Blockchain

In the United States, the Biden administration has been pushing forward a $1 Trillion Infrastructure Bill to fund much needed improvements across the country.

It would fund clean energy, transportation, and many other things I care about.

To top it all off with warm fuzzies, there seems to be lots of bi-partisan support on Hill to make sure it passes. Not every day you see America’s two parties play nice together!

But big spending bills need money to fund them. Some legislators believe that they can get $28 Billion from the blockchain/cryptocurrency industry by changing the definition of a “broker”.

From the EFF:

While the language is still evolving, the proposal would seek to expand the definition of “broker” under section 6045(c)(1) of the Internal Revenue Code of 1986 to include anyone who is “responsible for and regularly providing any service effectuating transfers of digital assets” on behalf of another person. These newly defined brokers would be required to comply with IRS reporting requirements for brokers, including filing form 1099s with the IRS. That means they would have to collect user data, including users’ names and addresses.

The broad, confusing language leaves open a door for almost any entity within the cryptocurrency ecosystem to be considered a “broker”—including software developers and cryptocurrency startups that aren’t custodying or controlling assets on behalf of their users. It could even potentially implicate miners, those who confirm and verify blockchain transactions. The mandate to collect names, addresses, and transactions of customers means almost every company even tangentially related to cryptocurrency may suddenly be forced to surveil their users.

This bill was clearly written by someone who doesn’t understand the technology or the industry. These blockchain technologies are by nature, secure, anonymized, and global.

The correct way to tax this industry is to monitor the on/off ramps when users take their crypto gains and convert them back into USD. Many inside the industry have been asking the IRS to do just that for years now.

The only thing this provision would accomplish would be driving the entire industry out of the United States.

Thankfully, there are a few senators that get it. A bipartisan amendment was proposed by Senators Ron Wyden, Cynthia Lummis, and Pat Toomey that would fix this language, keep the tax money flowing, and protect the industry.

For some political reasons I can only speculate on, this amendment isn’t getting the support it needs.

Do me a favor, call your senators, and tell them to support the amendment. I just did and it took less than a minute.

This link does 99% of the work for you.

Be nice, pleasant and professional. It’s important that this hastily written draft doesn’t become law.

There are lots of reasons we want to save money. We might need it for a rainy day, something expensive, or maybe our children’s future.

But money is only “saved” if it holds its value over time.

Some forms of money decay over time. Flowers die, metal corrodes, and cows get less tasty. But chemistry isn’t the only thing that can make money lose value. Money will lose its value if it becomes less scarce.

A dollar might buy a house if there were only a million dollars in the world. But if we created hundreds of trillions of dollars, a dollar might only buy a stick of gum.

Throughout history, technology has helped people create new money easily.

As I mentioned in an earlier post, wampum beads were money in North America before gold and the dollar. When Dutch colonists recognized wampum’s value, they began mass-producing it in the 19th century using their new industrial technology.

Once the newly made wampum flooded the market, its value diminished. Soon everyone was forced to switch to a form of money that wasn’t easy to create, gold. Today wampum is used for ceremonies and traditional jewelry.

Today’s money faces similar risks. Governments control the supply of money within their borders. Occasionally, a governing body will be short on the money they need. Instead of raising funds through taxation, they issue new currency to meet their needs.

If a government prints too much, hyperinflation begins, and the country’s economy tanks. This has happened dozens of times in just the last 100 years. It’s currently happening in Venezuela, and there isn’t much that the citizens of Venezuela can do to stop it.

A currency that is easy to create can make everyone poor.

Ease of spending isn’t the only quality that matters when picking a medium of exchange. Good money is also easy to move.

This concept is rather simple. Money has to be able to move from my possession into yours easily.

Cows were once considered money. It’s easy to see why that didn’t catch on. Not only are cows difficult to spend, but they are also difficult to move. The people you trade with need to be within walking distance.

Gold coins were easier to move. They could fit in a pocket and move across large chunks of land quickly without much thought. This proved to be the most efficient money to move until the invention of government-issued money.

When we invented central banks, we put our gold in a central location and used it to back our government currencies. Moving money at this point required either handing over our new paper currency or relying on banks and companies to process our checks, card swipes, or wire transfers.

While these systems that we use today seem convenient, they come at a cost. When I buy a cup of coffee with my Visa card, Visa has to:

• Make sure my account has the funds available.
• Authorize the payment (so I can leave with my coffee while the rest of this takes place.)
• Tell my bank to deduct my $4 purchase at the cafe.
• Tell the cafe’s payment provider to add that $4 payment, minus the costs and fees Visa and the banks take.

Assuming this process goes smoothly (and the payment isn’t disputed after it is authorized), it could take over 24 hours for the merchant to get their money.

Moving money to another country involves even more institutions. Payments can take over a week to settle and usually come with higher fees.

Needless to say, we’ve come a long way in our ability to move money, but it is far from perfect.

In the last post, I mentioned that money itself is a network. The more people that use the money, the more valuable it becomes. But what properties make some forms of money better than others?

The first property we’ll examine is the ease of exchange. Good money makes buying an apple just as easy as buying a house.

Let’s imagine you have a collection of gold nuggets. Since everyone likes gold, they’re willing to trade with you.

You find some land you’d like to buy. You and the landowner sit down and try to come up with a fair price but struggle to reach an agreement. Your gold nuggets vary in weight (quantity) and karat (quality).

The landowner now struggles to value your offer and compare it with others.

Throughout history, we solved this problem by making money uniform. By turning raw gold into gold coins of equal karat and size, we can simply exchange by agreeing to just the amount of money.

Economists refer to this as fungibility:

a property of a good or a commodity whose individual units are essentially interchangeable, and each of its parts is indistinguishable from another part.

Wikipedia

Throughout North American history, we’ve adopted a few forms of money. With each iteration, the money has become more fungible and easier to spend.

For example, in the 17th century when British colonists had settled the Americas, the colonists didn’t have money to trade amongst themselves.

They soon adopted Native American currency, wampum (hand-crafted beads from seashells), as legal tender in 1637. Wampum wasn’t perfectly uniform, so purchases required inspecting beads individually.

In 1661 the British sent uniform gold coins to the colonies. Being fungible, the colonists quickly adopted it as it was easier to trade. Although fungible, gold coins were too valuable for small transactions. Nobody would trade a gold coin for an apple.

To trade on smaller scales, Americans needed to carry other forms of money like silver or bronze.

By the end of the 18th century, the newly formed United States created a new currency, the US Dollar. The dollar had been backed by gold, which people valued, and allowed easy exchanges at any scale.

Today, the dollar can purchase small things, like an apple, to large things, like land, with the same ease.

Fungible money makes exchanges of any size easy.

Bitcoin wants to be perfect digital money, so it begs the question: “What is money, anyway?”

Money is commonly defined as a “medium of exchange.” Let’s break these words down a little further, starting with “exchange.”

Humans have been around for about 300,000 years. For the majority of that time, we weren’t so different from any other animal. We sought food for energy, shelter for safety, and mates for reproduction.

But humans are social animals. We rely on the help of our network to survive.

You hunt, I gather, and with any luck, we will eat something tonight.

For most of our existence, our networks were small, mostly family. Knowing who to trust was easy.

70,000 years ago, we started doing something new. We started sharing stories.

Some stories held important lessons, letting us pass knowledge to the next generation. Others were more fictional and helped us explain our place in the universe.

Those who believed our stories were easier to trust. As a result, we found ourselves cooperating within larger networks, across bloodlines. The larger the network, the harder it is to trust everyone implicitly.

We tried to trade goods directly with one another, but things got tricky. From Investopedia:

Early forms of bartering, however, do not provide the transferability and divisibility that makes trading efficient. For instance, if someone has cows but needs bananas, they must find someone who not only has bananas but also the desire for meat. What if that individual finds someone who has the need for meat but no bananas and can only offer potatoes? To get meat, that person must find someone who has bananas and wants potatoes, and so on.

We needed a valuable, scarce good that anyone would easily accept. Around the world, we used many different mediums to trade. Today we call it money.

Money is an IOU for work that you did in the past to get something you need in the future.

Money itself is the biggest network. We freely exchange it with anyone who likes the money we like. We refer to these networks as “markets.”

Throughout history, a lot of things tried to be money. Some forms of money worked better than others. But why? What specific qualities make gold better as money than cows, tulips, shells, beads, or stones?