Crypto-Currency and new tech finance seem to be going on trial with Sam Bankman-Fried (“SBF”), founder of the collapsed crypto-currency exchange FTX and of the (allegedly improperly connected) hedge fund Alameda Research. The actual criminal question is of straightforward fraud and theft. FTX, a trading exchange, held customer deposits to ensure it could execute on trades made on its site – but evidently drew funds from that deposit account to fund investments, donations, payouts, and trades at Alameda. Whether FTX was an exchange for crypto currencies or for lead, this is a question simply of stealing via lying – SBF says it was unintentional sloppiness – which in various forms laces the history of finance.
The fascination with crypto currencies, non-fungible tokens (“NFTs”), and ideas such as “effective altruism,” a philanthropy doctrine that SBF embraced, overshadows the mundane criminal charges. Why? In part, as Wall Street Journal columnist Barton Swaim lays out, it’s “politics:” the enthusiasm of progressive politicians, entertainers, and intellectuals who see the youth, oddity, and assertiveness of so many crypto practitioners as legitimizing an anti-establishment financial sector. In part, though, many young, and not-so-young, people carry a wider mistrust of governments and large institutions. They want, among other things, money that feels free from the hand of government.
Money, after all, generally amounts to a claim on a bank, which is regulated by government and holds reserves that include government assets (including US treasury bonds for many foreign banks). Currency is generally a claim on the issuing country’s central bank. What makes these claims credible as medium of exchange or store of value is public confidence that the claims will be honored, such that people are happy to take them in payment for goods, services and investments. Until 1971, the US dollar and the British pound were valued on the gold standard, and managed by the respective central banks to hold their value in the markets. In 1971 the dollar was taken off the gold standard, so markets now value it based on the faith and credit of the Federal Reserve system. Where gold had provided a seemingly independent base of confidence, confidence in the Fed – and government – now must suffice.
The Fed has generally held up over the decades, and the dollar is still the world’s reserve currency, in multiple senses. But confidence, in many other central banks, in the workings of financial institutions, and indeed in U.S. economic management, is waning, spawning a growing mistrust. The idea, first brought to life by Bitcoin, of a currency that carries market confidence with no government backing seemed to be an answer to the mistrust.
The argument, and the problem, says that confidence is governments is not sustainable, which means that traditional money rests on an ephemeral foundation. How about, then, placing confidence instead in technology, in the programming genius and independence of computer experts? Why not realize what John Lennon’s “Imagine” suggested, in these new forms of money? The reason why not, it turns out, is that oddballs who can program computers, even if they spout idealistic social doctrines, are still subject to greed, dishonesty, and arrogance. The SBF trial shows that techies can be less deserving of confidence than government.
Reasons for mistrust of governments and their central banks take many forms. Most have to do with true mismanagement, from Argentina to Lebanon, or with political interference, as seems the case in Russia, and has been oddly exhibited in Turkey. The European Central Bank has raised resentment as its decisions affect the finances of dozens of independent national governments, in nations undergoing variegated economic pressures since 2008.
Americans – and other nationals who use the dollar as a reserve currency – depend on the credibility of the Federal Reserve system. It has retained its aura, even as it has stretched to keep the economy performing in the wake of 2008, and stretched further to fight inflation in the aftermath of the pandemic effects. True, there are challenges to its policy choices, but free society and liberal exchange of ideas have always made for debate. The ‘newer’ strains arise from our extremely high levels of debt, and a rise in other nations’ interests in reducing the dollar’s power.
For now, the dollar still feels like the dollar – Americans don’t re-calculate its value every day as, say, Brazilians did with their currencies in the 1980s. The growing question is whether our confidence is sustainable. Ultimately, it is up to our government to show us that we can manage our obligations and our revenues better, to reduce the debt levels that threaten the value of our (and others’) reserves. Ultimately, any management will require a basic recognition among our politicians, that their running partisan contest must be suspended, to allow formation of some long term debt management regimen. And ultimately, the ability of our politics to focus on the public welfare will rest on voters’ recognition that there is something fundamental that we can all agree supersedes the parties’ partisan interests.
This blog aims to reinforce that Americans take identity from a creed, in rights and in the idea that government exists to secure those rights, and that that creed stands above the partisan contest that shapes our politics. The creed is radical in many ways. The one dollar bill carries the Great Seal of the United States, inscribed with the words “Novus Ordo Seclorum,” or “new way of the world.” To keep this nation, vessel of our founding ethos, running, we will need to ensure the soundness of that dollar. Then maybe we can use technology as a tool to help us in our national experiment, instead of subordinating our judgment to the hype of ambitious operators.
Common Conviction 