the products and services to hedge against the risk of volatility are becoming more numerous every year, and the overall liquidity would offer more utility than individual non-USD fiat currencies and nation-state funny “crypto” money.
An event like this would bring massive capital influxes and price movements like you could not comprehend, and I think the chances of this not happening some time in the next decade are extremely low. Buckle up.
In Conclusion
This next decade is going to bring change and evolution on such a massive scale it will melt your faces off. I really don’t think many people in this ecosystem really grasp that. Obviously the people building things, the company CEOs, the players actually involved in these shifts and changes know. It’s also definitely fair to say that the astute and balanced observers know as well. But most people who hold Bitcoin, or casually participate or spectate in this space…I don’t think they have any idea.
The last decade was the shift from cypherpunk pipe dream to playing in the minor leagues. This next decade is going to be the shift to the major leagues. Do we all fuck up? Do we knock it out of the park? Does someone get hit in the stands if we hit a homer?
Who knows. I think observant people are capable of seeing inevitable outcomes from large trends, of seeing the large trends themselves and projecting different ways they can go.
Things are serious now, and that requires acting and thinking seriously.
