Turning it to 11

Prior to eight years ago I did not intend to read and/or review blockchain-related books. See the full list here.

The first one I published covered The Age of Cryptocurrency, a book I thought was so bad that it immediately needed a second edition.1 And no one would believe me if I simply tweeted that.

So I manually typed up all of the passages I thought were inaccurate and boy what a chore. To save time I should have just gotten the Kindle version, will try to do so going forward.

The second book reviewed, Digital Gold, is a solid book even though its review is longer than both Blockchain Revolution and The Business Blockchain, neither of which were good.

It will sound strange but I think the critique of Cryptoassets itself mostly aged well (spoiler alert: it was not a good book) but that the lead author – Chris Burniske – is someone who I think has turned the lemon into lemonade. Can’t say that I agree with everything he opines on today, but of all the “bad books,” he seems to have had the most positive growth as a commentator/investor. I probably just jinxed everyone by saying that.

The Truth Machine is about as bad as its predecessor: The Age of Cryptocurrency.

The Cryptopians was a pleasant surprise and contained virtually no errors which is accomplishment due to its length and a testament to Shin’s effort to independently fact-check the manuscript.

The Billionaire’s Folly was a fun breeze written by one of the few people that I met at pre-Covid events who didn’t immediately come across as a scammer.

This summer, after I published the review for Popping the Crypto Bubble, I spoke with one of the co-organizers (“Bob”) of The Financial Times sponsored anti-blockchain event. Even though Diehl – one of the co-authors of the book – was a speaker at the event, Bob said he still hadn’t read Diehl’s book but stated that my review was outrageously long. I responded: if you had read the book you would have seen it was filled with errors every other page.2

And last but certainly not least is Number Go Up, another pleasant surprise. It was an informative page turner, or as I call it, a palate cleanser after having read a pretty bad take from some anti-coiners – Easy Money – just a couple weeks earlier.

Obviously these are my opinions, however I try to back up each counterclaim/argument with a link or reference. So readers can fact-check my fact-checking.

What are the numbers thus far?

Below is each title listed in chronological order of review with the paperback/hardback page length in parenthesis followed by how long my review was.

  1. Age of Cryptocurrency (368 pgs) – 23100 words in the review
  2. Digital Gold (435 pgs) – 7500
  3. Blockchain Revolution (368 pgs) – 7100
  4. The Business Blockchain (393 pgs) – 5800
  5. Cryptoassets (368 pgs) – 39900
  6. The Truth Machine (320 pgs) – 27700
  7. The Cryptopians (496 pgs) – 9000
  8. The Billionaire’s Folly (264 pgs) – 500
  9. Popping the Crypto Bubble (308 pgs) – 46900
  10. Easy Money (304 pgs) – 42100
  11. Number Go Up (444 pgs) – 21000

What does this look like?

In general, the longer the book, the better it is. But the longer the book review, the worse the book was. In fact, 5-out-5 worst books I have reviewed all exceeded 23,000 words. Coincidence, I think not. That was not intentional on my part, rather, it illustrates just how many mistakes those authors made. In fact, if anything, the most recent reviews have been atypically longer due to wanting to include longer passages from the book so the reader can have more context and not just rely on a pithy snippet.

Not too dissimilar from the Anna Karenina principle, the worst books (above) flopped in different ways.3 For instance, (9) and (10) were more ideologically driven then empirical driven; making claims without sources went downhill fast. (5) Used poor analogies (such as the adoption of Twitter) to compare Bitcoin’s adoption rate. (1) and (6) were written by the same authors but Casey’s jump from topic-to-topic without firm conclusions – in both – comes across like Ian Bremmer.

With apologies to Tolstoy above, one common overlap: most of these lemons were written by people with a vested interested in pushing the narratives across the finished line. For instance both (5) and (10) were written by guys who later disclosed their bags; one of them had his phone hacked and lost money and told the NYT, the other took out a $250,000 short on coins and lost money and told The Guardian.

In contrast, the top four books I have done a review, as of this writing, all had a few things in common: a single author, which reduced the need for reconciling differing tones and voices. It probably helped that three out of four were already journalists.

These were largely non-ideological explorations of a cast of characters – and subject matter experts – central to a given coin ecosystem. Digital Gold focused on the early years of Bitcoin; The Cryptopians and The Billionaire’s Folly described the Ethereum world; and Number Go Up primarily looked into Tether and all of the things it touched. All four were written for a mainstream audience yet didn’t treat the audience like unsophisticated rubes.

Be sure to grab these for the holiday season:

Are you an aspiring writer looking to fill a void left in the book marketplace?4

I think there are at least a few topics that still haven’t gotten much attention:

  • Non-hagiographic, non-shilling exploration of the world of proof-of-work mining. The market needs an author willing to visit these facilities and not play footsy with NDAs like the Easy Money authors did. Currently we’re left with an emboldened industry lobby and a seemingly out-to-lunch WWF.
  • A dressing down of the top 20 ICOs from the 2016-2018 boom and bust cycle. Where are they now, what have they delivered, what funds do they still have, did they spread the wealth and/or enrich themselves, how often do their (co)founders engage on social media now versus then? How decentralized is the base layer infrastructure? What law firms did they use to get deferred prosecution agreements from law enforcement? How many former prosecutors joined defense counsel in obtaining them? Which of the ICO boom/bust influencers received a proffer (“queen for a day”) from prosecutors? What PR firms did they hire back then and currently work with today? If it worked for them, why not tell the world how to do it?
  • An exploration into the partisan world of the Horseshoe Theory. Recall that some Bitcoin maximalists and anti-coiners often use the same a priori cudgel to brow beat their audience. Who is funding each of their narratives? For instance, in the U.S., how much money (from “institutes”) has been spent on lobbying state and federal government agencies on behalf of miners? How many independently wealthy anti-coiners fund opposing efforts? What PR firms do either group(s) currently work with today?
  • Coin lobbyists. There are probably more coin lobbying organizations than actual users on most layer 1 blockchains. Yet there is little insight into the level of coin donations they receive and where it goes. Are those who received BTC and ETH years ago sitting on large treasuries? Apart from playing with their Tungsten cubes in their large homes, what else do the lobbyists spend their gains on? How many expats are funding them?
  • Romance-scams. One of the strengths of Number Go Up was the author flew out to Cambodia to see first hand what “pig butchering” scams looked like (trigger alert: they are compounds guarded by guys with guns and filled with slaves who sext message you). What other romance scams rely on cryptocurrency-specific infrastructure?
  • Great success(es)! If any.5

Or maybe those are just the topics I think are interesting, that the marketplace lacks, but there is little demand for it. Maybe I’m, as that anonymous coward on Twitter recently said, an imbecile.

I dunno though. An investigative journalist flying out to Tbilisi to follow-up on this mining story could win a prize that rhymes with mulitzer. Give it a thought.


  1. One of my former colleagues at R3 regularly sent me the XKCD comic, Duty Calls, whenever I started fact-checking. []
  2. As an aside, it is a little odd that few people have reviewed the book since Diehl’s views go largely uncontested by any side of the aisle. For example, a portion of the ending was cribbed by the anti-Web3 letter (he also co-authored) word-for-word, two weeks after the book was published. That is astroturfing. []
  3. Obviously “flopped” means it did not win my thumbs up. I’m sure several of these became New York Times Best Sellers. []
  4. And if you’re counting at home, that leaves two books that reside in purgatory. Let’s let them simmer as they are closer to bad than good. []
  5. Even writers who have formed their priors should spend time in the trenches to look at existing product-market fit and infrastructure-market fit. It can be boring and often relies on speaking to people working at FMIs. []

Guest Post: “Why Gold and Blockchain Don’t Mix”

[Note: Below is a guest post discussing a “real world asset” (RWA) tokenization use case that has been proposed and re-proposed for about a decade (first with Colored Coins and Counterparty). Among other articles, the author previously co-authored another thoughtful piece A Quick History of Cryptocurrenices BBTC — Before Bitcoin. Reprinted with permission; and the views are those of the authors alone.]

By Ken Griffith

Since the appearance of Bitcoin in 2008 numerous people have had the idea of issuing gold tokens on a blockchain, or using a blockchain to support a digital gold currency system.  This short essay will look at some of the attempts to do this and suggest the reasons why this has not worked, and is unlikely to ever work.

In 2015 Roy Sebag borrowed a phrase from Satoshi and created a company called “Bitgold” which performed a reverse IPO on a Canadian stock exchange.  Sebag raised several hundred million dollars to “put gold on the blockchain.” However, instead of creating Bitgold, he proposed a buyout to James Turk at GoldMoney.com.  After buying out goldmoney.com, Sebag simply invested the funds into expanding that business which had been founded in 2001. Goldmoney has a ledger, but it does not use blockchain at all.  

In the intervening years a dozen or more different gold tokens have been created on Ethereum and other platforms.   Of these, many turned out to be scams, and one or two of them were legitimately backed by actual gold.  However, none of these have gained any traction in the marketplace.

To understand why gold and blockchain do not mix we need to look at the history of digital gold and cryptocurrencies.  E-gold was the first Internet money in 1996, 12 years before the Bitcoin whitepaper was published.  By 2001 e-gold had one million users worldwide, and had an annual transaction volume of about US $2 billion per year worth of gold.  By 2005 there were six such digital gold issuers.  However, the US Treasury began a campaign of prosecuting the digital gold companies using the USA Patriot Act from 2006 to 2009, in which the four USA based issuers were indicted, their gold reserves seized, and officers indicted.

Goldmoney.com was the only digital gold issuer to survive the purge because they were fully licensed in Jersey, UK.  However, they never allowed an independent network of exchange agents to provide exchange services to their users.  So Goldmoney.com never became a popular means of payment.  Goldmoney was primarily used by institutional investors to hold large amounts of physical gold.

The primary obstacle to developing a gold payments network is government regulations in various countries.

Blockchain tokens such as Bitcoin have the advantage of being decentralized with no person or company as the issuer.  They are resistant to government regulation and control because there is no central server that can be seized or turned off.  There is no person who can be arrested to stop the Bitcoin network from continuing to process transactions.  The network continues to operate so long as the people operating servers with this software continue to operate them and keep the same rules.

When you create a gold-backed token you violate the basic social reason that has allowed blockchains to ignore government regulations.  An asset-backed token is a promise by some person or company to deliver some asset in exchange for the token.  That is implicitly a contract between the issuer and the holders of the token. The token may live on a blockchain, but the person who issues the contract lives in the real world. The physical assets used to back the token also exist in the real world.  A government can arrest a person or a company and confiscate the physical assets.

The Crux of the Problem

Once a token is issued on a permissionless blockchain it is impossible for the issuer to control who gains access to that token.  It can be transferred to someone in a country where such tokens are illegal or otherwise regulated.

We saw this in the case of EOS, which raised $4 billion in a year-long token sale from 2017 to 2018.  The terms of the sale expressly forbade US Citizens from buying the tokens.  The sale contract required the buyer to swear that they were not a US Citizen or resident of the United States.  The website blocked US IP-addresses so the token sale could not even be seen by web browsers in the United States.

Two years after the token sale was complete, the SEC began an investigation, and a class action lawsuit was filed against EOS for selling tokens to US citizens.  This means that some US citizens made a false statement under oath to buy those EOS tokens, and then handed that evidence to US law enforcement agencies.  Because the company had raised $4 billion, the large pile of money was very attractive to US law enforcement agencies.  EOS ended up settling with the SEC for 24 million dollars.

The value of the assets is the critical factor in determining which companies are prosecuted and which ones are ignored.

We conclude that any tangible asset digitized on a blockchain is vulnerable to lawsuits and criminal prosecutions from countries that regulate or otherwise make such payments illegal.

Law enforcement agencies do not immediately prosecute every company who issues such a token.  They bide their time and wait until they see a large pile of value that is vulnerable to prosecution. Only then, do they begin an investigation and prosecution in order to seize those assets using asset forfeiture laws.

How to Avoid this Problem to Issue Real Digital Assets

An Internet ecosystem which allows persons to issue real-world financial contracts for various assets would require a contract-based ledger such as one based on Ricardian Contracts.

Rather than creating one company, such as Goldmoney.com, that offers gold accounts to citizens of many countries, it is better to create a network of lawful institutions in different countries that only offer asset accounts to residents of that country.  Thus, each institution need only concern itself with the laws of one nation, rather than the laws of all nations.

A clearing mechanism will allow payments to clear between different institutions in different countries.  This short video explains the concept of a clearinghouse in two minutes:

It is better to have many small issuers of gold or other assets than one large centralized issuer.  Each of the small issuers should have a license for a money service business in their jurisdiction.

Since corruption is part of human nature, and will always be a problem, it makes more sense to build a system that anticipates the cost-benefit factors that drive corruption. Even law enforcement agencies have a cost to seize financial assets.  They have to bring a case in court, which costs money.

Many small piles of gold are much more expensive for a government to seize than one large pile of gold.  If there are many issuers, then a government would have to indict each issuer with a separate court case in a separate jurisdiction.   This is too expensive and inefficient.  Ideally, you would want issuers to hold the amount of gold roughly equal or less in value than the cost of prosecution.  So, for example, a typical prosecution of such a company would cost $1 to $5 million USD.

In traditional banking, bank ledgers were protected by financial privacy laws.  Unfortunately, the twentieth century saw the steady weaponization of banks against their customers by the State.  However, banking privacy worked effectively for centuries.  The best long term solution is for states to reform their banking laws to restore and protect financial freedom and privacy.


We find that permissionless blockchains are not environments that are ever likely to work for contract-based financial transactions. They have no native means to record consent to a contract, nor to restrict access to a token to those who have consented to a contract. 

By contrast, a Ricardian Contract based ledger would be ideally suited to enable an online financial ecosystem with securities and asset-backed tokens operating within the law.  Ricardian Contracts were invented a decade before Bitcoin.  Yet, there has been very little community interest in building Ricardian Contract based systems.  The reason for this appears to be ideological.

The ideological spectrum of cryptocurrency users leans heavily towards anarchy.  Even classical libertarians believe in the necessity of courts of law to enforce contracts.  Yet, the majority of cryptocurrency fans seem to reject even the idea of courts of law, as seen in their reaction to the CSW defamation case.  Without courts of law, contracts are unenforceable.

The idea that computer code can be a replacement for law and courts is popular but fatally flawed.  It is extremely difficult to write and maintain error-free software.  It is fine to say that the code is the law, until an error in the code allows an outcome that was not intended.  Human courts of law are the ultimate error processing routine. This is unavoidable, and therefore should be embraced in the design of any financial ecosystem.

The dream of creating online financial ecosystems that live on the blockchain, free from courts of law is doomed to perpetual anarchy.  Financial institutions, by definition, hold assets in trust for their account holders.  Such relationships require contracts and courts of law to enforce.  Without contracts and courts of law, all that can be expected is a wild west of online fraud.  The long string of failed cryptocurrency exchanges and other projects testifies to the truth of that assertion.

Presentation: The Nuances of Tokenization

Since there are still a lot of misconceptions about what tokens are, below is a short presentation I gave at the Web 3.1 Unconference discussing several tokenization attempts over the past decade. Note: this is non-exhaustive, as a full landscape report would involve hundreds of other examples.

See also the previous post: Tribes of maximalism

Tribes of maximalism

Most people uninvolved or newly involved in the world of cryptocurrency are unaware of the prickly connotations, histories, and etymology of many different memes and phrases. Below is a short explanation of a few of them.

For instance, as it relates to coins, the term “maximalist” or “maximalism” first appeared in 2014. In March 2014, Daniel Krawisz, a co-founder of the Nakamoto Institute (who was later purged for supporting BSV), wrote “The Coming Demise of the Altcoins (And What You Can Do to Hasten It).” It never said the word maximalism but used many of the same arguments and logic that maximalists would later adopt. In November of that year, Vitalik Buterin wrote perhaps the first article explaining its origin and then-usage. Subsequently, there are about a million twitter threads (in English alone) that use it in some form or fashion.

In general, its original usage was similar to how “maximalism” is used in politics, economics, sports, and other areas of human competition, with connotation similar to dominance or hegemony.

What did Bitcoin maximalism – or any coin maximalism – mean? In short, it meant that Bitcoin (or some specific coin) – for a variety of reasons – was the Highlander coin, the one coin to rule them all. And that the rest were pretenders to the throne, predestined to fail or at a minimum be a far distant number two. Uni-coin maximalism.

This all sounds silly and cultish and it truly is. Especially the “predestined” element.

Why? Because cryptocurrencies fundamentally rely on blockchains, and blockchains are run by machines that are maintained by humans. Hence the term: Soylent Blockchains. Blockchains come and go, there are hundreds of dead coins that failed for one reason or the other. Thus empirically we know that claiming a priori, one specific chain will dominate (or fail), is both fallacious and a fools errand. There is nothing mystical or supernatural about cyber coins and their underlying infrastructure. That is not to say that all chains are going to fail or that all chains have the potential to become widely used. There is a lot of middle ground in the spectrum between all dead and a popular meme coin.

But back to the topic at hand: coin tribes. Note: it bears mentioning that “tribe” itself is a centuries old term, the etymology dating back to medieval France and Roman times.

Source: Eight Things

By mid-2017, mania surrounding initial coin offerings (ICOs) throttled up, resulting in not just large public capital raises, but also unadulterated tribalism. Us versus them attitudes reached fever pitch in late 2017 with dozens of coins hitting all-time highs in market value. Bitcoin peaked at just under $20,000 on December 17th.

During this time, promoters and advocates of uni-coin maximalism started exploring new ways to segment other tribes. Often this involved smearing one or more coins, loudly, repeatedly calling someone or some project fraudulent or scams. Paying for twitter bots to brigade threads with nonsense or defamatory claims or both. FUD, inglorious FUD.

Arguably the worst offender was the attempt to segment specific clusters of people who held similar views into arbitrary categories that were at a minimum, demeaning pejoratives.

For instance, below is the original definition of “nocoiner”:

Source: Twitter

It is baffling that anyone would write this but we (probably) know who co-created it: Pierre Rochard and Elaine Ou, both prominent Bitcoin maximalists. Rochard is the co-founder of the Nakamoto Institute (now at Kraken) and Ou was the co-founder of Sand Hill Exchange, which was sued and shut down by the SEC.

In reading this definition it is unclear why anyone would actively want to self-identify as a “nocoiner.” Yet, it is clear by how the original authors and their close circle of friends used it: not as a term of endearment. 1 On panels, podcasts, news articles: the overtones were understood and explicitly baked into demeaning attacks up through the present day.

Care to engage and object to this definition and its intent? Ou states in her “Reject Nocoiner Orthodoxy” to “never engage a nocoiner.” Michael Goldstein, the other remaining co-founder of the Nakamoto Institute goes into further detail about the various categories (pre-coiner, nocoiner, bitcoiner, etc.) in a 2019 podcast. What is a pre-coiner? Someone who has not yet bought a coin (specifically bitcoin) but who is not a “hysterical loser” nocoiner. Rochard’s numerous interviews leave nothing to the imagination about what the intended connotation we are supposed to conjure up with these categories. Together they laid the foundation for other maximalists not just in the US — see this talk from last year — but also abroad.

Fun fact: the very first time I was called a dirty, filthy “nocoiner” was by a venture capitalist on WeChat, and it came in floods on Twitter immediately thereafter. December 2017 is an amazingly cherished month in this household!

Obviously people are free to identify how they see fit. However, it is worth reconsidering adopting terms with connotations that at the very least were originally crafted to be a hateful pejorative, a slur. And handwaving away its origins, perhaps because you have adopted it as your own identity, does not memoryhole its ill intent.

I used to write a newsletter that chronicled this behavior, perhaps at some point I will get a chance to post some of the doozies.

Is that all the major maximalists?

Oddly enough, although they often fashion themselves as “nocoiners,” a group of anti-coiners exists. Unlike the pejorative nocoiner, anti-coin maximalism can be described thusly: utilizing deduction alone, anti-coin maximalists are individuals who are against the existence of cryptocurrencies (or tokens) without any exception. Follow this group on social media and you will see many of the same set of manners and memes that coin maximalists often deploy.

Source: Twitter

Are anti-coin maximalists inherently right or wrong? Hitchens’ Razor states: “What can be asserted without evidence can also be dismissed without evidence.”

This cuts both ways: for coin promoters who claim that coin X is the best and the rest are rubbish – without providing evidence – this is just polemical and can be discarded. Similarly, a priori dismissing all crypto projects as scams – without providing evidence of each project – can be dismissed. The burden of proof is clear: the onus is on the party making a positive claim, that is how prosecutors must operate in court.

Why are not all cryptocurrency / tokenization / blockchain projects a scam?

As mentioned in Section 5 in the previous post:

This is a non sequitur though because law enforcement, regulators, and courts in multiple different jurisdictions repeatedly state that the burden of proof rests with the prosecution and must involve “facts and circumstances.”

Philosophically it is also a fallacy of composition. Enterprises big and small often use public key cryptography, append-only databases, and synchronizing distributed systems for day-to-day operations. These are the key pieces of a blockchain, so which part is fraudulent or a scam exactly? Is all tokenization a scam? Is PBFT a scam? Is Onyx a scam? Is Allianz’s project a scam? Is geth a scam? Is Tendermint a scam? Maybe they all are, but the onus rests on those making the positive claim, in this case: the anti-coiners. Continually throwing the baby with the bath water seems like an intellectually dishonest raison d’être.

The attempts at disparage tokenization includes lazily lumping all blockchains — whether they are permissioned or permissionless, or use Proof-of-Work or Proof-of-Stake — altogether as an amorphous blob. One example of rhetoric-filled declarations is that all blockchain usage will lead to the melting of glaciers. Actually it is proof-of-work chains that could eventually lead to this negative externality and unfair (and dishonest) to lump alternative Sybil resistant mechanisms in with the PoW albatross.

But it is too hard to filter through the noise to find a (semi) legitimate protocol!

Yea, it can be unforgiving work. But that is the only intellectually honest way to go about providing analysis or drawing conclusions. Contrary to the memes, harassing blockchain developers or researchers on the bird app is not a perfect substitute for writing a facts-and-circumstances-based case. It is probably not a coincidence that several of the loudest anti-coin voices today seem to have no idea what the history or lineage of tokenization is (hint: it didn’t start with Cryptokitties). Ignorance is a badge of honor!

Disagree? Still hate any and all coins? That is fine but simply disliking tokenization or blockchains because everyone you have encountered turned out to be a scam, does not automatically make all of them scams. If you think you have a good case for why each one undoubtedly is, write it up, and submit it to a three or four letter agency. I am sure they would love to have the ultimate case against all coins to use as a trump card for their next case.

Or as the old law adage goes: if you have the facts on your side, pound the facts; if you have the law on your side, pound the law; if you have neither the facts nor the law, pound the table.

Still disagree? HFSP! Kidding, kidding. It would take pages to write but worth subscribing to LedgerInsights who cover all of the enterprises and institutions attempting to incorporate blockchains and tokenization into their trade lifecycles. The DTCC are clearly scammers!

What is the main takeaway Tim?

Just like sportsball or e-gaming, it is really easy to get caught up in tribes, in us versus them mentality. And for a slew of reasons, social media amplifies the emotions and strong views that seem tightly wed to the coin world. It is not super fun but it is possible to be tribeless, to take a nuanced approach at filtering projects, protocols, and other digitalization efforts. Maybe try out anti-maximalism maximalism for the next few years! And at the very least, try not to throw the baby out with the bathwater.

  1. In February 2018, Marc Hochstein wrote “The problem with nocoincers” for CoinDesk. The fact that the most recent crop of “nocoiners” – many of whom joined the fray at the height of the bubble in late 2021 – adopted the word as a brand speaks to their lack of literature review. []

Was 2021 the year the coin world went from edgy to banal?

Source: wizard dork

[Note: The views expressed below are solely my own and do not necessarily represent the views of my employer or any organization I advise.]

Stop: if you are looking for a single article to discuss price action and trading activity, I can recommend Kevin Zhou’s latest “State of the Market” from Galois Capital.

Below is my own belated, very short reflection on the past year:

(1) Back in early 2019, a reporter quoted my (critical) take regarding a high yield product from BlockFi. The genesis of that conversation started from a Twitter thread in which I was told by multiple responders that the marketed (high) yield was legit and to DYOR! I had, in fact, asked around prior to publicly commenting on this product and learned that BlockFi was reinvesting deposits into other coins and tokens. Not scandalous but not really transparent either.

Fast forward three years later: BlockFi was sued by and settled with the SEC and several US states (coordinated via the NASAA). This is not an endorsement of the settlement terms (or settlement process) rather this is a reminder that prominent coin promoters on Twitter — although paper rich — are sometimes substantively and materially wrong. In this case, BlockFi followed the path of Robinhood who in December 2018 announced with much fanfare a purported 3% yield produce that marketed as being insured by SIPC… only to have to backtrack completely after the CEO of SIPC said this claim was spurious.

Clearly I am a huge fan of low-yield boomer products! HFSP!

(2) One of my most widely cited articles happened to be on a topic that has been near and dear to myself and past and present clients: collateral-backed pegged coins. Or as I fashioned some of them: parasitic stablecoins. Parasitic because they asymmetrically rely on external financial and legal systems and infrastructure, like Fedwire and US courts.

Strangely, parts of the industry not only became vocal advocates of intermedization (commercial banks) but have spent millions donating to political incumbents (plus candidates) and lobbying organizations to sway public opinion away from options such as retail-accessible central bank accounts (e.g., FedAccounts). Why is this strange? Because the ill-fated STABLE Act, which was demonized by some coinbros, specifically provided legislators and regulators with the ability to create Narrow Bank-like entities which would be more appropriate for stablecoin issuers (versus the more onerous state banking charter).

What has happened since?

In October the BIS and IOSCO — the same two entities who drafted the industry standard PFMIs — released a consultation paper covering many of the same systemic risks (and more!) that I and others had previously identified with the rise of some pegged coins. The following month, the President’s Working Group published its own report on stablecoins.

And in the past month alone, three separate papers from Federal Reserve affiliated entities have published research reports on central bank digital currencies (CBDCs) as well as pegged coins:

In mid-February, the grand daddy of all systemic risk-focused regulators – the Financial Stability Board – released its own paper that analyzed the risks to financial stability.

And that is just a hand pruned set of papers, there is even more if we wade beyond regulatory circles.

My informed nuanced views can be found on the bird app. In short: in the digital era, why should commercial banks alone be granted the privilege of having access to public money, central bank money? For instance, the Bank of England, is once again allowing non-banks to have access to a master account. Why shouldn’t this access be fully liberalized allowing retail consumers to bypass commercial banks, allowing users to go straight to the source instead of dealing with intermediaries that introduce credit and liquidity risks?

One of my colleagues put it this way: the pro-intermedization argument is a bit contradictory. To be consistent, the anti-CBDC / anti-CBDA argument would conclude that we should not have central bank money at all (nada M0). Once you introduce central bank money, you end up either arguing for a system where everyone must hold money in the private sector liabilities of a privileged cartel that can have an account at the central bank, or you argue that everyone can do that, which drives commercial banks out of business and all money is a public sector produced good.

Access to a master account is arguably not arbitrary, rather it is deliberate and for a set of reasons: namely preservation of a monetary order where money and credit originate in private banks. Allow narrow banks and stablecoin issuers that same access, let them hold all their reserves in central bank money, then our current monetary order may transform into something where banks go out of business and credit originates outside the banking sector. Bankers and many economists think that is a bad thing, others think it might be a very good thing. Either way, the stakes and implications are very high which is one of the reasons why TNB has not been approved a master account.

What does this have to do with the “Overton window” today?

In the short and medium run, collateral-backed pegged coins will continue to thrive and grow, probably without even having to whitelist specific addresses (dapps). Putting aside the tactics in self-preservation, their products are sticky, provide utility to a wide range of users, and do illustrate the desirability of having a reliable on-chain settlement asset that enables some of the use cases that traditional finance has been experimenting with for 6+ years.

Separately, it is interesting to see the algorithmic stablecoin market evolve and grow, with both UST and Frax experimenting on two different approaches. But that is a topic for another day.

(3) Perhaps the funniest and saddest time waster last year was having to deal with two separate camps on the same day: coin promoters and anti-coin promoters.

About two weeks after I announced I had conjured up a protocol idea – the Tau Protocol – one of the projects that attempted to implement it (BTCST) put my face on a banner that included a widely despised blockchain (Tron). I am frequently invited to speak at events, podcasts, and even TV and for the most part, don’t see the harm in speaking to a wide range of audiences… including religious maximalists or token aficionados.

Often conference organizers will include an headshot or simply scrape the internet for an older image. In this case, I answered two questions at a public AMA in the Tron telegram room and within hours was treated as public enemy number one. I did not create BTCST, I did not even chat in their own TG room, all I offered was assistance in implementing a protocol that utilized their “hashrate token.” I didn’t hack an exchange, I didn’t promote a specific coin (there is no Tau token), I didn’t advocate forcing a country to adopt a specific coin as legal tender. In fact, if you look at the actual short Tau paper, it was purposefully bland on implementation details or possible collaborations — no project was mentioned.

Alas several vocal coin promoters who handsomely profited off of ICO mania in 2017 did not bother to look at the separate parties (Tau, BTCST, Tron) and instead disingenuously lumped them altogether. Simultaneously a group of anti-coin promoters took to the bird app to echo the same defamatory comments. None seemed actually interested in actually looking at the moving parts. How do I know? Because they would have realized that BTCST (not Tau) was created by a team of Chinese miners who formally, publicly partnered with ~5 other large mining farms to create a “hashrate token” on BSC via Binance Launchpad (Poolin, the largest mining pool in the world, and a few other PoW mining outfits have launched similar projects).

So if I truly was the creator of BTCST (which both groups implicitly claimed) then I have some highly undermarketed technical capabilities: (1) I have stealthily been mining and working with global miners all while censuring PoW mining; (2) I somehow designed and got a new coin listed on a major exchange after just a couple months of ideation. Neither is true but don’t let the truth get in the way of an angry clickbait narrative. It’s pretty obvious what the goal and agenda that these groups have based on how they continue to portray the Tau idea to this day. Thanks for the snitch tags!

Unfortunately my family and I caught Covid at the tail end of March and I ended up in the hospital for a couple of days. Pushing back on these fact-free missives was clearly the top priority! What should have been an interesting project – to help beta test a path for PoW miners to move over to a proof-of-stake chain (BSC) – got purposefully butchered by two different sects bent on manufacturing narratives that fit their ideology. RIP Tau v1.

Want more details? Scroll on down to the Interviews section in the previous post, I said as much in three different interviews on this topic.

(4) Speaking of agendas and shifting narratives. In 2014-2017, proto-PoW maximalists insisted that mining does not use that much electricity or semiconductor resources. Then after the 2017 bubble the narrative shifted to whataboutisms: so what if a single chain that is infrequently used for actual payments consumes the energy footprint of a medium-sized country, whatabout this completely other unrelated industry that in aggregate wastes energy but totally is not involved in payments and actually contributes to socially useful products. Whatabout this! Or that! Whatabout pop muzik!

Spurred by political patronage, and friends like Uncle Musk, over the past year PoW maximalists have attempted to deflect additional criticism by spuriously claiming that:

(a) Bitcoin mining is good for grids because they absorb otherwise extraneous energy without concurrently recognizing the multitudinal other socially useful activities that could use that same energy

(b) hash-generating equipment are like batteries, nouveau batteries… that only consume and never re-emit because nothing is actually stored

(c) Bitcoin mining incentivizes construction of (renewable) energy infrastructure, projects that could have otherwise not been constructed in the first place due to decarbonization and that likely crowd out other productive uses (e.g., opportunity costs)

(d) Bitcoin mining incentivizes oil & gas producers to… use natural gas to power hashing equipment that would have otherwise been immediately flare; slight delayed usage and emission is obviously cutting-edge science guys! Make Flaring Great Again!

Actually, it’s nearly impossible to keep track of the stream of outrageous claims that PoW maximalists and their sycophantic armies are pumping out on a daily basis. This includes dredging up the lamest anti-proof-of-stake arguments that have been debunked for over half a decade. They are using privatized gains in dubious locales to conduct a multi-pronged information war that includes direct government subsidies, tax breaks, and even outright regulatory capture in several countries. Attempting to fact-check all of the nonsense and propaganda runs into Brandolini’s law. I have got other things to do but hopefully I’ll be able to set aside some time this summer to publish an irregular update on this topic.

(5) Tether Truthers and anti-tokenization armies unite. What started as a legitimate analysis of reserve composition and executive backgrounds has morphed into a new cult-like entity: USDTQ. Complete with “teThEr is a fRaUd!” capitalization bots, anonymous reply guys, and innuendo-laden podcasts all echoing the same mantras.

For background: while not the first, I was one of the earliest analysts to question the composition and business model of Tether LTD (and its relationship Bitfinex). Likewise, reporters Matt Leising and Nathaniel Popper coverage on this topic predate nearly all of the current crop of Johnny-come-lately’s who arrived just in time to add their very strident views that largely recycle what Leising and Popper already gathered (FT reporting is perhaps the exception to this morass).

The gumshoeing ultimately culminated when the New York Attorney General and the CFTC announced settlements last year with Tether LTD that included findings, such as the fact that during large portions of the time frames investigated, USDT was not fully backed or collateralized as advertised. And the executive team knew that and repeatedly lied to the public.

Instead doing a victory lap and riding into the sunset with a solid “W,” a side group of the USDTQ group doubled-down on every possible avenue of corruption real or imagined. Yet in lieu of providing evidence for cabals, we were presented with innuendos layered on innuendos. At least a half dozen predictions by prominent self-identified members were made last year and passed without occurring, including: the collapse of USDT, collapse of major centralized exchanges, collapse of the NFT market, collapse of Bitcoin, imminent arrest of Tether LTD executives and so forth.

Where’s the accountability for such bold claims? Despite predictions that have come and gone, why are they perceived as having credibility? I made a public bet with Spencer Macdonald (aka Bitfinexed) about a specific scenario he regularly claims is just around the corner. The deadline for the wager arrives at the end in January 2023. Maybe it happens, then I’ll obviously eat crow.

Yet the ultimate indication that this group is more interested in LARPing as researchers for bird app engagement and uninterested in providing evidence for their hunches: Hindenburg Research – an activist short-selling focused firm – offered a bounty of up to $1 million for information on Tether LTD. With their raucous confidence you would think that USDTQ participants would be rushing to the front of the line with detailed exposes. Easy money! Yet it is likely none of them have. Why is that? I’ve got a conspiracy theory about their grift, subscribe to my newsletter today!

The missing nuance here is that: based on information provided by the NYAG and CFTC between 2016-2018, Tether LTD and its then-executive team were lying to investors and users about the reserve composition and solvency of the organization. Yet none of the prominent Tether Truthers knows 100% for sure if Tether LTD is currently operating fraudulently. Maybe they are. If so, would be an easy fine for the CFTC and NY AG to collect since Tether LTD and Bitfinex are on the hook for meeting regular reporting requirements the next couple of years. Whistleblower forms are right here.

What does this have to do with anti-tokenization hysteria?

Coincidentally, some of the key USDTQ folks have morphed into a priori anti-blockchainers. That’s to say, by default any type of tokenization (NFTs!) or cryptocurrency or blockchain-project is either a scam or the people promoting them are deluded, or both. Nuance is thrown out the door.

This is a non sequitur though because law enforcement, regulators, and courts in multiple different jurisdictions repeatedly state that the burden of proof rests with the prosecution and must involve “facts and circumstances.”

Philosophically it is also a fallacy of composition. Enterprises big and small often use public key cryptography, append-only databases, and synchronizing distributed systems for day-to-day operations. These are the key pieces of a blockchain, so which part is fraudulent or a scam exactly? Is all tokenization a scam? Is PBFT a scam? Is Onyx a scam? Is Allianz’s project a scam? Is geth a scam? Is Tendermint a scam? Maybe they all are, but the onus rests on those making the positive claim, in this case: the anti-coiners. Continually throwing the baby with the bath water seems like an intellectually dishonest raison d’être.

The attempts at disparage tokenization includes lazily lumping all blockchains — whether they are permissioned or permissionless, or use Proof-of-Work or Proof-of-Stake — altogether as an amorphous blob. One example of rhetoric-filled declarations is that all blockchain usage will lead to the melting of glaciers. Actually it is proof-of-work chains that could eventually lead to this negative externality and unfair (and dishonest) to lump alternative Sybil resistant mechanisms in with the PoW albatross.

More to the point, attempts to tokenize wares — such as off-chain assets — predates the current NFT craze that arguably started with Spells of Genesis and Rare Pepes, both launched on Counterparty a couple of years before Cryptokitties and the existence of the ERC 721 standard.

Wait, something came before SoG and Pepes? The multiple groups that attempted to implement “colored” coins in late 2012-2014 followed by Mastercoin in 2014-2015 ran into a variety of hurdles worthy of a small book.

A couple of the lessons learned in previous tokenization attempts:

(1) the lack of widely used neutral protocol standard (e.g., 721, 1155) plagued not just trade lifecycles on public chains but also permissioned projects (and that doesn’t delve into non-technical constraints: what happens to a tokenized financial instrument as it goes between chains managed by different consortia domiciled in different jurisdictions?).

(2) intense difficulty to fuse hooks into off-chain items, especially those in the real world. Some lawyers think the latter – especially as it relates to DAOs – should be verboten because it opens up participants to an exogenous legal systems (and liabilities).

Attempting to engage in public, non-Twitter debate on these merits and demerits often meets with deafening silence, because just like Bitcoin maximalism in 2014-present day, anti-tokenization appears to be a feelings based movement driven by performative theatrics. Disagree? Let’s do a Zoom debate at your leisure!

(6) Predictions! I’ve made them in the past. Some turned out to be pretty good (look at the NFT remark!) and others not so on the mark (a couple of Bitcoin Core developers have faced civil lawsuits but nothing BSA or RICO-related). Here are my latest for 2022.

One prediction that didn’t make it into that thread: decentralized derivatives. Despite a cornucopia of well-funded players and mature products on centralized exchanges, this is where you will probably see the largest on-chain trader-led growth the next couple of years.

Why? Part of it is the inevitable desire to replicate traditional finance products and compress trade lifecycles through post-trade automation on-chain. But increasingly likely, the barriers to entry are lower for new products in part because creators do not have to jump through the expensive and time consuming gatekeeping process. Hint: the $75 annual membership to ISDA isn’t the expensive part! In addition to the Injective’s, Mango’s, and dYdX’s of the world, and non-blockchain-projects like Kalshi are worth keeping any eye on. Be sure to read Delphi’s comprehensive market research from last year too.

One addition to a prediction in that thread: tokenized projects on public chains (e.g., art-related NFTs) will increasingly attempt to store digital assets (e.g., SVG art) on-chain such that the only off-chain involvement are trading venues (CEXs). Several NFT projects have spearheaded that effort last year including Chain Runners, Anonymice, and OnChainMonkey.

Why is this important? Party because of IP claims and disputes which have arisen (e.g., after you mint an NFT and sell it, do you still have commercial rights to it?). Efforts like Mintangible are attempting to create easy-to-use NFT license agreements to protect both creators and collectors.

(7) Lastly, your moment of zen for 2021. A US-based managing partner of a US-based coin fund stating that he is betting against the US, along with a former partner of a major US-based VC fund (who was a candidate to lead the FDA and later immigrated to Singapore). The new non-aligned movement owned by a handful of coin promoters and miners, sounds like a win-win for democracy and the rule of law.

Sauce: Twitter

Public engagements over the past year

Here are most of the public engagements I’ve been involved with over the past year or so. Unfortunately due to parenting a toddler during the pandemic, I had to cancel all F2F invitations but hopefully the coming summer will bring a respite to virtual-only meetings.

Interviews / panels



Presentations / guest lecture

Introducing the TAU Protocol

[Note: the short TAU paper is available here]

Outside of my day job (at Clearmatics) I have spent the past couple of months designing a new synthetic asset protocol that uses a rebase technique to stabilize an asset at a target level. I call it the (τ) TAU Protocol.

Frequent readers have probably seen my writings on stablecoins, mining, and DeFi- related topics. For TAU, I started the process in reverse: I knew what I wanted to stabilize but wasn’t quite sure how to get there. What do I mean?

The landscape of synthetic asset-focused projects is something I have discussed multiple times. My most recent pinned tweet was an entire paper on a specific type of stablecoin that relies on exogenous banks to provide utility.

As a thought experiment, what if instead of trying to stabilize around $1 USD, the protocol tries to stabilize an existing cryptocurrency but do so on a separate blockchain… and do so with as little manual intervention as possible. In steps rebasing.

Note: in 2014 several proposals were published on the idea of stabilizing bitcoins price with respect to the U.S. dollar:

My boss (Robert Sams) wrote a paper around the same time called “Seigniorage Shares,” which outlined a way to stabilize a PoW coin using endogenous information. The idea would later spawn a couple dozen (mostly broken) efforts now live on a couple of public chains.

One notable exception to these failures is FRAX (thus far), which uses a reserve fund partially collateralized in USDC. This is an interesting workaround.

One of the problems with rebase protocols is that once the peg declines from the 1.0 target level it can be hard to credibly move it back up: if it goes above the target the process is a bit easier, solved via inflation.

So to recap: the goal is to synthesize an asset (tAsset) and maintain its target value relative to its facsimile on a different blockchain… and to have a credible way of supporting the rebasing process. How would you go about stabilizing a tAsset in practice?

One way is to follow the model of FRAX or other (partially) collateralized stablecoins: with a fund. But setting up a fund of coins that reside on one blockchain to be used on another is hard. For instance, Bitcoin only resides on the Bitcoin network, right?

Actually over the past couple of years there have been ways to tokenize or “wrap” assets from one chain and shuttle them over to another. However, these often involve new trust models (and attack surfaces).

To-date about 1% of all mined bitcoins have been tokenized or wrapped and “transported” over to Ethereum. But to interact with WBTC on Ethereum mainnet can be expensive at times. Back in January I thought: has anyone tokenized hashrate itself onto another chain? Yes it has.

After some googling I came across a paper from Alex Zhao at BTCST. They had figured out how to tokenize hashrate onto a fairly inexpensive EVM chain (BSC). I reached out to explain what I had in mind for a new Protocol idea. And they decided to try and implement it.

Another quick reminder: a Protocol is separate from an implementation. For instance, in Ethereum the “Yellow paper” provides a neutral Protocol specification from which independent parties can build client implementations of. For TAU, I am striving to reuse a similar model.

Today, the initial Protocol idea (and paper) was announced for TAU. Next week the BTCST team will implement it live. Note: while I am currently assisting them as a protocol advisor I want to make it clear that this isn’t my day job and that others can build implementations.

Lastly, I have some additional ideas for how to expand and enhance the Protocol in the future and am keen to see what kind of feedback and modifications the larger cryptocurrency community may have, especially if it includes ways to minimize manual inputs.

Insurance versus “insurance”

Was recently talking to a close friend who has been working on an insurance-focused technology company the past couple of years.

I gave him this list of projects and asked him how he would categorize them:

  1. Nexus Mutual
  2. Cover Protocol
  3. Tidal Finance
  4. Etherisc
  5. Armor Finance
  6. Nayms
  7. Unslashed Finance
  8. Protekt Protocol
  9. Risk Harbor
  10. Soteria Finance

At first glance he thought there were roughly two buckets: protection against loss, theft, and smart contract failure versus DeFi insurance platforms and parametric risks. But then Nayms is a platform and marketplace so what are other nuances?

According to him, a lot of “insurance” above is really just a derivative product so in practice most of these are basically just prediction or options markets: you are betting a contract will not fail and hoping the pseudonymous claims committee rules in your favor.

A counter-argument is that all insurance is like that conceptually. But in reality, insurers try to underwrite the risk which then leads to a pricing exercise, but the prices are grounded first and foremost in risk and then market forces adjust pricing. As opposed to a pricing exercise which seems a bit divorced from the risk but mainly driven by the price action of a coin.

Other categories

  • Parametric risks (such as Etherisc)
  • Centralized Insurance (only a handful of stealth providers)
  • DeFi Insurance (theft, loss, smart contract failure)
  • DeFi “Insurance” (similar to an option: if this thing doesn’t work I pay you monies, but it’s not designed as an insurance product…a subtle but important difference)

What are some other projects and categories to add in the future?

For more context, I highly recommend this thread on “DeFi insurance” from Lucius Fang (who is a trained actuary).

Lastly, I reached out to Stephen Palley, a cryptocurrency-nerd / attorney who specializes in suing insurance companies. According to him:

So the big issue for me — and I am planning on doing a long form piece on this — is that people who sell insurance are subject to a maze of state level regulatory and licensing requirements that they so far have seemed happy to ignore. If/when/as this gets bigger, people will go to prison.

It’s a huge opportunity for people who want to do things the right way. But as is typical, you have a lot of people who are jumping in who don’t actually know eff all about the foundations they are building on.

Categorizing the derivatives and perpetuals landscape

Over the past couple of years there has been a lot of activity not just in DeFi but in the evolution of on-and-off chain platforms for trading derivatives and perpetual contracts.

Below is a non-exhaustive table that attempts to segment and differentiate who some of the major players known. It is a work in progress and likely is missing some parts. For instance, of those listed: Synthetix and uSTONKS are the only ones that track indices and Mirror (built on Terra) attempts to track real world assets. A notable company excluded from the list: FTX (a large CEX) trades tokenizes equities and indices.

Own Layer I
Perpetual Protocol (xDai Chain)ChainLinkDEXPerpetuals
Ethereum Layer I / II
BBX (sub of OKEx)N/ACEXPerpetuals
Huobi FuturesN/ACEXPerpetuals

What is missing, what should be added, what nuances should be made?

Recent activities

Below are list of interviews, presentations, panels and other public facing engagements I have been involved with the past couple of years.  Taking care of a newborn (now toddler) during a pandemic has dampened some of the external engagement relative to prior years.

Quotes and interviews

Events, presentations, and interviews


Bitcoin and other PoW coins are an ESG nightmare

[Note: an IPFS and PDF version of this paper is available. The views expressed below are solely my own and do not necessarily represent the views of my employer or any organization I advise.]


This paper looks at the energy consumption of seven proof-of-work-based anarchic (public) blockchains such as Bitcoin and Ethereum.  By using a hashrate division method – similar to the Cambridge Bitcoin Electricity Consumption Index – a lower bound and upper bound of mining hardware are provided.  Based on this method we are able to show that proof-of-work chains continue to consume resources in direct proportion to the underlying coin value.  Due to the rapid increase in coin value, proof-of-work-related activities – such as semiconductor manufacturing – are once again squeezing supply chains and retail channels, crowding out socially productive goods and services from entering the marketplace.

The model identified a bounded range for energy consumption.  If we took the most efficient energy consumption assumptions (the lower bounds), these seven proof-of-work chains in aggregate consume 59.3 TWh per year, or roughly the footprint of Kuwait.  In most cases – such as with Bitcoin itself – the lower bound is not realistic because the necessary amount of hashing equipment (miners) for that degree of efficiency has not been manufactured.  In contrast, if we took a less conservative assumption and used the upper bound these same proof-of-work chains in aggregate consume 180.1 TWh per year, or roughly the footprint of Poland or Thailand.  The upper bound scenario is likely unrealistic for coins that have seen their value (measured in USD) decline or stay the same (such as Litecoin).  For those that have seen rapid appreciation (such as Bitcoin), it is possible that older equipment has temporarily been reconnected.

The paper is organized into several sections.  Sections 1-4 provide a foundation for understanding how traditional financial market infrastructure, such as a real-time gross settlement (RTGS) system, operates, and uses Bitcoin and Ethereum as examples of how proof-of-work-based systems inherently result in socialized losses and e-waste.  Section 5 contains calculations of smaller proof-of-work networks.  Section 6 is a summary of the calculations found in the preceding sections.  Sections 7 and 8 briefly look at misinformation spread as memes on social media.  Sections 9 and 10 look at news reports covering several large ASIC and GPU mining operations.  Section 11 provides several recommendations framed as a Call to Action.

(1) Background

This paper is a sequel to our occasional series on the energy consumption of proof-of-work (PoW) cryptocurrencies such as Bitcoin.

We will get to resource consumption in the next section, but let us start in reverse order this time.   

Many Bitcoin promoters conjure a future world in which the future of finance clears and/or settles on the Bitcoin blockchain, and in which that the demand for PoW generating equipment (miners) will simultaneously usher in a greener world.

Source: Twitter

Putting aside the continual greenwashing that many advocates are guilty of, some of the same promoters are unaware of how clearing and settlement occur in existing financial market infrastructure.1 Take for example, a real time gross settlement (RTGS) system such as Fedwire.

Fedwire is categorized as systemically important financial market infrastructure due to the enormous amount of value it transfers and secures.

According to (Bilger 2020):

In 2018, Fedwire executed 158 million transfers with an aggregate value of $716 trillion (Federal Reserve, 2019). While many of the fund transfers executed by Fedwire were of small value, the average value per transfer in 2018 was $4.5 million.

Bureau of Economic Analysis (2019) estimated that 2018 total gross domestic product (GDP) was $20.5 trillion (para. 12). Fedwire may be viewed as a kind of force multiplier for the American economy by processing annual banking payments at 35 times the country’s GDP. Further evidence of Fedwire’s role promoting the efficiency of American financial markets can be seen by considering Fedwire payments against the aggregate value of all deposits at U.S. lending institutions – $12.6 trillion in March of 2019 (Federal Reserve Bank of St. Louis, 2019). Fedwire payments for the previous year were 57 times this figure.

We have discussed these types of large aggregates before in the past.  For instance, a December 2015 paper from the Federal Reserve Board pointed out that, in the aggregate, U.S. payment, clearing and settlement systems process approximately 600 million transactions per day, valued at over $12.6 trillion.

Per day!

Source: Fedwire

When we mention these large, socially significant aggregates in conversations and debates at cryptocurrency-related conferences and events, many promoters are at a loss for words because they are unaware of these post-trade processes.  

Another group – typically self-deputized coinfluencers – will proclaim that Bitcoin can move and secure the same value if not more, via metaphors.

Source: Twitter

The container ship fetish is a sleight-of-hand trick because Bitcoin versus a RTGS is not even a false dichotomy.


Simply: the Bitcoin blockchain only transfers and secures bitcoins.  It does not move actual money like Fedwire does.2 In point of fact, all ramps into and out of the Bitcoin network necessarily involves connections and hooks into traditional financial infrastructure.  Bitcoin is co-dependent on traditional finance, not the other way around.  In other words, Fedwire can (and does) live without Bitcoin but Bitcoin intermediaries cannot live without Fedwire or other RTGS systems.

A tangentially related argument is that Bitcoin transactions are structured to move blocks of data that can include additional information beyond bitcoin itself: even if a single coin is a ‘container ship,’ Bitcoin structurally has more capacity or flexibility than traditional networks. 

The problem with this argument is that it is entirely possible to do that with a non-proof-of-work system as well.  In fact, a blockchain may not be necessary at all.  The fact the U.S., or international co-ops like SWIFT, set up its payments system to move around specific types of (messaging) data was a generational choice but not a permanent design constraint.  In other words, a PoW-based network architecture does not have an exclusive monopoly on richer or broader forms of data.  That is a red herring when comparing the two systems.

What about “stablecoins” piggybacking on top of Bitcoin?

The ongoing growth of parasitic stablecoins (such as Tether) rely on reliable banking access, specifically dollars cleared by the New York Federal Reserve.  Not to mention all the new traditional-style institutions and intermediaries hooking into Bitcoin for custody and trading.  Don’t like old, monocle-wearing trusted third parties?  Here are newer, hoodie-wearing trusted third parties to hold your coins!

More to the point, the majority of Bitcoin transactions today are simply bitcoins moving from one known intermediary to another, typically between coin exchanges for speculative purposes.  If most of the endpoints and miners are self-doxxed then there is no longer a Sybil attack problem, removing the raison d’etre for proof-of-work.

How can we visualize this?

Source: Chainalysis

The monthly line chart (above) shows the USD value of bitcoins received by merchant services during the four year period (January 2017 – December 2020).  Merchant services include processors such as BitPay, whom we have written about many times.3  

Despite oodles of free marketing that bitcoin has received, payment-related activity is still lower than during the 2017 bubble.  By some measures it is a zombie chain because Bitcoin users do not spend volatile chainletter earnings.  Or more precisely, merchant processors handled less than $4 billion of bitcoin last year.

What is another key difference between an RTGS and proof-of-work chain such as Bitcoin?

Settlement finality.4

We have discussed this multiple times but it bears repeating: proof-of-work chains – by design – allow mining participants to fork or reorganize the chain.  Block making is permissionless.  Now in practice, this does not frequently happen because the cost to acquire hash-generating equipment needed to successfully double-spend or reorg a chain is often quite prohibitive.

Either way, all a proof-of-work chain can guarantee is probabilistic finality that some type of confirmation has occurred but that there is a possibility that a well-funded attacker could reverse or reorganize the chain.  For example, in August 2020, Ethereum Classic was hit by three separate 51% attacks, one that was more than 7000 blocks deep.

In practice, the way some financial institutions involved in the cryptocurrency world (such as trading desks) mitigate the risk of a double-spend or reorg is requiring a certain amount of blocks confirmed (often 3-6 confirmations) before allowing users to have access to recently transferred funds. 

In contrast:

Fedwire transfers are one-way, which means banks can wire funds out, but cannot debit other banks and wire funds in. Fedwire is a payment system and does not perform the traditional banking functions of managing deposits and withdrawals. It simply transfers funds between accounts within the Federal Reserve System. Once Fedwire transactions are complete, they are irrevocable.

What about the actual network infrastructure?  Surely Fedwire needs millions of hash-generating machines to secure all of those transactions each day!

According to (Bilger 2020) Fedwire has around 6600 nodes, 25 which are considered “core” which also have backups in case of disruption.  Critically: none of the nodes in Fedwire is purposefully consuming oodles of extra energy to generate hashes.  

Why not?  

Because there is no Sybil attack problem in Fedwire, there are no nyms.  Anarchic chains such as Bitcoin – by design – allow pseudonyms to participate in block making.  To make it expensive to double-spend or conduct a block reorganization, proof-of-work was purposefully integrated in Bitcoin so that the attacker has to expend real economic resources to succeed.  

This entire kludge is negated in Fedwire because all participants are known: it is permissioned.

What does this image (above) represent?   

A single day of Fedwire transactions in 2004.  According to (Bilger 2020), a group of researchers isolated links and the nodes that connect them, that team was able to determine that just 66 nodes and 181 links comprised 75% of the value of daily payments. These core nodes and links are illustrated above.  And as mentioned a moment ago, the inner ring of approximately 25 densely connected financial institutions is also evident.

What does this all mean?

The participating computing infrastructure for Fedwire involves between ten and twenty thousand computers, none of which need to generate SHA256 hashes.  Its participants securely transfer trillions of dollars in real value each day.  And most importantly: Fedwire does not take the energy footprint of Egypt or the Netherlands to do so.

As we will see below, the more than 2 million machines used in Bitcoin mining alone consume as much energy as Egypt or the Netherlands consumes each year.  And they do so while simultaneously only securing a relatively small amount of payments less than $4 billion last year.  

In other words, Bitcoin currently uses about three orders of magnitude more computing machinery than Fedwire yet processes and secures significantly less.5 It is monumentally less efficient per watt on purpose.

Remember, the original purpose of Bitcoin was to enable P2P payments between unknown participants without intermediaries.  Today, it has metastasized into a network that is primarily used for speculators to trade various coins and rarely used for actual payments. 6 And it involves a vestigial PoW infrastructure whose participants are identifiable because nearly all of the miners and major endpoints are self-doxxed. 

This oxymoronic phenomenon — a resource intensive permissioned-on-permissionless infrastructure — has led to Ray Dillinger – one of the first Bitcoin users – to declare Bitcoin a disaster:

Bitcoin mining has encouraged corruption (Because it’s often done using electricity which is effectively stolen from taxpayers with the help of government officials), wasted enormous resources of energy, fostered botnets, centralized mining activity in a country where centralization means it’s effectively owned by exactly the kind of government most people thought they *DIDN’T* want looking up their butts and where the people who that government allows to “own” this whole business work together as a cartel.  

There’s a pretense of monitoring the network to guard against a 51% attack, but to me it seems pretty clear that what they’re guarding against is merely the mistake of the cartel failing to give the latest warehouse full of miners a distinct network identity.  The whole idea of proof-of-work mining is broken the instant hardware comes out which is  specialized for mining and useless for general computation because at that point the need to have compute power for other purposes is absolutely irrelevant in having any effect on mining, and there ceases to be any force that causes mining to be distributed around the world. It becomes a “race to the bottom” to find where people can get the cheapest electricity, and then mining anywhere else – anywhere the government tries to make sure ordinary people actually get the benefit from electricity bought for tax money, for example – becomes first pointless, then a net loss.

We interviewed Dillinger a couple of years ago.  Be sure to check it out.

Nornickel is a Russian mining and smelting corporation.  Last year a series of news articles described how BitCluster, a Russian cryptocurrency mining company, was building a mining farm above the Arctic Circle in Norilsk.  It chose this location in part because of the natural ambient cooling and in part to re-use land from a closed nickel smelting plant.  The farm will utilize a local coal power plant to generate 11.2 MWh to power bitcoin miners. 

The next several sections will dive into the energy consumption of the largest proof-of-work chains, including Bitcoin.  As we will show, PoW chains are the equivalent of adding an undead country – a zombie chain – to the power grid: one that consumes energy and produces little beyond emissions.

If you are an asset manager considering whether or not to include proof-of-work coins in your portfolio – and have an ESG mandate – or a policymaker considering whether or not to encourage the proliferation of these types of coins in your jurisdiction, it is pretty clear that PoW coins such as Bitcoin are an ESG nightmare and not a suitable fit.  If and when some (or all) of these coins transition to proof-of-stake is beyond the scope of this article.

(2) Bitcoin

There are multiple ways to estimate how much energy and how many resources (mining equipment, physical plant) are used generating hashes for a PoW chain.

One involves surveying miners and mining pools, and hoping they provide accurate self-reported information.  Another method involves a bit of detective work, physically visiting locations or obtaining purchase order documents from mining manufacturers.  However, this makes it hard to ascertain how much second hand equipment is being re-used.

For example, Bitcoin has a carbon footprint comparable to that of New Zealand, producing 36.95 megatons of CO2 annually, according to Digiconomist’s Bitcoin Energy Consumption Index (BECI).  According to this tool, Bitcoin consumes as much power as Chile — around 77.82 TWh.

The Cambridge Bitcoin Electricity Consumption Index (BECI), a separate tool from researchers at Cambridge University, shows a much larger figure of 121.88 TWh — more than the entire annual energy consumption of the Netherlands.

There is one more simple method that everyone can do at home on their own computer.  One that can create lower and upper bounds with a high degree of confidence.  This is the hashrate division method which we have used multiple times in the past.

The way this works is by taking the publicly known hashrate of a network and dividing it by common hashing (mining) equipment metrics.

Source: BitInfoCharts

For example, on December 30, 2020, the Bitcoin network hashrate momentarily spiked to a record high 178.6 EH/s.  That is exahashes per second (an exahash is one million terahashes).

How can we derive aggregate energy usage from this singular number?

Last May, Bitmain began shipping its Antminer S19 Pro.  There is a bit of public information on how much each of these hashing units consumes and performs.

On paper a single S19 Pro generates a maximum hashrate of 110TH/s or terahashes per second with a power consumption of 3250 watts.

If the entire Bitcoin network were solely comprised of S19 Pro’s (which it is not), it would consist of around 1.624 million hashing machines consuming 46.2 TWh in a year.  According to estimates from the EIA, that is about as much as Portugal or Singapore consumes each year.  This is a likely lower bound for how much energy is being used.

But wait, where does the Egypt number come from?

Recall that the S19 Pro is basically the most efficient, mass produced machine available today.  Due to variance (the inhomogeneous Poisson process), the network hashrate varies day to day.  In the process of writing this article it has gone from as low as 140 EH/s to the spike mentioned above.

Due to the rapid increase in Bitcoin’s price over the last few months — because hashrate follows coin value — over the next several months it is likely that the hashrate will continue to grow as purchase orders are fulfilled and hit 200 EH/s by the end of this summer.  This is why manufacturers like Bitmain are crushing it, with $327 million in cash holdings as of last month.

In practice, the network is not comprised of 1.6 million S19 Pro’s because Bitmain has not even produced half a million of them.

To get a more accurate figure we must look at older, but more common systems that are still running.

For instance, the Antminer S17e system can churn out 64TH/s running at around 2880 watts.  If the entire network was comprised of S17e systems there would be about 2.8 million machines involved.

That’s about 70.4 TWh in a year.  Which is about as much energy as Colombia or Bangladesh use.

But that is still not the upper bound.

Enter the older, but reliable Antminer S9i first released in May 2018 which can churn out 14 TH/s and consumes 1320 watts.

If the whole network was using S9i’s, then there would be about 12.8 million of these machines churning out hashes.

In a year these would consume 147.5 TWh or roughly the same amount of energy that Malaysia or Egypt use each year (this is larger than either Chile or the Netherlands).

While there are probably botnets trying to use CPUs or GPUs to mine bitcoin, the amount of hashrate generated by them is likely marginal.  Thus the S9i approximation is probably the upper bound.

Manufacturers such as Bitmain, MicroBT, or Canaan will eventually reveal how many systems they have sold which will give us some better refinement on the lower bound, the minimum amount of machines being used.

But it is clear that the spectrum is at a bare minimum Portugal and likely closer to Malaysia or Egypt, especially with so many people and companies trying to bring on older systems right now.  This would put Bitcoin around the 27th largest ‘country’ by energy consumption.

Is the hashrate division method a better estimate than the Cambridge or Digiconomist BECI models?

They both have their tradeoffs.  The Digiconomist model is inherently more conservative because it is based on miners’ income, whereas the Cambridge model uses a similar framework as the hashrate division method, starting with mining hardware that is available.

In any case, it is clear that while the energy consumption is somewhere between the Netherlands and Egypt, there is not an equivalent economic gain to the same degree.  

Another way to say this is that: historically as a country develops it produces more economic output per unit of energy input, getting more output with less input.  For example, U.S. energy consumption has been relatively flat since 2000 yet its GDP has more than doubled over the same period.  Likewise following reunification, Germany’s GDP growth rapidly outpaced energy consumption.

But the opposite occurs with Bitcoin and other PoW coins.  The more valuable a PoW coin becomes, the more energy is used to extract (mine) it.  We have written about this phenomenon before, in which the marginal cost to mine eventually equals the marginal value of the coin (MC=MV).7

As a result, PoW is clearly not something a fund with an ESG mandate should want to be involved in.

(3) Socialized losses and e-waste

Source: YouTube

Speaking of older systems, because these hash generating systems are single use ASICs (i.e., they can only do one specific thing: generate SHA256 hashes), they are often discarded in a time frame of 18-24 months.  Some parts are salvaged and reused – such as the power supplies – and sometimes a new buyer is willing to acquire used machines second hand (as in the case of North Korean coin miners).  

One estimate is that around half of all data center energy usage is now tied to Bitcoin mining.  In fact, the energy consumption of Bitcoin is more than the combined energy use of Amazon, Google, Microsoft, Facebook, and Apple.  And the e-waste that is generated annually from discarded mining equipment is roughly equivalent to what Luxembourg throws in the trash each year. 

This also does not include the socialized costs – and privatized gains – that miners place on specific geographies due to the type of energy used in generating the hashes.

Below are several recent examples:

  • In December 2020, Gazprom (the state owned petroleum company in Russia) announced that a natural gas subsidiary in Siberia was setting up coin mining equipment on-site.  Based on recent stories, similar setups have been built in natural gas fields in the U.S.
  • Another example of socialized losses and privatized gains: the Republic of Georgia.  Bitfury Group used its political connections to obtain property at below-market rates and now the Republic has the distinction of having 10% of the country’s energy production siphoned off by Bitfury’s mining operations.
  • A coal-fired powered plant in Yates County, NY was converted to natural gas back in 2017.  The owners of this 20 MW plant are trying to expand it to 106 MW, to mine more bitcoins.  Putting aside the emissions this plant will create, it will also consume vast quantities of water – 150 million gallons per day – which will get discharged back into the lake solely to provide cooling to machines that can and do one thing: generate SHA256 hashes.  Unsurprisingly the locals sued.
  • Miners in southern China depend on coal-fired power plants, especially during the winter.  Due to trade frictions between Australia and China involving coal transportation ships – PoW miners which depend on these taxpayer financed coal-fired plants – are struggling with the ensuing power shortage.
  • Kazakhstan is allocating taxpayer funds to build more than a dozen mining farms.  These are mostly powered by coal-fired plants.  Miners at a 180 MW facility in Ekibastuz will consume as much electricity as needed to power 180,000 U.S. homes.
  • Due to concerns that the record price for PoW coins like Bitcoin could cause an energy crisis in Abkhazia, the state-owned utility (Rosseti) has banned all coin mining.  

Why?  Because state-run facilities are regularly targeted by electricity thieves:8

Beginning with the 2017 “crypto boom,” Rosseti started noticing abnormal jumps in electricity consumption in numerous Russian regions. The firm identified unauthorized cryptocurrency mining farms and estimated the damage to be over 718 million rubles—about $9.5 million—a significant part of which has already recovered through court procedures.

The “black” miners are known to do more than just tap into power lines. Illegal Bitcoin operations actually build their own transformer stations.

This is by no means an exhaustive set of sources on the topic.  The examples serve to reinforce how PoW mining can be a one-way wealth extraction (privatizing gains) whilst externalizing environmental costs.

(4) Ethereum

Like Bitcoin, the past month has seen Ethereum (ETH) hit several new record prices.  Unsurprisingly this has also led to a new record in hashrate, at over 360,000 GH/s.

Source: Etherscan

In December 2020, a mining manufacturer in China, Linzhi, revealed an early demonstration of its new Phoenix mining machine via F2Pool.  According to the demo, the Phoenix could generate 2,600 MH/s and consume 3,000 watts.  It has not shipped any to the retail market and it is unclear when it might.

In contrast, the most efficient ASIC mining system on the market today (for Ethash) is the InnoSilicon A10+ Pro.  A single A10+ Pro can generate 500 MH/s and consume 1,300 watts.  This is just slightly faster than the A10 which the previous article used as a baseline.

The Ethereum network hovers at over 360,000,000 MH/s per day.  That is equivalent to 720,000 A10+ Pro’s.

Annually these machines would consume 8.2 TWh.  That’s about as much as the Congo (DRC) or Trinidad and Tobago consume.  This would probably be the lower bound.

As mentioned in the previous article, there are many mining farms that still use GPUs to mine Ethereum.  So much so that it has led to a massive, publicly reported on shortage of high end cards from Nvidia and AMD.

Without any modifications, the top-of-the-line GeForce RTX 3090 can churn out 122 MH/s and consumes 350 watts. ((With some tweaking this can reportedly be increased to 150 MH/s.)) This makes it about 50% faster compared with the 3080.

A network entirely composed of 3090’s would involve 2.95 million GPUs.  Altogether they would consume about 9.1 TWh per year.  This is about as much as Bolivia or Panama consume annually.

As you can see, as these GPUs have closed in on the previous generation of ASIC, this has led to some speculation that GPU manufacturers such as Nvidia may once again roll out GPUs just for cryptocurrency mining (again).  The last time was a major dud as Nvidia had to write-off over $57 million in hardware due to a glut in 2018.

What is an upper bound for Ethereum mining?

This is a bit harder to guesstimate compared with the upper bound for Bitcoin or Bitcoin Cash, because of the unknown factor: how many GPUs are being used.  Anecdotally it appears that a lot of less efficient GPUs and older ASICs are likely being used due to the run-up in ETH.

For example, an overclocked RTX 2080 can generate 35.3 MH/s and consume 235 watts.  

An entire network of overclocked 2080’s would consist of 10.2 million GPUs.  These would consume about 21 TWh per year.  This is about as much as Azerbaijan or Ecuador uses annually.  

In the summer of 2018 it was estimated there were around 10 million GPUs churning hashes for the Ethereum network.  For instance, JPR Research estimated that 3 million GPUs were sold to cryptocurrency miners in 2017.  During those heady days, mining farms such as Genesis Mining, rented 747s to fly large batches of GPUs to its mining farms.

Because of the mix of older, less efficient GPUs (such as the RTX 10 series) or first generation ASICs that have been switched back on, it is likely that the network hashrate is closer to the upper bound of Ecuador than mid-range of Bolivia or Panama.  This would put Ethereum around the 70th largest country by energy consumption.

Unlike many Bitcoin promoters, most Ethereum developers – and even some miners – believe that this energy footprint is temporary, pointing to an ongoing transition to proof-of-stake which started with the Beacon chain (Phase 0) launched last December.  Obviously the work-in-progress towards PoS has been known since before mainnet was even launched, yet it has been a slow slog.  

Despite the desire of developers to quickly sunset proof-of-work, last month we contacted Vitalik Buterin who pointed out that there is currently no EIP to switch over from PoW to PoS.  Based on the roadmap at least one EIP is expected to be crafted during the year.

It also bears mentioning that Buterin – unlike Bitcoin promoters – recognizes the large aggregates of energy consumption that PoW chains account for.  In an interview three years ago he explained:

“I would personally feel very unhappy if my main contribution to the world was adding Cyprus’s worth of electricity consumption to global warming.”

While “DeFi” usage and total-value-locked (TVL) has soared since the previous two articles on this topic were published, this would be an ends-justify-the-means argument.  Not a fallacy per se, but also not a frequently used argument, because greenwashing is not part and parcel to the Ethereum ecosystem.

(5) Other large PoW chains

(5a) Litecoin

The fact that Litecoin is still a “Top 10” coin in 2021 should indicate how ridiculous proof-of-work coins are for society.  No one really uses it for anything.  Except one guy who invested more than he could afford to.

In fact, the hashrate is roughly the same today as it was two-and-a-half years ago because — as pointed out many times — hashrate follows coin price.  Its most recent surges were due to PayPal adding it as an option users could buy or sell with, and an adult website (PornHub) that announced it would accept it as a form of payment.

Despite having launched several years ago, Bitmain’s Antminer L3+ is still basically the top ASIC mining unit that is used today.  It generates ~500 MH/s with ~800 watts. A slightly more powerful L3++ is on the market as well.

At around 300 TH/s, there are the equivalent of about 600,000 L3+ machines generating hashes for Litecoin.  In aggregate, these machines would consume 4.2 TWh per year.  It would be placed around 130th, between Namibia and Cyprus.

The Antminer L3++ specifications are similar:

  • Hash Rate: 580 MH/s ±5%
  • Power Consumption: 942W + 10% (at the wall, with APW3 ,93% efficiency, 25C ambient temp)

If only L3++’s were used, the outcome would be about the same. 9

This consumption is pretty absurd once we factor in things like how there are only a couple of active developers who basically just merge changes from Bitcoin into Litecoin.  In other words, one of the largest PoW networks has very few users or developers, yet consumes the same amount of energy as Cyprus.  

How is that a socially useful innovation?

(5b) Bitcoin Cash

Unlike Bitcoin, Bitcoin Cash has seen a dramatic decline in hashrate since it briefly peaked at over 5 million TH/s in 2018.   In fact, it is now oscillating around 1.3 million TH/s, or half of what it was 15 months ago.

The calculations for Bitcoin Cash are very straightforward since it is just a modified version of Bitcoin.

Recall from above that a single S19 Pro generates a maximum hashrate of 110TH/s or terahashes per second with a power consumption of 3250W.

A network consisting of just Bitmain S19 Pro systems would comprise about 12,000 systems.

In a given year these would use about 336 GWh, this will serve as our lower bound.

Not counting e-waste, that would put the energy usage of Bitcoin Cash somewhere around 174th or about the same as Burundi. Despite the fact that BCH has almost doubled in value since the last article, the hashrate decline is likely due to more efficient hardware now available.  

This presents a problem for potential malicious forks as an attacker could rent hardware (via NiceHash) or purchase older discarded hardware previously used for Bitcoin mining.  There are disagreements as to how to prevent this but most of them involve some kind of centralized group of developers manually inserting themselves into the validation process (via block signing).

For an upper bound, let us use an S9i for approximation.  Recall it churns out 14 TH/s and consumes 1320 watts.  That would involve about 93,000 systems consuming 1,073 GWh placing it somewhere between Fiji and Benin at 160th place.

Unlike last update, there is relatively little economic activity beyond speculators moving coins from one intermediary to another.  In fact, an economist with Chainalysis noted that Bitcoin Cash saw less merchant processor volume, about $12 million in 2020.10

Clearly on-chain payments is not the use case, even though the infrastructure exists to do so.

(5c) Monero

Unlike the previous article, it appears that the decision makers behind Monero stopped trying to fork it every six months to prevent involvement from ASICs.  

At the time of this writing Monero’s hashrate is hovering near its all-time high, likely due to the fact that XMR’s price has also risen, reaching a two-and-a-half year high.11

Compared with the previous article, the hashrate has increased nearly six fold to about 2 GH/s. And it is believed that most of this hashrate is still generated by GPUs and CPUs.

There are lots of how-to guides for building a CPU-focused Monero mining system, and NiceHash even has an easy-to-use profitability calculator.  

In the previous article we looked at a Vega-based GPU build, which could still work, but again, CPU mining is still typically used for Monero.  Currently the top performing CPU system on Monero Benchmarks is a modified 3990X Threadripper which generates 64,000 hashes/s and sips 600 watts.  Note: these are self-reported, user-submitted numbers.

If the entire network were composed of just this type of machine, there would be 31,250 systems running.  They would consume 164 GWh annually.  This would place it around 195th, between American Samoa and Saint Kitts and Nevis.  This would be the lower bound.

For comparison, a slightly more common Ryzen 3600 generates 7,400 hashes/sec and consumes 100 watts.  A network would consist of around 271,000 systems.  They would consume about 237 GWh annually.  This would place it around 190th between Chad and Sierra Leone.

In terms of GPUs, a RTX 3090 generates 2053 hashes/sec and consumes 350 watts.  A network of these would involve 974,184 systems.  Altogether they would consume about 2,987 GWh per year.  This would place it around 136th, between Montenegro and Jamaica.  This is not the upper bound.

As you can see, just like ASICs in sections above each older or slightly less energy efficient CPU or GPU system will incrementally increase the aggregate energy consumed.

For instance, in the previous article we looked at a 12-card Vega build, the user was able to generate 28,100 hashes/sec and consume 1920 watts. That’s about 2341 hashes per card.

That’s about 854,335 GPUs each sipping 160 watts. Altogether these consume 1,197 GWh annually.  This is still not the upper bound.

What is the upper bound then?

Without knowing how many large scale (organized criminal botnet) farms there are, it would be hard to guess because of how easy and common CPU mining is, especially CPU-cycle theft.  For instance, cryptojacking malware is so common today, that there is a distinct possibility that you know someone who is a victim, it might even be you.  Monero is typically the top coin mined in this process.  We could do an entire article on all of the variants that have come and gone.

A few months ago a manufacturer, ASICLine, claimed to be shipping a mining system that can generate hashes for Bitcoin, Litecoin, Ethereum, and Monero.  Because of how inflexible ASICs are, it is unlikely that their claim is true.  While we would like to be able to say for certain how much energy Monero is consuming, there is a possibility that someone has built a custom ASIC (or FPGA) which could throw off our estimate.  

Based on the same electricity consumption chart as the others, we can guesstimate that Monero drinks around 1 GWh a year and would be placed somewhere definitely above Chad and probably below Montenegro

(5d) BSV and ZEC and DOGE

There are hundreds, if not thousands, of dead PoW coins.  Three proof-of-work coins that have remained in the “Top 50 as measured by USD” over the past few years are Bitcoin SV (BSV) and Zcash (ZEC) and Dogecoin (DOGE).

BSV was created (forked) by Craig Wright, an Australian who claims – without sufficient evidence – to be Satoshi Nakamoto.

Due to a lack of interest beyond a core group of his followers, BSV — as measured in USD — has declined relative to its cousins BTC and BCH.  As a result, its hashrate has also declined.  At the time of this writing it is just over 600 PH/s, which is a two-and-half-year low.  This makes it relatively inexpensive to successfully double-spend or reorg the chain.12

If the BSV network was composed only of S19 Pro’s there would be around 5,454 systems consuming 155 GWh per year.  That is about as much as America Samoa at around 200th place.  This is the lower bound.  An upper bound is unknown but if we re-use the S9i there would be about 43,400 of these systems consuming 502 GWh.  That would put it around Andora or South Sudan, around 170th place.

There are a number of gambling-related apps that have been built around BSV, but no substantive economic analysis beyond the regular speculation that dominates in other chains.

Zcash received a lot of attention when it first launched for its privacy and confidentiality (opt-in) properties.  For one reason or another, it has not seen as much market interest as Monero (despite arguably having stronger technical capabilities).

Either way, at the time of this writing Zcash’s current hashrate (6.79 GH/s) is hovering near its all-time high.  That may sound like a relatively small number compared to Bitcoin or Ethereum, but it uses a hashing algorithm called Equihash, which is more difficult to generate hashes.  Unlike Monero, it is primarily mined via GPUs instead of CPUs.  There are a variety of online calculators and guides comparing different setups.  

There are also multiple ASIC miners for ZEC available including the Antminer Z15.  The Z15 churns out 420 KH/s and consumes 1,510 watts.  If the entire network were comprised of these ASIC machines there would be about 1,620 of them. Altogether they would consume 21.4 GWh each year.  It would rank around 215th, near the Falkland Islands and Kiribati.  This would be the lower bound.

One of the slightly dated comparisons involved tweaking a Nvidia 1080 Ti. One user was able to achieve around 641 H/s at 300 watts.  A network of these GPUs would comprise 1.06 million GPUs.  These would consume about 2,783 GWh.  That would place it around 140th, between New Caladonia and Mauritius.  While there may be older GPUs and even some CPUs mining, this is probably closer to the upper bound.

What about Dogecoin?

We wrote a bit about Dogecoin in 2014 but stopped because it merge mined with Litecoin in September of that year.  While it is no longer independent — as it piggybacks off of Litecoin mining — people still mine it with the same L3+ machines mentioned above (both Litecoin and Dogecoin use the same hash generating algorithm called ‘scrypt’).  Despite new record highs in prices, Dogecoin’s hashrate is about 30% less than its all-time high.  In fact, it is nearly identical to Litecoin’s hashrate because it uses the same farms and pools.  While some have suggested that this is an efficient usage of resources (two-chains-for-the-price-of-one) it creates a top-heavy situation that in theory, makes them both less secure.

(6) Status check

With all of these numbers and calculation spread around, let us briefly collate them in an easy to view section.

If the entire Bitcoin network were solely comprised of:

  • S19 Pro: it would consist of around 1.624 million machines consuming 46.2 TWh in a year.  That is about as much as Portugal or Singapore consumes each year.  This is a likely lower bound for how much energy is being used.
  • S17e: it would consist of around 2.8 million machines consuming 70.4 TWh in a year.  Which is about as much energy as Colombia or Bangladesh use.
  • S9i: then there would be about 12.8 million of these machines consuming 147.5 TWh or roughly the same amount of energy that Malaysia or Egypt use each year.  While there are probably botnets trying to use CPUs or GPUs to mine bitcoin, the amount of hashrate generated by them is likely marginal.  Thus the S9i approximation is probably the upper bound.

If the entire Ethereum network were solely comprised of:

  • A10+ Pros: it would consist of about 720,000 machines consuming 8.2 TWh.  That’s about as much as the Congo (DRC) or Trinidad and Tobago consume.  This would probably be the lower bound.
  • GeForce RTX 3090: it would consist of 2.95 million GPUs consuming 9.1 TWh per year.  This is about as much as Bolivia or Panama consume annually.
  • GeForce RTX 2080 (overclocked): would consist of 10.2 million GPUs consuming about 21 TWh per year.  This is about as much as Azerbaijan or Ecuador uses annually and is a possible upper bound.  Because of the mix of older, less efficient GPUs (such as the RTX 10 series) or first generation ASICs that have been switched back on, it is likely that the network hashrate is closer to the upper bound of Ecuador than mid-range of Bolivia or Panama.  This would put Ethereum around the 70th largest country by energy consumption.

If the entire Litecoin network were solely comprised of:

  • Antminer L3+ there would be about 600,000 machines consuming 4.2 TWh per year placing around 124th, between Moldova and Cambodia.
  • It is commonly believed that there are few, if any, dedicated GPU miners due to the inefficiencies relative to ASIC equipment.  Hypothetically these GPUs would serve as an upper bound. 

If the entire Bitcoin Cash network were solely comprised of:

  • S19 Pro: would involve about 12,000 systems consuming 336 GWh, this will serve as our lower bound.  Not counting e-waste, that would put the energy usage of Bitcoin Cash somewhere around 174th or about the same as Burundi
  • S9i: it would involve about 93,000 systems consuming 1,073 GWh placing it somewhere between Fiji and Benin at 160th place.  This is a possible upper bound.

If the entire Monero network were solely comprised of:

  • A single (modified) 3990X Threadripper: there would be 31,250 systems consuming 164 GWh annually.  This would place it around 195th, between American Samoa and Saint Kitts and Nevis.  This would be the lower bound.
  • A single Ryzen 3600: would consist of around 271,000 systems that consume about 237 GWh annually.  This would place it around 190th between Chad and Sierra Leone.
  • An RTX 3090: a network of these would involve 974,184 systems consuming about 2,987 GWh per year.  This would place it around 136th, between Montenegro and Jamaica.  Because of rampant CPU-cycle theft and cryptojacking, this is not the theoretical upper bound.

If the entire BSV network were solely comprised of:

  • S19 Pro: there would be around 5,454 systems consuming 155 GWh per year.  That is about as much as America Samoa at around 200th place.  This is the lower bound.  
  • S9i: there would be about 43,400 of these systems consuming 502 GWh.  That would put it around Andora or South Sudan, around 170th place.  This is a likely upper bound.

If the entire ZEC network were solely comprised of:

  • Antminer Z15: there would be about 1,620 of them consuming 21.4 GWh each year.  It would rank around 215th, near the Falkland Islands and Kiribati.  This would be the lower bound.
  • A tweaked Nvidia 1080 Ti: would comprise 1.06 million GPUs consuming about 2,783 GWh.  That would place it around 140th, between New Caladonia and Mauritius.  While there may be older GPUs and even some CPUs mining, this is probably closer to the upper bound.

What does this all mean?

As mentioned above (and in numerous previous articles) there are hundreds if not thousands of dead or dying PoW chains.

If we took the most efficient energy consumption assumptions above (the lower bounds), these seven PoW chains consume 59.3 TWh per year.  Roughly the footprint of Kuwait, around 46th place.  But in most cases – such as with Bitcoin itself – the lower bound is not realistic because the necessary amount of efficient hashing equipment (miners) have not been manufactured.

In contrast, if we took a less conservative assumption and used the upper bound these same PoW chains consume 180.1 TWh per year.  Roughly the footprint of Poland or Thailand, around 25th place.  The upper bound scenario is likely unrealistic for coins that have seen their value (measured in USD) decline or stay the same.  For those that have seen rapid appreciation (such as Bitcoin), it is possible that older equipment temporarily comes back online until newer replacements are installed.

And yet, in either scenario, these PoW networks are not also adding the equivalent GDP output of similar sized countries.  Society is in effect, at a net loss.

How so?

As we have mentioned in this article and others, historically, as a country industrializes, its growth is often limited by access to energy which throttles its energy consumption.  Simultaneously, as it grows and develops, it becomes more efficient per wattage of input. 

For example, according to the Energy Information Agency:

In the United States, energy intensity has been declining steadily since the early 1970s and continues to decline in EIA’s long-term projection. A country’s energy intensity is usually defined as energy consumption per unit of gross domestic product (GDP). Greater efficiency and structural changes in the economy have reduced energy intensity.

Despite dozens of RTGS systems being deployed across the world, in no instance do any of them consume the footprint of a small or medium sized country to operate.

The next section will look at some of the coin promoters and how they try to whitewash this issue away.

For instance:

Source: Twitter

Only two nuclear reactors have been built in the U.S. in the past 25 years.  One of the reasons why others may not be built in the future: the shale boom.

Interested in hearing the twenty-first century equivalent of “smoking is good for you”?

Source: Twitter

On with the show!

  1. Coin promoters

No, Bitcoin is not a battery.

Contrary to the musings of venture capitalists with a heavy stake in coins (and coin mining), mining PoW chains is not the same as a battery.  It should be obvious that energy used in mining is not reusable, it is turned into heat as it enters the environment.  When miners pay bills they convert some of their holdings into actual money, energy is not released in this process because no energy was stored to begin with.

It is hard to know where to start with this batch of Bitcoin promoters, nearly all of whom work for prominent cryptocurrency intermediaries.

Fun fact: despite continual claims that Bitcoin will spur development of Thorium-based nuclear power plants, to date, there have been zero Thorium plants built let alone funded by Bitcoin personalities.

What about stranded energy?

In practice “stranded energy” means there is some kind of inefficiency in storage and/or the transportation grid.  In some cases capital could be used to increase efficiencies (e.g., new pipelines) which could reduce the price of energy extraction or transmission.  Yet because it is stranded, it centralizes PoW mining in that specific area.13

But what about renewables?

Source: Twitter

Hitchen’s Razor: That which can be asserted without evidence, can be dismissed without evidence.

Even when a region has hydroelectricity available, the hydro power is not consistent throughout the year.  Consistent energy generation has led Bitcoin miners to areas which they perceive as stable, which often involves coal power. The “renewable argument” that many Bitcoin promoters use, neglects to account for the ‘seen and unseen’ opportunity costs involved.  For example, solar panels and wind farms still require land that could otherwise be used for different, more productive purposes; likewise dams can be deconstructed allowing habitats to regrow and rivers restored. 14

In terms of cyclical generation, even in the summer, when hydroelectric dams are at their peak output in the northern hemisphere, Cambridge BCIE estimates that more than half of energy generation still relies on non-renewables such as coal or gas.  

Many miners themselves do not provide any reason to believe this. Cambridge surveys miners, and they indicated that while a majority has renewables in the energy mix, only 39% of mining is done with renewables (as it can be a small part of the energy mix).

Source: Digiconomist

The location data above is from Cambridge, sourced from mining pools rather than a survey.  If you look at where miners are situated most of the time, you also see that while they use some renewables during the summer (wet season) in China, they are using fossil fuels the rest of the year.

According to Stoll et al., the carbon intensity of the energy used for mining Bitcoin was 480-500g CO2 per kWh in 2019 and went up to more than 550g CO2 per kWh recently due to increasing popularity of Iran and Kazakhstan.  8% of miners are now using sanctioned Iranian oil-based energy to mine.

There is also a steady stream of on-the-ground local stories providing anecdotes to the rush for relatively cheap energy.  For instance, clandestine Bitcoin mining in Iran is believed to be one of the reasons for a rash of blackouts (and smog).

Lastly, even if Bitcoin miners were mostly run on renewables (which is not occurring) Bitcoin mining could not be considered environmentally friendly.  Why?  Because of the regular cycle of e-waste that is created as next generation ASICs are introduced.

(8) Whataboutisms

Whataboutery is commonplace and normalized in the cryptocurrency world.  

Tired of policy makers pointing out that illicit activity is attracted to KYC-less chains?  Whatabout HSBC!  Dislike the moans from hospitals impacted by Bitcoin-funded ransomware operations?  Whatabout nuclear warfare!

This fallacy rears its head in the discussion of energy consumption: ignore this category of waste because there is also a category of waste there!

Source: Twitter

This is not a contest to waste as much energy as possible.  Aircraft carriers, submarines, and airborne infantry divisions do not protect RTGS systems. All wasteful activities – such as nuclear warhead production – can clearly be categorized as bad and undesirable.  It is also unclear from that thread how Bitcoin can end war or reduce military spending.

Speaking of poor analogies:

Source: Twitter

If we are going to play along with this game above: we actually know who participates in Federal Reserve decision making processes.  Whereas we still do not have a regularly updated list of who funds those with merge control in the Bitcoin Core github repo.

At the time of this writing about 70 RGTS systems are live across the world.  But only a small handful of countries with an RTGS also have nuclear weapons and/or aircraft carriers.  And only six have both. 15 This illustrates that you can have one – a secure large value transfer system – without the other.

Source: Twitter

Held’s argument is a Whataboutism.  Why?  Because this is not a contest over who wastes more (or less).

As Galloway correctly points out in that thread: no one is trying to run a PoW-based payment system with Christmas lights.  Christmas light operators are not incentivized to string up more lights as the aggregate market capitalization of light manufacturers increases.16

Source: Twitter

No one is trying to run a PoW-based payment system with smartphones.  Furthermore, telecoms do not need to consume oodles of more energy per extra unit of phone added to their networks.  PoW chains empirically and theoretically will consume energy in direct proportion to the value of the coin price.  That is why we continue to see ever larger amounts of ASIC machinery sold by Bitmain and MicroBT to miners, not less.  Yet PoW chains do not have a monopoly on securing permissionless payment systems.

Proof-of-stake (PoS) chains require some electricity too.  If this was a comparison of say Polkadot or Avalanche (both of which are PoS-based), they would consume several orders less than Bitcoin does today.  

And if these were compared to running full nodes (since there is no hash generation needed)? 

For instance, according to Bitnodes there are approximately 9,415 nodes relaying transactions on the Bitcoin network (including the 25 or so mining pools).  

At the time of this writing, there are about 110 validators alive on Polkadot and about 830 up on Avalanche.  Yet both PoS networks are arguably just as secure as Bitcoin yet neither requires burning mountains of coal to stymie malicious actors.  While we could debate ways to quantify “decentralization,” more is not necessarily better. 17 In this case, the thousands of extra non-block making validators in Bitcoin are essentially superfluous.

Source: Twitter

Source: CNBC

Virtually every sentence is incorrect.  And this is all Whataboutery.  Bitcoin mining usage could boil the ocean?  But what about banks!

For what it is worth, nearly every large bank has announced some kind of carbon neutral initiative or has attempted to provide some semblance of where the energy is sourced. 18 That is not an excuse to justify their wastes or privatized gains (and socialized losses).  

The bar should be: how can a value transfer system reduce its energy consumption and externalities, not to distractingly point fingers at other entities that also waste.  

Speaking of which, in her examples above, it is also a different type and magnitude of waste.  Banks do not generate more revenue if they leave their computers on 24/7 whereas PoW miners have to be left on around the clock to generate hashes in order to compete for block rewards.  

Furthermore, banks as a whole provide many more services (and products) beyond just processing payments.  In contrast, Bitcoin has very limited functionality, including the inability to do any on-chain lending.

Source: Bloxlive

That is not an accurate description of boiling gold (alchemy?) or what proof-of-work is as described by the original creators (Dwork and Naor).  Neither its supply schedule nor energy consumption is what creates value for PoW coins, external demand is.  

Claiming that PoW imbues a cryptocurrency with value because it requires real effort to produce it is a variation of the Labor Theory of Value.  And saying PoW can promote energy efficiency is like saying paying people to dig holes and fill them up again helps the economy. 19

Source: Twitter

The chart (above) that Held uses, does not actually describe what he is saying about Kardeshev scale civilizations.  If anything, assuming a “million dollar” bitcoin happens, PoW will actually drag Norway, China, and the U.S. back down towards Afghanistan.  Why?  Because if energy consumption goes up in those countries (via PoW mining), per capita GDP is decreasing because Bitcoin itself does not really produce anything.20 As a result, productive capacity for goods and services is being squeezed (or crowded out) by PoW-related endeavors.

In his accompanying article for this image Held states that: “The pressure to find cheap electricity sources will accelerate the effort to build fusion reactors.”

But that basically saying if you leave your car running it is good because it incentivizes finding alternate power sources.

Speaking of which:

Source: Twitter

Due to the demand shock from COVID-19, depending on geography, the cheapest sources of energy today might actually be oil and gas.  Perhaps the near-future of mining are cars parked outside of refineries in Houston, churning up hashes for PoW networks.

And last but not least:

Source: Twitter

According to modeling from the Resources for the Future, a think tank, Miami will become the most vulnerable major coastal city in the world with “100-year floods” occuring every few years rather than once a century in many locations.  A quarter of all homes at risk from flooding due to climate change reside in Miami-Dade county.  If the mayor wanted to stave off this crisis the last thing he should be encouraging is direct investments in proof-of-work based cryptocurrencies.

(9) Competing for scarce resources

Due to the rapid rise in some cryptocurrency prices, foundries that churn out semiconductors have months of backlogs due to GPU and ASIC demand.  Why?  Because there are only a small handful of foundries capable of manufacturing state-of-the-art chips and as a result there is a limited capacity irrespective of what the ultimate destination may be.

This has led to a shortage of chips used in automobiles to the point where large manufacturers such as Ford or General Motors (GM) have announced plant shutdowns.  In its most recent earnings announcement, GM estimated that:

The semiconductor shortage will shave $1.5 billion to $2 billion off adjusted earnings before interest and taxes this year.

How much semiconductor output capacity is being squeezed because of PoW miners?  

Digiconomist estimates that TSMC – the largest semiconductor manufacturer in the world which produces most, if not all, ASICs for cryptocurrency mining – would need 3-4 months at full-capacity of its 7nm output just to produce the ASICs for PoW mining equipment that have been ordered. 21 

This also impacts any industry or job that needs cutting edge GPUs, including squeezing smartphone manufacturers, console manufactures, graphic designers, and e-sport gamers.  Why?  Because the surge in mining demand has resulted in street prices for GPUs doubling what the original MSRP is.

History repeats itself: in November 2017, Chen Min (a chip designer at Avalon Mining) gave a presentation which noted that 5% of all transistors in the entire semiconductor industry were used for mining and that was driving up DRAM prices.  Last cycle this negatively impacted a variety of ancillary set of actors, such as astronomers who rely on GPUs to chug through cosmic signals.  

We are witnessing a similar phenomenon today.  For instance, MSI announced that it may launch mining-specific GPUs this year.22

The current surge in demand for GPUs for mining has led some participants to acquire hundreds of gaming laptops en masse, crowding out, again, anyone who needs a high performance GPU.  The image (above) comes from a Weibo account tracking various China-based miners who are showing off their GPU farms consisting of high-end laptops.  

“Laptop mining” has pushed new buyers down the performance curve, to hardware that is two generations old.

Below are three publicly listed companies that have announced large purchases of mining equipment in the past several months:

  • Riot Blockchain – which pivoted during the last bull run from a biotech company (Bioptix)   to a coin mining company – announced it was purchasing and installing about 10,000 S19 Pro’s from Bitmain.
  • Hut 8 purchased 5,400 mining machines from MicroBT for $11.8 million
  • The9, a gaming company, purchased 26,007 mining machines from Canaan

A few days ago UK-listed Argo Blockchain announced it would build a 200 MW mining facility in West Texas.  

Private companies have also announced large purchases of coin miners.  For instance, last month Blockstream announced that it had purchased $25 million worth of equipment from MicroBT and that this would be part of its 300 MW of mining capacity.  

And an anonymous buyer in Russia, recently acquired 20,000 mining systems that consume 70 MW for a new farm in Bratsk, Siberia.

And this is just the tip of the iceberg.

Source: Tech ARP

A GPU farm of 78 GeForce 3080s was photographed (above) churning up hashes for Ethereum last month.  

An entire paper or two could be written on large bulk purchases of ASICs or GPUs which crowd out other industries that need the same resources for actual productive activities.

(10) Undead countries are an ESG nightmare

Is it a stretch to call Bitcoin a ‘smoldering Chernobyl sitting at the heart of Silicon Valley’?  

In May 2014 we briefly discussed a hypothetical “million dollar” bitcoin.  At the time, Bitcoin’s price had dropped below $500 and we were already able to empirically discern that hashrate grows (or declines) directly proportional to coin value.

In the previous articles we found that, despite the introduction of increasingly energy efficient hardware, a PoW network like Bitcoin consumes ever larger amounts of energy.  That is because of the Red Queen’s Race: miners do not downsize farms in aggregate, they simply replace aging hardware with newer ones; they must run faster in order to stay in the same place.

That is why anyone that has access to a hashrate chart can project with decent certainty what the likely outcome of a “million dollar” bitcoin will be in the future.

If a $40,000 bitcoin has already led miners to consume the energy equivalent of the Netherlands or Egypt, a million dollar bitcoin would be about 25 times as much.

What does that mean in actual numbers?

  • If the Netherlands is the proxy: 2,757 TWh, roughly midway between India and the U.S.
  • It Egypt is the proxy: 3,764 TWh, roughly the same as the U.S.

Critical to any analysis of energy usage is economic output.  In a million dollar bitcoin world, society would be bearing the externalities of mining activity that does not produce a proportional amount of GDP.  For instance, much of the coin mining industry is reliant and dependent on taxpayer funded utility companies and grids.  As a result, we would see the equivalent of an additional U.S.-sized energy usage without seeing anywhere near the economic output, this would be a huge net loss.

This also does not take into account e-waste that is created via discarded single-use ASICs.  And it does not take into account other PoW networks such as Litecoin which are basically ghost towns yet consume country-sized energy units too. 

Miners will surely lead to greener sources of energy production, right?

This is a red herring.

Through the usage of either permissioned systems (like an RTGS) or a proof-of-stake chain, the energy consumed by PoW chains did not need to take place at all.  In fact, PoS chains can provide the same types of utility that PoW chains do, but without the negative environmental externalities.  PoW chains are the equivalent of adding an undead country – a zombie chain – to the power grid: one that consumes energy and produces little more than emissions.  

Because of disputes among its undead participants these zombie chains must utilize the judicial and legal resources of third party countries. The chains also have a parasitic relationship to other government-run services that they continue to rely on such as taxpayer-financed energy grids.

(11) Call to Action

What can be done?

For starters, do not patronize coin lobbying organizations that weaponize misinformation.  They are not dedicated to protecting consumers or the environment.  Their mission is to convince legislators around the world to take a hands-off approach to regulations, including potential taxes on miners.

Source: Twitter

Nearly three years ago, the executive director of Coin Center, Jerry Brito, solicited names to hire to whitewash easy-to-prove energy consumption numbers.  

Why?  Because it is bad for business. Some Bitcoin promoters like to present themselves as being part of the cutting-edge future, one disassociated with the ancien régime.  But as we have seen repeatedly in this paper, PoW miners compete for the same scarce resources and capacity that society relies on to generate real goods and services.

Source: Twitter

This is not true.  Agrawal, who works with Brito at Coin Center, attempts to limit the available options when there are a wide range of other possibilities.

For instance, according to The New Republic:

In 2020, Tesla sold about $1.58 billion worth of these [carbon] credits—almost exactly the value of the Bitcoin purchased.

Tesla is going to account for its Bitcoin holdings as intangible assets (goodwill) which is not how this line item was intended for.  This is clearly shrewd opportunism (and accounting), not some re-imagination of resource consumption.

According to Digiconomist

If 12 million people used Bitcoin to buy a Tesla, it would be enough to completely offset the combined total of CO2 saved by these EVs (by Tesla’s own account).

Elon Musk says he is now a fan of Bitcoin but PoW miners are directly cannibalizing the chip production capacity required to produce Tesla vehicles, a point that Tesla’s latest 10-K filing indirectly touches on.

Like parasitic stablecoins, miners in proof-of-work networks such as Bitcoin piggyback on top of the current energy extraction and generation infrastructure. 23 Furthermore, Bitcoin itself is not an alternative to an RTGS (traditional finance) so much as it is a shadow payment service that enables illicit activities to occur via a spectrum of intermediaries (e.g., underregulated coin exchanges).  Continually comparing one versus the other is specious because one fully depends on the other to exist.

What can you do?

Most developed and developing countries levy taxes on polluters or “sin” activities. 24 Clearly proof-of-work mining falls into both categories.

Contact your local Public Utility Company and explain the socialized losses and privatized gains that are possibly accruing to miners.  In addition to levying a tax on coin mining activity, perhaps introducing a tax on PoW-based holdings at intermediaries could be discussed since they directly benefit from miners providing the underlying blockchain infrastructure.

And if you are a user of a cryptocurrency, publicly advocate for switching to proof-of-stake (PoS) chains or accelerating such transitions if they are already underway.  You can still enjoy decentralized finance in a way that does not dramatically contribute to climate change.25


Thanks to the following people for their helpful feedback: CK, JG, VB, RG, KR, JH, MW, and AV.


  1. As one reviewer noted: this leads to a Bastiat-esque “what is not seen” argument: if Bitcoin forces really smart people to work even harder on renewable energy, that would come at the cost of those really smart people working on other things that could easily be just as important. You can’t just make people do more stuff in the abstract by throwing more problems into the world and expect the result to be better on-net.  If that were true, then we should advocate destroying cities to help promote the development of next-generation construction and medical technology. []
  2. There is a clear distinction between Bitcoin and actual money that is beyond the scope of this article (it partially has to do with the unit-of-account).  We could focus on the non-money-moving-related functions of the financial system that of course Bitcoin does not provide at all (although “DeFi” on Ethereum partially does).  However, for the purposes of this article, the act of securing, transferring, and verifying payments is what we wanted to highlight. []
  3.  In 2016 I visited Hong Kong a few times. On one visit I met with a couple of executives at a coin exchange.  They said that their number one product was pre-loaded debit cards that were sold to mainlanders, typically to skirt capital controls and/or bribe folks with.  Some of the large cryptocurrency payment processors (like BitPay) also provide payroll services, perhaps some of those coins are miscategorized as “payments.”  In another anecdote, one commenter explained that: I can say w/ high confidence that most of that volume in ’17 was related to bitcoin wallets converting BTC to USD through Bitpay in order to load funds to prepaid cards – up until Visa killed that product in early Jan 2018. So not really representative of “BTC payment activity”. []
  4. This dovetails into conversations around legal recourse and recovery due to disputes.  See also: Settlement Risks Involving Public Blockchains and Code is not law []
  5. One counter-argument from promoters is: “what about stablecoins” such as Tether that piggyback on top of Bitcoin via Omni?  Through an FMI lens, a lengthy rejoinder can be found in Parasitic Stablecoins.  Through a technical lense, it bears mentioning that these piggyback coins arguably make the underlying PoW networks less secure; see Watermarked tokens and pseudonymity on public blockchains. []
  6. According to Chainalysis, more than three quarters of on-chain activity in a given day for Bitcoin are transfers between intermediaries, specifically exchanges.  Due to volatility, users typically resort to utilizing ‘parasitic stablecoins’ – such as USDT.  In this case, PoW chains are superfluous due to the usage of permissioned end points. []
  7. One reviewer commented: From an outside view, even taking into account economies of scale and miniaturization, it is extremely rare that consuming more of something takes less energy than consuming less of something.  A contrived example is: ‘if you invade a country with more soldiers you could lose fewer soldiers because the war finishes more quickly.’ But that’s not really the same situation at all. []
  8. Several months prior to that report, Rossetti announced that it had been victim to at least $6.6 million in stolen electricity via coin mining.  Following the run up in coin prices in 2017, one of the culprits believed to have stressed parts of the European power grid in early 2018 were coin miners. []
  9. A network of only L3++ would comprise 517,241 machines and consume 4.3 TWh. []
  10. Private correspondence, February 10, 2021 []
  11. The XMR price is still well below the highs from late 2017 – early 2018.   []
  12. Due to the size of its blocks, BSV also regularly sees orphans and accidental reorgs. []
  13. PoW mining might also be inadvertently subsidizing energy that would otherwise be anathema (e.g., “dirty” hydrocarbon extraction due to its lower costs). []
  14. Another unseen cost: scarce resources such as rare earth minerals used to construct solar panels or PoW equipment (and the e-waste it generates) that could have been used in more productive endeavors or not consumed at all. []
  15. The six countries that have both are: China, France, India, Russia, the U.K., and the U.S. []
  16. There are some good jokes waiting to be made about “alternative” Christmas light implementations.  With faster or slower blinking; or larger bulbs! []
  17. One model to measure could be “sliding windows” as described in Measuring Decentralization in Bitcoin and Ethereum using Multiple Metrics and Granularities from Lin et al. []
  18. In 2019 over 50 banks and other financial institutions launched the Partnership for Carbon Accounting Financials (PCAF) to assess and disclose the impact their loans and investments will have on climate change using common carbon accounting standards.  Several other initiatives track the aspirations of banks including Mighty Deposits and Bank Track. []
  19. Ironically they do not yet realize it but PoW proponents are embracing a type of impaired Keynesianism. []
  20. Bitcoin-focused intermediaries (such as coin exchanges) do enable trading of various financial products (such as derivatives) which likely contribute to some kind of economic output.  But these trusted third parties are – from an accounting perspective – separate from the Bitcoin network which only produces intangible bitcoins. []
  21. According to Digiconomist: 28 TWh annually of Antminer S19 Pro’s is about a month of capacity.  If the Bitcoin network doubles from current levels, it will take about 3-4 months (not including replacement of older ones).  And that is just production for Bitcoin-specific hardware. []
  22. Tom’s Hardware recently compared 30 different GPUs to find out which ones had the best return-on-investment for Ethereum.  Surprisingly, it was the Nvidia 1060 first released in July 2016. []
  23. Again, PoW chains such as Bitcoin often involve hundreds or thousands of superfluous nodes that maintain copies of the blockchain and verify balances; all of this subsists on top of the existing energy exploration and production infrastructure. []
  24. Another consideration that funds with an ESG mandate should consider is not just the environmental impact of PoW mining but also the human rights that may be violated in the production of said coins. []
  25. Decentralized Finance: On Blockchain- and Smart Contract-Based Financial Markets by Fabian Schär []

Parasitic stablecoins

Leech - Wikipedia
Source: Wikipedia

[Note: this is a sequel to my previous post: Systemically important cryptocurrency networks, which critically examined how certain digital tokens parasitically leech off the U.S. banking system. There is an accompanying Appendix to this document as well.]

The second half of 2020 saw a large set of draft regulations and proposals surrounding cryptocurrencies and specifically, “stablecoins.”1

For instance, in July, the influential Group of Thirty published its investigation into digital currencies and stablecoins. In late September, the E.U. announced an expansive regulatory framework called Markets in Crypto Asset Regulation, or MiCA.2 A month later the Financial Stability Board (FSB), the top global stability watchdog, released its “final” report on what they called global stablecoins (GSCs). A month after that, the Bank for International Settlements (BIS) released a report specifically looking at stablecoins.

A few days later there was a flurry of tweets and articles written up in response to the newly proposed STABLE Act in the United States. And coincidentally, this past month the President’s Working Group on Financial Markets released a report on stablecoins that came out swinging against “multi-currency” projects like Facebook’s Diem (formerly Libra) as well as broad pieces of enabling infrastructure. 3

While each was written by different sets of authors in different jurisdictions, all had some common ground: regulation and risks of panjurisdictional commercial bank-backed “stablecoins.”4

This post will go through some of the background for what commercial bank-backed stablecoins are, the loopholes that the issuers try to reside in, how reliant the greater cryptocurrency world is dependent on U.S. and E.U. commercial banks, and how the principles for financial market structures, otherwise known as PFMIs, are being ignored.5

Let’s start in reverse order.


What are the PFMIs?

We have discussed the Principles for Financial Market Infrastructures (PFMIs) before. It is an evolving set of principles and guidelines for financial market infrastructures (such as CSDs, CCPs, payment systems) that are maintained and updated based on research and collaboration between two international regulatory bodies: BIS and IOSCO. Their joint 2012 paper is considered the gold standard and is frequently cited in the press, academia, and regulatory bodies.

For the purposes of this article, we will look at just once slice of the 2012 document. Principle 9 of the PFMIs states:

An FMI should conduct its money settlements in central bank money where practical and available. If central bank money is not used, an FMI should minimise and strictly control the credit and liquidity risk arising from the use of commercial bank money.

We have ample evidence from the 2007-2009 Great Financial Crisis (and other eras) that dependence on commercial banks is subpar and adding yet another (underaccountable) layer on systemically important financial institutions (SIFIs) is not ideal. 6

Without going into weeds, the PFMIs and the committees involved in drafting them, state and then re-state the importance of reducing credit risk exposure to commercial banks. Yet in all instances today, almost every collateral-backed stablecoin that has thus far been issued does so through tokenizing deposits custodied at commercial banks.

This is improper for a variety of reasons and there are remedies and solutions. For instance, while we await liberalized access to central bank digital accounts (CBDAs) or currencies (CBDCs), setting up “narrow banks” or FedAccounts have been highlighted as complimentary solutions in the United States.78

When presenting these alternatives in public — especially on social media — a noticeable amount of “fist shaking” and “pearl clutching” occurs from partisans unaware of how reliant stablecoins are on the U.S. and E.U. commercial banking systems. 9 10

For example, a number of prominent cryptocurrency promoters claim that draft legislation (such as the STABLE Act) would destroy innovation or even blockchains themselves. 11

As it stands today, non-compliance with the Bank Secrecy Act (BSA) is strictly speaking not “innovation.” It is regulatory arbitrage which can create a race to the bottom that may harm consumers.1213 Commercial bank-backed stablecoins are ‘innovative’ insomuch as they are not playing by the same explicit rules that other bank-like entities have to.

We will discuss them at length further below but currently – as measured in trading volume – the two most “popular” commercial bank-backed stablecoins are USDT (Tether) and USDC (USD Coin).14 Both claim to be collateralized by U.S. dollars held in custody at commercial banks. Together they accounted for nearly 90% of all stablecoin trading volume this past year. 15

How big is that volume?

As an aggregate, in 2020, on-chain volume alone from these stablecoins reached more than $1 trillion. That does not count the exchange-based (off-chain) transactions that also use these collateral-backed coins. And problematic for policy makers: the on-chain volume was exchanged with limited oversight or surveillance sharing, which is part of the reason why various governments are moving quickly to pass laws to deanonymize self-hosted wallets that are exchanging this parasitic “e-banknote” or “shadow deposit.”161718

For example, Tether and USDC are not being stifled through the proposed STABLE Act, rather they would be required to jump through the same hoops as anyone else providing similar financial services.19 Based on how their product is used, these issuers are arguably a form of wildcat banks (from the 19th century) or what is called a shadow bank or shadow payments today. Lots of shadows!

What is a “shadow bank”?

The term itself is just over a decade old but these entities existed prior to 2007. In general they are “non-bank financial intermediaries that provide services similar to traditional commercial banks but outside normal banking regulations.”20 Readers can imagine that this type of activity is what organizations such as the Financial Stability Board (FSB) would like to keep track of.

One member of the FSB is the Federal Reserve. The screenshot (above) is a relevant portion of their mandate and why they could – in theory – be interested in obtaining information of off-shore entities that are attempting to (anonymously) use U.S. linked e-banknotes.21

“Shadow banking” is occurring off-shore through intermediaries (e.g., coin exchanges and lending protocols) that use Tether or USDC without needing to connect to a local bank who would require some semblance of surveillance such as AML or CFT compliance.2223

Based on their external messaging, multiple centralized exchanges (CEXes) claim to operate banklessly but this is a superficial: they each maintain an umbilical cord to the U.S. dollar via USDT or USDC. 24 Similarly, decentralized lending protocols such as Compound or Aave accept commercial bank-backed stablecoins as collateral and allow rehypothecation of these same tokens (or others). 25

Putting aside new proposed legislation for the moment: stablecoin issuers (administrators) have fought feverishly to categorize themselves under a “lighter” more lenient regulatory regime (money service business) despite more stringent laws covering deposit-taking activities that are not enforced, such as 12 USC 378 (a)(2) being on the books. 2627

More precisely, in retrospect specific activities enabled by commercial banks (such as issuance of e-money) were not properly regulated. Righting this wrong that exists to day – so the argument goes – all MSBs (not just commercial bank-backed stablecoin issuers) should no longer be able to conduct unregulated shadow payments or banking activities.2829

Related to the concept of shadow banking is shadow money, and clearly stablecoins fit the bill. When he was a Governor at the Federal Reserve, Dan Tarullo gave a speech, stating:

“Shadow banking also refers to the creation of assets that are thought to be safe, short-term, and liquid, and as such, “cash equivalents” similar to insured deposits in the commercial banking system. Of course, as many financial market actors learned to their dismay, in periods of stress these assets are not the same as insured deposits.”

The classic example of shadow money is money market funds which were deemed to be “money good” pre-2008 crisis. Reforms were implemented post-crisis, such as redemption gates and floating NAVs for certain money funds, but in March 2020 the Federal Reserve still had to backstop money funds via the money market mutual fund liquidity facility (MMLF). Last month the President’s Working Group on Financial Markets released a report highlighting the need for further reforms to money market funds.

If consumers and investors think stablecoins are the same as insured deposits because they are “backed” by insured deposits at a commercial bank, they are clearly not. Does this mean that if stablecoins become big enough, the U.S. government would bail the sector out just like they have bailed out other shadow money investors? This is an open question but the answer should arguably be no. 30

While regulators have informally discussed systemically important cryptocurrencies networks and potentially overlap with PFMIs, to date there have been few discussions in long-form prose.31 Let us check back in on this topic next year.

Double the credit risk

As mentioned above, the credit risk (solvency) of commercial banks is worse than central banks.32 During the 2007-2009 financial crisis, while a number of commercial banks received direct taxpayer-funded bailouts that immediately underwent public scrutiny, the entire financial industry was effectively propped up through the coordinated actions of central banks and finance ministries around the world.

We could always argue about which policies should or should not have been implemented during that time. The Dodd-Frank Act was just one set of legislation that was passed in an attempt to prevent another, similar systemic crisis from happening again.

What does this have to do with parasitic stablecoins?

Transactional users and speculators of commercial bank-backed stablecoins are faced with at least two potential credit risks:

  • the credit risk of the stablecoin issuer
  • the credit risk of the commercial bank that the stablecoin issuer uses as a custodian
Source: FDIC

A conventional bank account exposes to the account holder to a single level of credit risk, the risk that the bank becomes bankrupt and is unable to meet its liabilities to account holders. In most developed countries and many developing countries, deposits are protected by a national deposit insurance scheme ranging between tens and hundreds of thousands of dollars.

Even if Signature Bank or Silvergate Bank have impeccable credit quality, they are not the lender of last resort. They rely on the implicit and explicit backing of the FDIC and the Federal Reserve.33

As a result, stablecoins present a double layer of credit risk. There is the risk that the issuer of the coins fails and the risk that the party holding the reserves (e.g. a bank, fails). Generally stablecoins would not benefit from the deposit insurance provided for bank accounts.34 Where the issuer invests in a more complex range of assets to act as reserves, such as debt instruments, it also exposes the stablecoin holder to the risk that assets fall in value, which can be an issue, even for relatively short-dated assets, where reserves have to be liquidated. 35

This raises a major question: who bears losses, the issuer or the holder of coins? An issue banks deal with (to a certain extent) by having to set aside regulatory capital.3637

In other words: a stable coin backed by commercial bank deposits has worse credit risk than simply having money in the bank because it would not benefit from any deposit insurance scheme.38


Tangentially related to the PFMIs are central bank digital currencies (CBDCs). Public discussions surrounding the regulation of stablecoins often neglects prior research conducted by central banks, industry, and academia.

For instance, several years ago, the Bank for International Settlements (BIS) published one of the most widely cited papers on the topic of CBDCs. In it, the so-called “money flower” Venn diagram illustrated how existing money could be categorized:

Source: BIS

As we can see, the current crop of stablecoins (such as USDC) and cryptocurrencies (such as Bitcoin) are clearly in different categories from CBDCs.

Representatives of coin lobbying organizations, such as the Chamber of Digital Commerce, makes the common mistake of conflating the two:

Source: Twitter

Are commercial bank-backed stablecoins a central bank digital currency (CBDC)?

No. There is a lot of commentary which blends stablecoins with CBDCs but they are not the same. Unless a stablecoin is backed by reserves at the central bank or issued directly by a central bank, a stablecoin marketing itself as a CBDC is being dishonest.

Furthermore, the DC/EP initiative in China is not a CBDC. It is a liability of an intermediary that is not the People’s Bank of China.39

Source: Twitter40

Are CBDCs a stablecoin?

No, although in theory central bank reserves could be tokenized and put onto a blockchain. But that’s not what is happening today (yet).41

Any other reasons why stablecoins are lumped together with CBDCs?

Stability. Credible central banks such as the Federal Reserve, provide a reliable unit-of-account such that more than two dozen countries “dollarize” their domestic economies with it. This article will not go into the merits or demerits of issuing CBDCs or if a blockchain is needed in doing so.42

Ironically, while some vocal coin promoters have claimed a “hyperbitcoinization” event will occur soon. But the cryptocurrency ecosystem as a whole has seen the opposite take place: rapid dollarization due to the growth of commercial bank-backed stablecoins. This is the central conceit for much of the coin world today: promoters and meme artisans often claim they are about to launch off from planet Earth all while drilling ever deeper foundations into the Earth’s crust.

For example, in the second half of 2020 at least four U.S.-based cryptocurrency companies applied for deposit-taking licenses or banking charters.43 And because of how embedded these tokens have become to “DeFi” apps, portions of it have turned into centralized DeFi (CeDeFi), which is an oxymoron.44

As a result, it has made anarchic chains less resilient which will be discussed later.45

Reliance on external U-o-A

One characteristic or function of actual “money” is something called the unit-of-account (U-o-A). A unit-of-account is used to price goods and services in an economy. On a macro level, economic aggregates such as GDP are measured by a stable U-o-A, such as the USD or EUR.

Similarly, international commerce and trade is often denominated in a stable U-o-A. In this case, foreign exchange ultimately takes place somewhere along on “the edges” but the price discovery and (often) payment settlement occurs in the stable U-o-A. 46

For instance, despite doomsday predictions, the USD is becoming more dominantnot less dominant – in financial markets.

What does this have to do with cryptocurrencies and specifically stablecoins?

Source: Twitter

More precisely, the question should be: why are stablecoins so popular?

The answer is one that has been discussed many times on this site: volatility.47 Contrary to what some promoters claim, Bitcoin is not becoming less volatile over time. As JP Koning illustrated in the chart (above), bitcoin is more volatile today than it was in early 2017 when it had a ‘market cap’ of just $15 billion or in 2013, when it was worth just $1 billion.

While some early coin investors and hoarders may be okay with rampant swings in volatility, actual users (such as day traders or remitters) desire stability. As a result, more than 20 different U.S. dollar-linked stablecoins have been created to fill that need. And unsurprisingly, because the identity of on-chain activity can be obfuscated, another set of stablecoin users are criminals involved in money laundering and terrorism, as identified by the Financial Action Task Force (FATF).

For the purposes of this article “stablecoin” is a catch-all term used to describe a spectrum of coins that attempt to peg a token to exogenous (external) value.48 Typically the exogenous value is denominated in USD. In terms of trading volume, the two biggest buckets of stablecoins are:

  1. Collateral-backed tokens such as USDT (Tether), USDC, PAX, TrueUSD, and DAI49
  2. Algorithmic or synthetics such as AMPL, ESD… and the older generation of BitUSD, and Nubits

In practice, nearly all collateral-backed tokens in use today are commercial bank-backed tokens that are centrally issued by a singular entity.50 In contrast, virtually all of the algorithmic tokens are launched by anonymous teams and often use a form of rebasing or Seigniorage Shares model to arrive at a value.51

The focus of this article is on the former not the latter. Let’s dive into a few of them.


USD Coin (USDC) is a stablecoin issued through the Centre Foundation and backed by Circle, Coinbase, and others. This entity is registered as a MSB in the United States. USDC is an ERC20 token that can be moved around the Ethereum network however the “backend” on-and-off ramps are fully powered by U.S.-based commercial banks such as Silvergate in San Diego.52

At the time of this writing about $4.3 billion of USDC has been issued. In Q4 2020, the trading volume of USDC was usually between $335 million to $1.3 billion per day.53

Wiring instructions to Silvergate

USDT is issued by Tether Ltd which is also registered as a MSB in the United States.54 Customers that want to use USDT, create an account on the Tether website and link their bank account. Then using the traditional financial system, wire cash to Tether’s partner banks. USDT has been issued onto multiple different blockchains, including Bitcoin and Ethereum. As of this writing, it is the most actively used ERC20 token.


Tether Ltd and its parent company (iFinex) have been debanked multiple times. Why?

Because both are under multiple investigations from several regulators and law enforcement (such as the New York Attorney General) for lying about their collateralization levels, among other allegations.

At the time of this writing about $21.3 billion USDT has been issued. In Q4 2020, the trading volume of USDT was usually between $25 billion to $80 billion per day.55

When it was initially launched in December 2017, DAI was collateralized only with ETH and the software company that created it, Maker, is not registered as a MSB (though it could be categorized as a “shadow MSB“). About 18 months ago, DAI transitioned to accept “multi-collateral” which includes other types of coins, such as commercial bank-backed stablecoins. In addition to being listed on most major cryptocurrency exchanges, traders can also buy DAI directly via 3rd party partners (such as Wyre and MoonPay).

However, depending on the day of the week, the proportion of U.S. commercial bank-backed stablecoins can comprise more than 50% of the collateral backing DAI (which is why it was identified by authors of the STABLE Act):

The chart (below) shows the growth (measured by ‘supply’) of the most popular collateral-backed stablecoins this past year.

Assuming the self-reported numbers are correct, this illustrates an increase in USD deposits sitting in banks on behalf of stablecoin issuers.

Source: The Block

Note that at the time of this writing about $21.3 billion USDT has been issued and about $4.3 billion of USDC has been issued.

The bar chart (below) shows the daily trading volume of roughly the same collateral-backed stablecoins over the past three year:

Source: Messari

Recall from above that in Q4 2020, with a few outliers the trading volume of USDT was between $25 billion to $80 billion per day and the the trading volume of USDC was between $335 million to $1.3 billion per day.

In other words, the average daily turnover for USDT was about 2 to 4 times the amount allegedly deposited with their banking partners. This likely shows that some forms of leverage, credit creation, and rehypothecation are taking place. 5657

The line chart (below) shows the total value of tokens that are locked up (TVL) in DeFi-related projects over the past ~3 years:

Source: DeFi Pulse

As we can observe above, growth of TVL substantially increased between January 1, 2020 and January 1, 2021 by about 2,000 percent. DAI contributes to about 20 percent of these deposits.

What about Diem née Libra?

With mountains of press and marketing the past 18 months, they are finally planning to launch (soon). What Libra initially proposed in the summer of 2019 (to the chagrin of regulators and payment-related partners) was that Libra would deposit user funds in multiple custody banks (like Citi) but purposefully do it in a way such that no single regulator (such as FinCEN or OCC or the Fed) would have complete oversight.  That was shot down and the proposal evolved further the past year.

For example, it initially involved pegging to a basket of currencies (including SGD) kind of like an SDR, but without FSB or IMF oversight. This put commercial banks at risk in part because of non-existent AML controls.  Thus the entire proposal was scrapped and a new narrative created through the use of a commercial bank-backed stablecoin similar to USDC.

There are other bits and bobs that we can dive into – such as the older generation of algorithmically “stabilized” coins Nubits or BitUSD – but that’s a separate, mostly irrelevant category of faux stablecoins.

What would happen if issuers of collateral-backed stablecoins had to obtain something akin to a bank charter?58 Last month Paxos (PAX) applied for a national charter in the United States, will other issuers do the same?

While there may be rigorous surveillance at the on-and-off ramps of USDC or USDT today, the same cannot be said for on-chain activity where the “Travel Rule” is ignored or compliance with the BSA is non-existent.

If the self-reported volumes at coin exchanges is accurate, then tens of billions (measured in USD) of these stablecoins are traded each day likely in a non-compliant manner. This undersurveilled activity is part of the motivation behind a new draft rule from the U.S. Treasury department.

For perspective, according to The Block in the first 11 months of 2020 stablecoins hit some hockey stick growth:

  • Supply grew 322%
  • Transaction volume grew 316%
  • Daily active addresses grew 332%

And as mentioned in the first section above, total stablecoin on-chain volume surpassed $1 trillion during 2020.59

If payment processors are held liable for the activities (e.g., knowingly processing payments for scams) that take place on their networks, the argument goes, so should stablecoin issuers. In the past, both Tether and USDC have frozen funds and blacklisted addresses due to law enforcement orders, so at a minimum they should be held to the same standard as a payment processor (but are not).

Source: The Block

Either way, it is clear that from trading activity and total-value-locked up (TVL), that the DeFi ecosystem (and all coin worlds really), are reliant on maintaining frictionless U.S. banking access.

Is this DeFi-in-name-only (DeFi-ino)? Without the on-and-off ramps into U.S. banks and most importantly – parasitic access to a stable unit-of-account, arguably the middle (TVL) activity would be a lot less than it is today.60

If the (end) goal or ethos of the DeFi world — and broader anarchic cryptocurrency universe — is to be self-sovereign and enable self-custody and not reliant on U.S. commercial banks or the Federal Reserve, the exact opposite has occurred.61

A quick DAI diversion

It is not a full barnacle however some have previously argued that DAI could become a victim of its own success. 62

How’s that? Maker’s current governance leans heavily on identifiable humans and VCs which would be hard to quickly anonymize/decentralize. Recall that its human-led governance process modified the collateralization process, allowing new types of coins and tokens to be included.63

As a result:

  1. Often more than half its collateral are other USD stablecoins (none of which have bank charters), so if these are shut down or liquidity severely restricted, this could impact DAI stability and/or liquidity64
  2. Dependence on humans to manage governance and reliance on oracles for exogenous info; these are a single-point-of-failure.

What are some solutions for Maker (DAI), whose investors and developers are identifiable?

  1. Act like cypherpunks, “disappear,” and go fully anonymous making enforcement more difficult65
  2. Eschew the current crop of oracle architecture because it is arguably a single-point-of-failure
  3. Remove collateral whitelists, which is something prominent developers have suggested in the past

Regarding that last point, here’s an example:

Source: Twitter

Let us check back next year to see what Maker, Compound, and Aave do with their formal governance and collateralization processes.

Breaking pegs

Worth noting that USDT, USDC, and DAI have either broken their pegs with the USD or at some point dramatically drifted from their pegs. There are multiple reasons why.

For example, in April 2017, USDT dropped below $1.00 and traded at $0.91.

Why the sudden drop?

As mentioned in a previous post, a lawsuit revealed that Bitfinex sued WellsFargo because the bank had refused to process Bitfinex’s international wires. Over a span of a few months, tens of millions of USD had been wired through WellsFargo into and out of four different banks in Taiwan which Bitfinex, Tether Ltd, and other affiliated subsidiaries had bank accounts with. At some point prior to March 2017, someone on the compliance side of WellsFargo noticed this large flow of USD and for one reason or other (e.g., fell within the guidelines of a SAR?), placed a hold on the funds. In early April 2017 Bitfinex’s parent company filed a lawsuit for WellsFargo to release these funds.

WellsFargo eventually returned the USD-denominated funds but without those funds, the peg was unable to withstand sell pressure. In other words, WellsFargo was integral to Tether Ltd’s correspondent banking relationships.  About a week later Bitfinex withdrew its lawsuit but not before causing a Streisand Effect.

This was not the first time Bitfinex has been “debanked.”  Phil Potter, then-CFO of Bitfinex, gave an interview and explained that whenever Bitfinex had lost accounts in the past, they would do a number of things to get re-banked. In his words:

“We’ve had banking hiccups in the past, we’ve just always been able to route around it or deal with it, open up new accounts, or what have you… shift to a new corporate entity, lots of cat and mouse tricks that everyone in Bitcoin industry has to avail themselves of.”

With this blasé attitude, it is any wonder they are under active investigations from the Department of Justice, the CFTC, and the NY AG.

Source: Twitter

The ethos of blockchainology is supposedly: “don’t trust, verify.” Above is a tweet from Paolo Ardoino, current CTO of Bitfinex and Tether.

Because no reputable firm will provide regular audits of Tether Ltd, we are left having to trust a non-credible actor.66 For instance, in April 2019, during its legal proceedings with the New York Attorney General, Stuart Hoegner, the general counsel for Tether Ltd admitted that USDT was not backed 1:1 as was claimed on their website. Instead it was running an undisclosed fractional reserve operation that was only uncovered due to this ongoing lawsuit.

In its filing with the court, Hoegner states:

“As of the date [April 30] I am signing this affidavit, Tether has cash and cash equivalents (short term securities) on hand totaling approximately $2.1 billion, representing approximately 74 percent of the current outstanding tethers.”

Executives at the parent company (iFinex) would not even acknowledge ownership of Tether Ltd until an exposé from The New York Times revealed it was the case due to leaks from the Paradise Papers (be sure to also read Amy Castor’s timeline).

We know historically that other intermediaries have lied or misled users (and investors) of what they do with deposits. For instance, during a series of investigations in 2017 in China, at least two major domestic cryptocurrency exchanges (Huobi and OKCoin) were found to have secretly re-invested customer deposits into other financial instruments.

This type of abuse is the reason why at a minimum regular audits from reputable, independent firms are required for financial service providers. Let us check in next year to see if Tether Ltd gives us more than tweets to audit.

Innovation theater

We briefly mentioned this topic at the beginning of the article but worth looking at this closer.

In the early 2010s, several prominent VC-backed fintech efforts insisted they needed carve-outs for what they knew were highly regulated activities.67 Some even hired lobbying organizations to push the “don’t suffocate innovation” meme which persists today in the form of “deregulated finance.”68

For instance, in 2014 the New York State Department of Financial Services (DFS) proposed a new virtual currency regulation dubbed the “BitLicense.” Prior to its enactment in 2015, the same sort of “everyone will leave the US” argument was made by its opponents. Throughout the second half of 2014, DFS held multiple public comment periods, the responses of which were made public. Among others, the EFF submission included the word “innovation” thirteen times. 69 Upon its enactment, a few coin-related companies claim to have left, some vowing never to return.

From a systemic risk standpoint, is society worse off because of the small handful of coin companies that had no intention of becoming compliant with a stricter MSB, let alone a banking license, left New York? No. Is the BitLicense perfect or flawless? No.

But contrary to views of partisans, entrepreneurs continue to seek it out as a stamp of approval: as of this writing there are 25 entities that have been approved for a BitLicense (although a couple overlap).70

Three years after its enactment, in May 2018, coin-focused media gave softball interviews to the “refugees” that left New York, notably Shapeshift and Kraken. Both are cryptocurrency exchanges and had (have?) legal and regulatory issues.

At the time Shapeshift allowed KYC’less transfers to take place. That changed in September 2018 after The Wall Street Journal did an investigation discovering that Shapeshift was being used to launder proceeds of crime such as the infamous WannaCry ransomware.

Perhaps publicly telling the world that you are not going to comply with the BitLicense was a redflag?71

Source: Twitter 72

The other prominent “departure” from New York was Kraken, another U.S.-based cryptocurrency exchange.73 The CEO publicly has written multiple articles and posts on social media for why the organization would no longer cater to New York residents. But upon closer examination, in September 2018 the New York Attorney General announced that it had evidence that Kraken was still operating in New York. While that investigation simmers in the background, a year later a lawsuit was filed by Jonathan Silverman, who had run Kraken’s OTC desk in NYC for a couple of years. He sued the exchange because they had stiffed bonus payments. It is unclear what the current status of Kraken’s business is in New York, however, a number of employees appear to reside there.74

Likewise many prominent ICO promoters made similarly grandiose statements after the SEC released its report on The DAO in 2017. That capital pooling and investments would move off-shore and the U.S. would be left behind. Regulatory arbitrage certainly did take place, with hundreds of ICOs being registered in Singapore, Taiwan, and other island nations (such as The Caymans).75 But we also saw that in practice, coin-focused developer teams continue to be hired here in United States.

Either way, as Nathan Tankus correctly pointed out:

Shadow banks have always sold themselves as providing competition to the regular banking system. And to a certain extent, they do. But its an undesirable form of competition which causes a race to the bottom.

If other nations want to put their own financial infrastructure at risk due to underaccountable shadow banking – so the argument goes – that is not a great outcome but not a terrible outcome for the U.S. banking system in terms of systemic risk.76 For example, the aim of the STABLE Act is not to globally enforce a regime: it is to prevent systemic risk in the U.S. and this can be done by strictly enforcing existing laws or enacting new laws on entities such as stablecoin issuers reliant on U.S. commercial banks.

Chernobyl-backed meme coins

This may sound repetitive, one cannot overstress systemic risk in the context of an underaccountable IOU layer, as Tankus once more explains:

The [STABLE Act] is aiming at systemic risk. leaving unlicensed stablecoins as a fringe financial product offered in other jurisdictions unlisted or on minor exchanges that can survive not being able to interact with the U.S. legal system accomplishes the goal

Recall that in the U.S., the only entities that have access (accounts) at the Central Bank are commercial banks. And we empirically know that the credit risk of commercial banks is worse than a Central Bank because there is just one type of money: reserves at the central bank.

Everything beyond coins, notes, and money equivalents is arguably a credit risk. Thus, not only should we want Narrow Banks and FedAccounts created, but from a resiliency standpoint at the very least we should require stablecoin-issuers to stop piggybacking on other commercial banks due to their modus operandi.

Miners and block makers

We have touched on this topic more than a dozen times on just this site alone. Let us look at this issue from a different angle.

Visa and other payment providers are liable for certain activities that take place on their networks, hence why they on-board certain merchants and off-board others that are deemed “higher risk” or whom have violated some law.77 Similarly all FMIs have various binding agreements (MSA, TOS, EULA, SLA), and the penalty for violating them could result in a participant being removed (e.g., Fedwire has a terms of service that is effectively passed on to the users of commercial bank wiring services). ISPs and telecoms are also regulated and permissioned and they can (and do) kick users off for violating their TOS.

Proof-of-work chains like Bitcoin intentionally did not include a ‘terms-of-service’ and by design did not include hooks into any legal agreement or, for that matter, attempt to integrate AML screening of participants.78

But this is just RICO theater: in an “even Steven” world, miners should be held to the same standard as other processors. Assuming some or just one of the frameworks mentioned at the top of this article is ratified, issuers can be held accountable for additional disputes that arise.79 What then of the block makers who process transactions that fail to comply with a specific jurisprudence?

For example, in terms of proof-of-work chains – in practice – nearly all of the mining pools for both Bitcoin and Ethereum are operated by identifiable entities. FinCEN’s 2013 guidance gave miners a carve-out based on the assumption that mining pools were neutral, but in practice they are not and do manually add (or censor) transactions.

For instance, at a public event in 2019, Roger Ver and Tone Vays (aka Anthony Vaysbrod) made a bet on stage regarding sending transactions – and importantly the associated fees – across both the Bitcoin and Bitcoin Cash blockchains. To aide Vays’ attempt to send a below-market transaction fee, Slush (a mining pool), manually included it despite the below-market fee. They were not neutral the opposite to how miners are often portrayed to regulators.

With more than 10 years of operation, the Slush mining pool is the first (and oldest) Bitcoin mining pool. (Photo: the original Slush team, self-doxxed)

During the frenzy of ICO mania, the rush to get into a “capped” raise meant that some speculators would “bribe” mining pools to guarantee that their transaction could be included in a specific block. For example, in May 2017, a principal at a Canadian-listed fund successfully paid more than $6,000 to an Ethereum mining pool so that his transaction could be included during the sale of the Basic Attention Token (BAT).

We could spend a couple of posts just walking through the subreddit /r/bitcoin in what is basically the de facto customer service forum in the event that a user accidentally sends a mining fee that is too big or small.

What these human-run chains independently highlight are some of the lessons from 2015. How can validators become BSA compliant or apply for a MSB license?80

Why would they need to?

In what became the “permissioned chain” or “enterprise chain” vendor world, startups like Symbiont and Digital Asset first looked at using Bitcoin mining pools to process transactions for regulated financial institutions (e.g., banks) but ultimately walked back for a couple of reasons:8182

  1. lack of settlement finality
  2. transaction fees or payments could be going to sanctioned entities

The discussions surrounding identifiable validators (this paper uses the term “KYM” – know your miner) – and the legal and regulatory buckets they fall under – has been an ongoing topic since at least 2013. The STABLE Act potentially fixes that loophole.83

Why hasn’t law enforcement prosecuted mining pool operators in the past?  Partly because of coin lobbying organizations have successfully pushed a one-sided agenda on behalf of their donors and rallied external support by fear mongering about criminalizing node operators.8485

This is a red herring and is not the aim of the STABLE Act; in fact its co-authors believe that would be a bad strategy. But a bigger issue has been a lack of resources.  Agencies like FinCEN have in general been underresourced and went after the lower hanging fruit (e.g., ransomware profiteers in Iran).8687 It is an open question whether they will have more resources under a new administration to look at miners.88

With the roll out of real-time transaction monitoring from many different vendors, intermediaries such as cryptocurrency exchanges and mining pools can identify and flag suspicious or illicit activity before participants can fully realize their gains.

For instance, almost four-and-a-half years ago, Bitfinex was hacked and lost 119,756 bitcoins. At the time this was worth about $65 million of actual money. Today that is around $4 billion. The hacker(s) have never been (publicly) caught. Proportionally, this would be equivalent to a large commercial bank losing $20 – $30 billion USD. There have been Congressional hearings for much less.

Source: Twitter

As I have pointed in previous posts and presentations (slides 10-12), at the time 9 out-of-the-first 10 mining pools that processed the stolen Bitfinex tokens operate outside of the U.S. (specifically in China).89 If a U.S.-based financial intermediary was hacked and $4 billion in customer deposits was stolen, the fine print in the terms-of-service kicks into high gear to protect customers. Despite the billions in VC funding and headline-grabbing coin prices, similar consumer protections do not exist in the coin world.90

Even with the existence of real-time monitoring from multiple vendors, intermediaries including miners have gotten away with profiteering from processing illicit transactions that would have shook up FMIs or PSPs. Ransomware, a blight on critical public infrastructure, and the processing of its transactions are something that well-resourced prosecutors could disgorge.91


The motivation behind anarchic chains, such as Bitcoin and Ethereum, was about creating an alternative, sovereign economy that was independent of any nation-state. But if your alternative economy uses USD (or any other fiat-linked cryptocurrency) as its unit-of-account, it is not really an alternative economy, but a subsystem subordinate to the monetary policy and pricing system of the nation that the system is supposed to be independent of.

If the aim or ethos of anarchic cryptocurrencies is to truly reduce moral hazard (e.g. taxpayer funded bailouts of banks) and systemic risks that unfortunately occur during a financial crisis, the DeFi ecosystem has a long way to reverse the current trend.92 It is not too late and in fact, client pluralism (in Ethereum) is one way to reduce systemic risk.93

“Pegged coins” are clearly fragile because they rely on an exogenous judiciary system to resolve disputes and an exogenous banking system to maintain a unit-of-account. Much of the proposed legislation above should serve as a motivation for building a more resilient on-chain U-o-A.

Perhaps the one call to action is to encourage education around “narrow banks” which could be viewed as a ‘middle ground’ between a bank charter and a MSB.94 If you are interested in learning more on the short history of commercial bank-backed stablecoins, worth re-reading the prequel from 2018 to see what has changed.


I would like to thank the following people for their feedback: AC, RG, RS, RR, CW, MW, LR, JM, PE, FC, JG, JK, KV, DZ, AV, JW, and VB


  1. Regarding terminology, one reviewer noted: “By necessity, a stable coin is either subsidized or fictional. Dollars cost money to hold and transact in, so the only way a stable coin can be stable is if the sponsor takes risk on the underlying or uses it as a loss leader. The term has come to imply backing. Which not only is probably not true, it doesn’t necessarily need to be true. Have you ever tried to redeem a “stable coin”? Any stability of a “stable coin” is derived not from the assets backing the coin but by the ability to sell (not redeem) for a fixed amount. Which is of course true until it isn’t.” []
  2. One commenter explained: “In the E.U., MiCA will take a while to be implemented by member states. As a result, some member states are trying to get ahead of the E.U. itself by releasing their own related laws with the aim of attracting market participants; at least until the E.U. comes to a consensus of what it will want to do. Even if being ahead of the E.U. could have short term benefits, it is also extremely important to not deviate from E.U.-wide consensus, so part of this is identifying areas that the E.U. would obviously regulate. One approach, which has been seen in Hong Kong as well, has been a phased approach to regulating cryptocurrencies by first regulating the areas that are easier to regulate (e.g. funds and fund managers, applying existing requirements to those who want to invest in cryptocurrencies), and waiting for things to develop before trying to regulate areas that are hard to regulate (e.g. custody). There is a key difference between a directive and a regulation in the E.U. A directive has to be transposed into law by the member states, which have to update their own legal systems. And when a member state is behind in transposing, like Cyprus for AMLD5, they get put in special working groups and the E.U. can even take legal action toward them. A regulation is already a law that is automatically enforceable across member states.” []
  3. The PWG uses a broad definition: “For the purposes of this statement, “stablecoins” are the digital assets themselves. A “stablecoin arrangement” includes the stablecoin as well as infrastructure and entities involved in developing, offering, trading, administering or redeeming the stablecoin, including, but not limited to, issuers, custodians, auditors, market makers, liquidity providers, managers, wallet providers, and governance structures.” []
  4. Most industry-driven commentary thus far seems to use the term “stablecoin” as if it is a well-defined concept. As one reviewer noted: “Assuming that there is a case for regulating a non-custodial coin, if you push the analysis to try to clearly characterize the type of coin that should be regulated, there is no other way to draw the boundary other than to say: coin that’s designed to track the unit-of-account of any currency that’s considered to be money under the law in question.” []
  5. It could be argued that coin promoters are looking at engagement the wrong way: the onus is not on any government to bend to the needs of coin efforts. Governments should not necessarily be accommodating since it is not a reciprocal or equitable relationship. For example, Satoshi intentionally did not architect Bitcoin to be compliant with any surveillance regime, it has been an one-way conversation — mostly a monologue — from day 1. []
  6. Recall that in both the U.S. and E.U., access to central bank accounts are restricted to commercial banks and handful of non-banks. Rather than create narrow banks themselves or seek central bank access, stablecoin issuers are arguably de-stabilizing the highly concentrated U.S. banking system by building underaccountable shadow banks on top of systemically important financial institutions (SIFIs). If an aim for “DeFi” is protecting consumers and investors, concentrating more activity onto SIFIs is not the way to go. []
  7. One reviewer who previously worked at a central bank noted: “We need to understand narrow banks and think through what they would look like. Even I have skipped this because ‘The Federal Reserve won’t approve them so why bother.'” []
  8. In his November 2020 speech, Andy Haldane, chief economist at the Bank of England, said: “On financial stability, a widely-used digital currency would change the topology of banking in a potentially profound way. It could result in the emergence of something closer to narrow banking, with safe payments-based activities to some extent segregated from banks’ riskier credit-provision activities. In other words, the traditional model of banking would be disrupted.” []
  9. Ironically by vocally defending Tether or USDC, partisans that do not like the Federal Reserve or JP Morgan are actually defending the very entities they claim to dislike, because commercial bank-backed stablecoins are just tokenized deposits sitting in a bank. And each of those banks rely on dollar-clearing services provided by the New York Federal Reserve. In other words, the aspiration of “anarcho-capitalism” is in direct conflict with how all settlement, clearing, and payment FMIs operate today; to use a stablecoin necessarily involves needing an exogenous U-o-A maintained by the Fed. []
  10. Quizzically, the “moral hazard” issue – that taxpayers are once more on the line to bailout commercial banks – has been glossed over by many DeFi and CeDeFi proponents. Again, the benefits of commercial bank-backed stablecoins largely accrue to issuers, traders, and speculators. These are privatized gains. Unless issuers move to a different banking model, they are ultimately relying on socialized losses by taxpayers via FDIC. []
  11. Worth pointing out that the article above is about specific groups of people, not technology. Several years ago Steve Waldman authored the memorable “soylent blockchain” presentation. It is germane because chains – in practice – are (often) run by identifiable humans. []
  12. One reviewer commented: “There probably needs to be a new regulatory framework, such as a narrow bank or something enabled by the STABLE Act because stablecoin issuers do not fit well in existing models. In the U.S., issuers are stuck between obtaining a bank charter versus an MSB so the current framework might accidentally muzzle innovation. If stablecoins grow to a size where meaningful risk – shadow banking, systemic risk, reduced consumer protection – are visible then how to achieve regulatory outcomes without stifling innovation? On the one hand you have the argument ‘if it looks or talks like a bank it should be regulated as one’ and on the other extreme you have ‘if it is involves a blockchain it shouldn’t be regulated.’ Both those polar extremes are wrong. Blockchain advocacy is often full of hyperbole where the centralized implementation doesn’t really follow the decentralization thesis. On the other hand, the financial industry’s default position often is: technology companies that do what we do should be as heavily regulated we are. And then financial institutions use this to curb innovation and secure their moat. The question is: how to have an enlightened discussion without interference from lobbyists in the VC-backed tech world versus the banking industry? There is probably a middle ground approach that does not result in us having to take sides. Narrow banks are one approach although it also could become political.” []
  13. One area that cryptocurrency promoters often claim “innovation” is taking place is in the cross-border or remittance arena. Yet little more than anecdotes are provided to back up that narrative. For a detailed explanation for why this narrative is probably false, see: Does Bitcoin/Blockchain make sense for international money transfers? One reviewer commented: “This is not to dismiss the very real demand for banking services in underserved markets.  The majority of companies around the world are SMEs and they provide the majority of global jobs, yet in many cases they have historically had trouble accessing banking services.  This dovetails into “open banking” – access to APIs and bank data – which is a different approach from what the cryptocurrency-focused narrative often seeks to market.” Another reviewer explained: “The argument that stablecoins are not inherently as stable because they depend on the underlying creditworthiness of the backing institution is hard to argue against. At first glance, the current generation of stablecoins allow value to reach areas of new economic interest – inclusion – that traditional banks seem to ignore, yet this is likely accomplished by eschewing strict KYC gathering, AML, and CFT compliance that banks are required to conduct.” []
  14. This article does not explore projects like USC or JPM Coin, the latter of which is ultimately backed by the balance sheet of the bank itself. []
  15. Generally speaking, most stablecoins are issued as USD. As one commenter noted: “Recently a subsidiary of GMO, a Japanese IT giant, was authorized to issue a USD and a JPY stablecoin under New York State regulations. I think we’ll see much more of these cross-border combinations. And I don’t see regulators in New York State bowing to an emerging market central bank that doesn’t want to see its currency being wrapped into a stablecoin.” []
  16. The (intentional) lack of on-chain surveillance is one of the reasons why a Bitcoin ETF has not been approved by the SEC. For instance, see Comments on the COIN ETF (SR-BatsBZX-2016-30). []
  17. One reviewer noted: “Instead of saying ‘e-cash’ I would say ‘e-banknotes’ or ‘shadow deposits’. I think ‘cash’ has specific properties that most of these blockchain/account-based payments systems don’t have. It is too generous to call them cash and for the banking laws, it is the deposit-equivalent that’s the real issue.” []
  18. Another reviewer commented: “In one scenario you effectively end up with a regulatory regime where any stablecoin issuer has to whitelist (or blacklist) the supported chains and then only custodial wallets or KYC’ed wallets can hold coin. An alternative is having to monitor activity and while this can become “theater,” compliance is still robust and the team can point to “we are doing something” that can be tweaked and tightened up. Monitoring obligations may be the route otherwise you end up having to authenticate every address as a stringent requirement. Mandatory KYC’ed addresses could make certain “digital cash” impossible to use.” []
  19. The terms within the STABLE Act also provide latitude for U.S. regulators to create ‘narrow bank’-like structures for these types of issuers. []
  20. For more discussion on defining “shadow banking” see Towards a theory of shadow money by Daniela Gabor and Jakob Vestergaard. []
  21. The Board of Governors of the Federal Reserve oversees two FMUs in the United States: CLS and CHIPS. CLS was launched about 20 years ago in part to reduce Herstatt Risk. In all cases, users of FMIs and FMUs have large MSAs to agree to. []
  22. The term “Tether” itself connotes a purposeful tie to actual money. And like the term “smart contracts,” stablecoins are neither stable and nor coins. Just a risk disguised as a rational ‘crypto safe haven.’ []
  23. One reviewer commented: “‘1-1 fiat-backed at the Central Bank’ stablecoins are close to narrow banks but far from full license banks. Lending is the risky part of the license. The Ant Group IPO debacle is in part around this distinction. We need to think through what a “just lending” bank looks like.” []
  24. Some of these exchanges allow users to trade a variety of other financial instruments and even add leverage. []
  25. Promoters often claim that these protocols are just tools that help the unbanked but that is another way of saying the ends justify the means. []
  26. A detailed explanation for how and why the MSB regime has been improperly used for years can be found in: Comment Letter – Office of the Comptroller of the Currency: Warning of the Dangers Posed by the Shadow Payment System and Shadow Digital Money by Dan Awrey, Lev Menand, and James McAndrews. []
  27. The observation around illicit deposit-taking is not new, I even wrote about it more than five years ago. []
  28. One reviewer noted: “The best argument stablecoin issuers have is “Paypal got to do it, why cant we?” the response to which is: Paypal shouldn’t have been allowed to do it, and we certainly shouldn’t repeat this mistake now when we have a real chance to fix up all of this mess.” []
  29. Another reviewer noted: “For stablecoin issuers this ‘fix’ could become a slippery slope resulting in a bifurcation of blacklisted versus white listed addresses (or coins).  Today physical cash transactions are not KYC’ed but intermediaries have KYC obligations for a reason: because they are an intermediary engaged in regulated activities (e.g., holding client deposits).  One of the innovations with cryptocurrencies was getting rid of account-based money but creating white and blacklisted addresses brings account-based money back in so if that happens why bother using it versus PayPal?” []
  30. State intervention already occurs via taxpayer subsidies to proof-of-work miners removing a raison d’être for proof-of-work mining. []
  31. One of the earliest discussions on this topic comes from an Australian attorney: Australian update: PFMIs on Crypto Exchanges []
  32. We know empirically that the credit risk of commercial banks is not zero, hence why the supervisory departments at central banks regularly perform not just audits, but stress tests to see how financial institutions would weather systemic events. []
  33. It is quite common to hear professional coin traders claim that a governmental organization like FinCEN or SEC would never shut down an entity like Tether because the knock-on effect would be devastating… that Tether was “too important to fail.” Concentration of risk this early in the game is not a good thing. []
  34. The FDIC has a history of stepping in and protecting uninsured deposits as well. Do stablecoin issuers believe this is an implicit guarantee for future crises? []
  35. Office of the Comptroller of the Currency’s guidance from October permits national banks to hold fiat stablecoin reserves. This supports the argument that these “projects” are inextricably linked sovereign currencies. And while it is likely that Acting Commissioner Brooks is replaced under the upcoming Biden administration, changing that guidance may not happen. While it can be rescinded it is probably not a high priority and it is clear that some banks were already holding stablecoin reserves and the guidance just gave them more cover. A major caveat comes in its footnote #5 regarding a 1:1 ratio for collateralization that we know, for example, Tether Ltd has lied about before. []
  36. As noted in the Appendix: “Other relevant issues to maintaining the stability, or even basic credibility of a stablecoin relate to legal and operational issues.  If the issuer of a stablecoin fails, the assets ideally should be in a legal structure that is “bankruptcy remote” i.e. the holders of the coins can claim the reserves in preference to other creditors of the issuer. The bankruptcy remoteness of the Libra foundation, or even the general recourse Libra holders would have to the reserves of the Libra foundation are currently unclear. For the stablecoins used in cryptocurrency trading such as Tether and the Gemini Dollar there are varying degrees of bankruptcy remoteness. JPM Coin (or almost any commercial bank-issued stablecoin) is supported by the overall balance sheet of the bank. Holders of JPM Coins would most likely be treated like any other bank account holder.” []
  37. Another reviewer commented: “The argument for exchanges and stablecoins to have direct Fed access to my mind is about protecting retail investors. Exchanges and stablecoin issuers encourage retail investors to make fiat deposits. These deposits are uninsured and there is no guarantee that the investor will ever get the money back. Tether specifically says in its legal documentation that it doesn’t guarantee to redeem USDT in actual dollars. Retail deposits can be lent to margin traders with or without the knowledge of the depositor, and they can also be leveraged up and traded by exchanges themselves, since exchanges seem to have no shame whatsoever about commingling funds. Fees can also be high, and naïve retail investors can be vulnerable to hacking if they leave their coins in hot wallets, as I suspect many do. This whole area desperately needs the sort of consumer protection that banks are forced to provide to their depositors. To my mind exchanges and stablecoin issuers should not be allowed to take retail fiat deposits at all unless they are licensed depository institutions, which would give them access to Fed liquidity. And retail fiat deposits on crypto exchanges should have FDIC insurance.” []
  38. A third systemic-like risk that a users faces is if and when a blockchain partitions and forks. Each issuer has a different view on handle these. For instance, according to the USDC User Agreement: “In the event of a fork of USDC, Circle shall, in its sole discretion, determine which fork of USDC it will support, if any.” []
  39. For more information on the DC/EP, be sure to read: Understanding China’s Central Bank Digital Currency by Zhou Xiaochuan []
  40. Note that Raphael Auer from the BIS wrote in response: “Interesting but that’s not what we know about the project.” Even if it turns out that the highly esteemed ex-PBoC source was wrong, the tweet still confirms that several things we call CBDCs are not direct claims on the Central Bank. And if they are not, maybe we should just call them e-money or similar terms for new forms of commercial bank money. []
  41. Projects like USC from Fnality are attempting to tokenize reserves at the central bank. While formal approvals have not been made, there is a possibility that non-banks are provided a pathway to opening an account at the central bank. For example, in July 2017, the Bank of England announced that it would allow direct access to RTGS accounts to non-bank payment service providers; this was followed up with a detailed information pack in December 2019. []
  42. What are the criteria that a CBDC must have? The BIS recently published key criteria in: Central bank digital currencies: foundational principles and core features. For a critical look at CBDCs, see “Central bank digital currency – nine key questions answered” by Martin Walker []
  43. In fact, because there is no circular-flow-of-income, proof-of-work miners must liquidate a portion of their earnings to pay utility companies and taxes in what is effectively a stable foreign currency. See Why Bitcoin Needs Fiat (And This Won’t Change in 2018) []
  44. There are several parallels between CeDeFi and permissioned-on-permissionless chains. For instance, introducing regulated intermediaries that collect KYC removes the raison d’etre for proof-of-work (as P-o-W was used to make Sybil attacks costly). []
  45. From a technical perspective, if these anarchic systems were fully resilient and sufficiently decentralized, it should not matter what laws are passed or enforced. Why? Because the assumption in 2008 and 2009 was that these proof-of-work networks would be operating in an adversarial environment. Currently the end-points (on-and-off ramps) act as weak, fragile links that can be compromised. As one reviewer quipped: “Based on the outcry on social media, cypherpunks seems to have gotten soft and forgot why proof-of-work is used.” []
  46. Nominalism‘ and why it is important to legally enforceable contracts and debt is a tangential point to this. As is nemo dat. []
  47. Even as market structure improves (i.e. new hedging products, clearing, ability to move in and out of positions cross markets), bitcoins volatility relative to actual money, persists. See: Bitcoin is not the New Gold – A Comparison of Volatility, Correlation, and Portfolio Performance by Tony Kleina, Hien Pham Thuc, and Thomas Walthe; and Bitcoin Remains Vastly More Volatile Than Traditional Currencies by Max Gulker []
  48. Some analysts and lawyers refer to a stablecoin as a “pegged coin.” []
  49. Note: TrueUSD (TUSD) was operating for an extended period without registering as a MSB. As of this writing, TrueCoin LLC (a subsidiary of TrustLabs) is now registered with FinCEN. []
  50. One reviewer commented: “Any system that involves trusting some central actor (a bank, an issuer) is not embracing the core element to cryptocurrency innovation, and is mostly just a way of using money over the internet. Since stablecoins (or coins issued by tokenized deposits at banks) fall into that category, I don’t think they’re fundamentally different from the banking I can already do today. I know some people disagree—they think the openness of the ledger still means something important—but I tend to think that’s not that big a deal if you have to rely on centralized actors again.” []
  51. Several of the “rebasing” tokens seem to be replicating the ‘Hayek Money‘ proposal from 2014. Whereas a number of the Seigniorage Shares projects frequently cite a paper authored by Robert Sams. Note: since rebase and Seigniorage Shares tokens do not custody any commercial bank-backed stablecoins, they may not be directly impacted by some of the proposed legislation. []
  52. Silvergate’s total cryptocurrency-related USD balances were up $500 million (39% QOQ) as of Q3 2020. Note: the Silvergate Exchange Network (SEN) is administered and operated by a single entity and is not a distributed ledger (blockchain). []
  53. There were several spikes for USDC beyond that amount, including one $24.1 billion spike on January 3, 2021. []
  54. Tether Ltd is incorporated in Hong Kong and registered with FinCEN, but in searching the Wyoming’s banking regulator, Tether Ltd is currently not listed. To be registered as a U.S.-based MSB, typically Tether Ltd would have to have a license with one of the state banking departments. What this means is: Tether Ltd is a foreign business that has chosen to register with FinCEN but Wyoming does not require MSBs that deal in cryptocurrency to get a state license. So Tether Ltd is operating in Wyoming as a transmitter, but does not have a license. That does not mean that the foreign jurisdiction where they reside regulates them. Many jurisdictions lack any sort of MSB framework. For instance, Canada does not have licenses for MSBs. So a Canadian business that transmits money does not operate by a separate set of rules from any other business, unlike in the U.S. where the state banking departments put limits on what sorts of assets MSBs and transmitters can hold. []
  55. There were several spikes for USDT beyond that amount, including one $211.3 billion spike on January 4, 2021. []
  56. There is leverage in the traditional foreign exchange marketplace too. Statista has a relevant chart showing average daily turnover in the global FX market. []
  57. One reviewer commented: “Credit is a huge part of the current monetary system.  We would be wrong to ignore it when we talk about stablecoins, which are interconnected with the financial system.  Stablecoin promoters who intend to disrupt this system often don’t understand the very system they are disrupting.  For example, some issuers wouldn’t be able to answer how their stablecoins would account for potential inflation or deflation, how supply and demand for these coins would be stabilized, or what happens during a crisis.  This also ties back to an understanding of interest rates, which is so often lacking among stablecoin disrupters and is an integral part of the current system. []
  58. Note: one of the common misconceptions of the STABLE Act is that stablecoin issuers would necessarily have to get a bank charter but the language of the actual bill provides lots of flexibility to regulators. []
  59. We do not want to conflate velocity with TVL or rehypothecation either. Without the ability to see an exchanges books, the leverage facilitated by on-chain lending protocols is likely a magnitude order less than the leverage provided by off-chain exchanges. []
  60. One reviewer commented: “The rapid growth in DeFi is directly correlated with the developments of the current generation of stablecoins, and this has been used to justify DeFi’s current value proposition. As a result, I do not see that as a sustainable way to create real value because of the dependency on these types of stablecoins. Programmable money and programmable assets is where the real innovation is and ideally neither should be reliant on pegged coins.” []
  61. In other words: if large portions of “DeFi” applications rely on USDC or USDT, arguably this is incompatible with cypherpunkism or the decentralize-all-the-things meme. []
  62. One reviewer noted that: “Cryptocurrency, like Bitcoin, was supposed to be sui generis. But if you peg or wrap to a fiat currency you are going to fall into regulatory problems.  Even if DAI itself was just cryptocollateral they have a human-run governance mechanism and it is pegged to the dollar so it could fall under Securities law or Exchange regulations.  If DAI remained entirely crypto, would be less problematic.” []
  63. Maker maintains a public forum in which new types of collateral are proposed and voted on. []
  64. In contrast, RAI only uses ETH as collateral and Seigniorage Shares is re-based solely on endogenous info. It is arguably hard to do but using endogenous data from the chain itself to rebase the coin value leads to a more resilient app and system (e.g. hard to switch off). []
  65. Coin promoters – some of whom call themselves as cypherpunks – can ignore whatever regulations they want but that doesn’t prevent regulators and law enforcement from attempting to regulate and enforce activities in their remit.  Over time the modus operandi of some coin promoters has shifted away from an endogenous engineering effort: ‘we have built an anti-fragile sovereign network and exited, so who cares what the government does.’  It has shifted towards an exogenous model, wherein coin promoters ask their followers to write to policy makers and donate to coin lobbyists because a popular “dApp” relies on something that the government regulates. []
  66. Friedman LLP was the most recent auditor and they publicly walked away from Tether Ltd in 2018. See also research from professor John Griffin. []
  67. One germane social media comment: “Stablecoins are IOUs with collateral in state-issued money. You can not expect non-intervention from State if you peg your asset to money issued from State. Stablecoins are Statecoins.”  Another said: “If your coin is pegged to the USD, I don’t think you’re sticking it to The Man quite as much as you think you are.” []
  68. Felix Salmon arguably had the most adroit take on the pushback against the STABLE Act. []
  69. Another example: during the summer of 2014, rumors circulated that the BitLicense was about to be enacted (it wasn’t until the following year). During one of these periods, billionaire Tim Draper and his son, Adam, hosted a public meetup at their “university” in San Mateo. Multiple speakers repeated the same erroneous claims that the license would stymie “innovation.” Another memorable exchange was an reddit AMA with Ben Lawsky (then-Superintendent of Financial Services and architect of the BitLicense) in which the word “innovation” was flung around a lot as well. []
  70. Executives from overseas cryptocurrency exchanges used to tell investors and potential investors that they had submitted paperwork to receive a BitLicense. This “impressive feat” was meant to show how “legit” the exchange was. One story involved Bobby Lee, then the CEO of BTC China, telling potential investors in the U.S. that BTC China had filed the paperwork with DFS. But what was left unsaid was that the application was mostly left blank and may actually have never been sent at all. []
  71. Following the WSJ exposé, ShapeShift implemented identification checks for all trading activity. []
  72. Note: I did say something similar to that on stage at the American Banker event. It was a panel that included Barry Silbert, who coincidentally was helping ShapeShift fundraise the next round at that time. It was the only panel whose video was not published online because not all of the panelists would give A/V permission to do so. The funding round was announced two months later. []
  73. Payward Inc is d/b/a Kraken. It is registered with FinCEN as a MSB and has licenses in more than 50 territories and states. Strangely, Kraken’s Chief Legal Officer – Marco Santori – recently said Kraken is not a MSB: “Kraken is not a money transmitter. We haven’t sought licenses in the U.S. This is an alternative path to that, speaking purely from the regulatory perspective. The SPDI charter will help us to satisfy those rules as we seek to bring more and more of the payments flow in-house.” Technically speaking, a MTL is a subset of the MSB but unclear what that means in the context of Kraken or Tether Ltd. []
  74. One of Kraken’s vocal investors, Caitlin Long, lobbied on their behalf in Wyoming and helped them gain approval for an SPDI. It will be interesting to see which bank(s) in New York handle the correspondence wiring between the two states. []
  75. Dozens, perhaps a couple hundred, ICOs have registered in Singapore. The accommodative stance from MAS stems in part due to political influence from senior leaders, some of whom are believed to own ICO tokens. []
  76. One reviewer commented: “It is probably too extreme to requires cryptocurrency exchanges and stablecoin issuers to become licensed banks. I think exchanges and stablecoin issuers that don’t deal with retail investors should be allowed to do what they like on the understanding that if they get into trouble, they will have no help whatsoever from the Fed Reserve or the U.S. government. But exchanges and stablecoin issuers that take retail deposits must be licensed and subject to banking regulation, and there may also need to be legislation to enforce structural separation of retail deposit-taking from crypto trading – something like a modern Glass-Steagall Act.” []
  77. Technically speaking Visa is a card association that provides products to intermediaries, including access to VisaNet. Visa directly competes with China UnionPay and Mastercard. They operate tangentially to Square or Stripe who operate payment gateways on behalf of merchants. In his debate hosted by The Block, Jeremy Allaire conflated USDC issuance with activity on PayPal and Venmo.  This is apples-to-oranges because USDC issuance and redemption happens at the very edge.  And unlike PayPal and Venmo (who can continuously surveil internal accounts), USDC via Centre cannot on Ethereum.  In fact, PayPal will not allow cryptocurrency-related transfers because the organization would be unable to comply with the “Travel Rule” or other FinCEN reporting requirements which by definition would mean USDC operates under a less strict framework relative to commercial banks.  Note: other brokers such as Robinhood, Sofi, and Webull also do not allow users to transfer coins. []
  78. There is some irony in how proof-of-work (P-o-W) chains have evolved. Initially P-o-W was used because Satoshi wanted to make Sybil attacks expensive in an adversarial environment with unknown participants including governments. Over time, as the dependency on U.S. and E.U. banks has grown, many promoters are now stating that governments better not (properly) regulate commercial bank backed-tokens despite some of these same promoters linking their KYC’ed wallets to other intermediaries. In theory, anarchic chains maneuver around The Man, by decentralizing and pseudonymizing the set of parties responsible for processing transactions. But in practice, most activity — more than 80% — still takes place between trusted intermediaries. []
  79. From a systemic standpoint holding specific parties (issuers) responsible for activities they permitted (or were involved in) is a positive development. Why? Because, like banks or even payment processors, stablecoin issuers would have to monitor malignant behavior more closely than it does today. []
  80. For perspective, at the state level there are MSB and/or MTO licenses that the entity such as a cryptocurrency exchange has to apply for. A couple of states don’t license this activity, hence why a few large cryptocurrency exchanges have 47 or 48 licenses. At the federal level the entity also registers with FinCEN (and then complies with the BSA). []
  81. I wrote the most widely cited paper on “permissioned chains,” the creation of which was spurred by the inability of P-o-W chains to provide settlement finality or meet other requirements of the PFMIs. []
  82. One of the problems with “enterprise”-focused blockchains or distributed ledgers is that they often introduce a single-point-of-trust (SPOT) which reduces their resiliency and makes them a poor candidate as an FMI. See also: “B-words,” “Evolving Language: Decentralized Financial Market Infrastructure,” and “Decentralized Financial Market Infrastructures” (forthcoming). []
  83. Bears mentioning that if any anarchic chain has to rely on exogenous legal or financial support then it is not sovereign or anarchic. For example, each day somewhere there are multiple courts around the world in which aggrieved parties sue one another because of activities involving cryptocurrencies. While some of the outcomes remain as judicial precedent, others could become codified as statutes by legislatures. In either case, the disputes are not being handled on-chain. This off-chain dispute handling is another example of the “parasitic” reliance that anarchic chains continue to have on exogenous legal systems. []
  84. For example, Coin Center published an article scaremongering readers into thinking the STABLE Act would – among other allegations – criminalize node operators.  Vocal maximalists did the same thing.  Not only are these claims unfounded but neither of these groups are focused on consumer or taxpayer protections. Commercial entities involved in money transmission, payment services, and/or using financial market infrastructure have to comply with a sundry of requirements in each jurisdiction they operate in.  Irrespective of how mining nodes or non-mining nodes are categorized in the U.S. (or elsewhere), a “sufficiently decentralized” network should be resilient in an adversarial environment, including one with State-sponsored law enforcement snooping around.  No one but faux “crypto lawyers” are talking about outlawing anonymous ledgers or chains. In other words, non-neutral critics are dwelling on remote edge cases that are outside the Overton Window. No law enforcement is going to go door to door searching for a Raspberry Pi node. []
  85. One reviewer explained: “At both the state and federal level, governmental bodies in the U.S. have done a lot of heavy lifting and diligence to understand the cryptoasset and blockchain space. They have given it space to grow and develop, much more so than other innovations like drone deliveries which are just now being approved. For instance, the SEC created FinHub in 2018 which has its own permanent office; and in 2020 the SEC released a safe harbor proposal for special purpose broker dealers for custody of digital assets. If U.S. regulators wanted to kill the cryptoasset space, they could always go to the extent of cutting the cables, and destroying the servers, or using physical force and throwing everyone involved in jail, but what they have done was the opposite. It may have taken a couple of years to build capabilities and get it right, but they have devoted real resources and staff to make sure they understand what cryptoassets and blockchains are.” []
  86. According to a recent article from Politico, the Office of Terrorism and Financial Intelligence is one of the few areas at Treasury under Secretary Mnuchin that has seen a resource bump. This trend could continue under the Biden administration as the recently passed NDAA included provisions (Section 6102) to enhance FinCEN’s capabilities and widen the definition of what a financial institution and money service transmitter are to broadly include other entities such as all virtual asset service providers (VASPs). []
  87. A savvy prosecutor could probably make an easier case for why a mining pool / block maker is legally liable for say, knowingly processing ransomware payments because they are the “issuers” of coins. Whereas it may be harder to build a case against a vanilla non-mining node operator who merely performs non-administrative tasks. []
  88. Run-of-the-mill “validating” nodes are not equivalent to actual miners who process transactions and build blocks.  Without re-earthing the multitudinal debates around UASF / SegWit2x circa 2016-2017, mining pools are objectively in a different league. Non-mining nodes are often (but not always) overstated in importance on anarchic chains. With Deadcoins.com as evidence, proof-of-work chains live and die by miner participation. []
  89. Of the ten pools, the sole exception was Bitfury, who uses its political connections in the Republic of Georgia to receive taxpayer subsidies for its massive mining operations. About 10% of the energy production in the Republic goes towards powering Bitfury’s mining rigs. []
  90. This is not an idle thought experiment. In 2016, fraudulent wiring instructions from a compromised SWIFT account of the Central Bank of Bangladesh resulted in multi-year, multi-national investigation. Whereas the hackers attempted to transfer $1 billion to the Philippines, because of the financial controls and fraud detection framework at the New York Federal Reserve (which clears these types of transactions), only 10% of the total funds were transferred and of the stolen funds about 15% has been recovered. In contrast, throughout 2020, the hacker(s) in control of the stolen Bitfinex coins continued to peel off portions of the heist into unknown wallets. The restitution to the Bitfinex victims is itself worth looking at, as it involved the exchange self-issuing two different IOUs (BFX and RRT). Further Balkanization via more tokens by intermediaries is not the answer to hacking, oversight and accountability are. []
  91. Ransomware is a multi-billion dollar industry that has grown to new heights because of liquid cryptocurrencies used in payments from victims. For more, see: Ban All Ransomware Payments, in Bitcoin or Otherwise from JP Koning. []
  92. One reviewer commented: “In theory, all prudential regulations should be proportional to the risks. In addition to payment versus lending, most stablecoins are likely too small to be categorized as “systemic.” This is not an argument to not regulate them, it is one to phase in levels of regulation on stablecoins based on design and scale. Nobody wants to hear this, but here ETFs are probably a better parallel than banks. Maybe a way out is opening access to Central Bank accounts to stablecoin issuers (not individuals directly) and regulating other types of stablecoins as securities.” []
  93. In the Ethereum world there is clear separation between a reference design (Yellow Paper) and client implementation. In practice, there are multiple independent teams working on different client implementations written in different coding languages. In the event one team disappears or one implementation has a bug and crashes, the network can continue to work. Pluralism creates resiliency. In contrast Bitcoin is developed in the opposite manner: the Bitcoin Core implementation used by block makers is also the reference design. Confusingly, a group called “Bitcoin Core” acts as a gatekeeper to the Bitcoin Improvement Proposal (BIPs) and have used their position to lobby exchanges and miners to prevent or stifle certain alternative client implementations and/or BIPs from being adopted (such as SegWit2x). See: Who are the administrators of blockchains? []
  94. See The Broad Consequences of Narrow Banking by Matheus Grasselli and Alexander Lipton. []

Appendix to Parasitic Stablecoins

[Note: this is part of a standalone document written by Martin Walker in late 2019. It has been edited and condensed as it provides important considerations surrounding the topic of stablecoins. For more context, be sure to read the accompanying Parasitic Stablecoins article.]


In spite of the relative immaturity of “Stablecoins” as both an asset class and as a form of financial sector technology, they has recently attracted a huge degree of attention from regulators, central banks, academia, the media and many parts of the financial sector. This attention has particularly intensified since the announcement by Facebook of its own stablecoin (Libra) on June 18, 2019.

Reportedly prompted by this, a joint committee was formed by central banks from the G7 group of major economies, the International Monetary Fund (IMF) and the Bank for International Settlements (BIS).1 This group reported its own findings, focusing on potential regulatory and economic impact in October 2019.2

Defining stablecoins can be challenging business because there are already a significant number of variations and some of the most discussed stablecoins are still in development. The most basic and broadest definition includes three main characteristics,

  • They are intended to perform at least two of the main characteristics of money, acting as a means of exchange and as a short-medium term store of value
  • They use some variant of Distributed Ledger Technology (DLT) to record and transfer ownership in a similar way to cryptocurrencies such as Bitcoin and Ether
  • They are intended to have a value that is relatively stable compare to major currencies.
Characteristics of stablecoins

While most research on stablecoins focuses on the economic and regulatory implications, the purpose of the this paper is to present an analysis of the practical implications for key processes such as payments and settlement, not to mention the potential impact on systems within financial institutions and overall financial market infrastructure. Stablecoins as both an asset class and to some extent a form of financial sector. Consequently they have challenges to adoption in terms of competing with the current world and interacting with it.

Stability and Collateral

The most straightforward step to create a form of digital currency that has a stable value is to peg its value to a financial asset with a stable value. Most stablecoins are pegged in value to a specific currency. Tether is pegged in value to the U.S. dollar on a one-to-one basis. Others are pegged (or proposed to be pegged) to a basket of currencies. Libra was originally proposed to be pegged in value to a basket consisting of the U.S. dollar, euro, yen, British pound and Singapore dollar. Other stablecoins attempt to achieve a higher degree of stability by pegging their value to a basket of assets, including cryptocurrencies, in the belief that diversification alone will achieve a higher degree of stability. Finally there are stablecoins pegged in value to commodities such as gold or oil. Claiming to have a pegged value does not (as is discussed below) mean a stablecoin is fully backed by funds in that currency.

Maintaining a peg is much harder than simply claiming a stablecoin has a value pegged to another asset or basket of assets.3 The degree of stability depends on

  • The type of reserves
  • The proportion of reserves relative to the amount of stablecoins issued
  • The nature of the issuer of the stablecoins
  • The legal structure including the protection of the reserves from the issuers creditors in the event of the issues default

Real or proposed stablecoins have reserves in one or more of the following types

  1. Deposits in a commercial bank marketed as providing one-to-one back – this is the backing claimed by Tether, the Gemini Dollar, Pax and many others.4
  2. Backed by the balance sheet of the issuer where the issuer is a bank. JPM Coin, at least based on initial news about the proposed stablecoin, would be supported by the balance sheet (i.e. the assets and capital of JPMorgan). From a credit and valuation perspective it should be broadly equivalent to funds deposited in a JPMorgan bank account.
  3. Backed by a basket of bank accounts and other financial assets – According to the Libra whitepaper the stablecoin would be supported by assets held by the Libra foundation consisting of bank deposits and short term debt denominated in a basket currencies, subsequently announced as the U.S. dollar, euro, yen, British pound and Singapore dollar.5 Potentially the set of assets held by the Libra Foundation could include central bank reserves, subject to being allowed to open reserve accounts.
  4. Stablecoins backed by a reserve of cryptocurrencies can be one of the most transparent ways of demonstrating the existence of a reserve. If created correctly holders would be able to check the balances of cryptocurrencies held by addresses relevant to the stablecoin. Unfortunately due the relatively high correlation of all major cryptocurrencies to each other means it is unlikely that the degree of diversification that could be obtained would provide much stability.
  5. Algorithmic stablecoins such as the proposed, “Basis” Coin are intended to be a form of currency that had stable value but which was not fully collateralised. The plan for Basis was for it to be partially collateralised but to use an algorithm to maintain stability by buying or selling the coin in the market. The problem with a “currency” created like this is that it creates the incentive to short the asset, perhaps one of the reasons Basis was abandoned.

It is easy to claim a stablecoin is pegged to the value of an established currency and is backed by reserves is not by itself, it is another matter to maintain a stable value for a stablecoin some of which, such as USDT, experience periods of extreme instability.

Maintaining Stability

Central Banks could potentially issue a form of electronic money that had the same economic characteristics as physical cash or central bank reserves. This is typically referred to as Central Bank Digital Currency (CBDC). CBDC could be issued on some form of DLT (making it a form of stablecoin) or a centralised system. While there have been experiments by central banks with central bank money issued on distributed ledgers, no central bank has announced plans to create a “stablecoin.” The People’s Bank of China has been developing the concept of a form of using digital cash (potentially using DLT) for five years but nothing is in production yet. As of late-2019 the closest thing to a real world CBDC system was Ecuador’s failed attempt, the Dinero Electrónico, which was launched in 2015 and closed in 2018.6

Other relevant issues to maintaining the stability, or even basic credibility of stablecoin relate to legal and operational issues.  If the issuer of a stablecoin fails, the assets ideally should be in a legal structure that is “bankruptcy remote” (i.e. the holders of the coins can claim the reserves in preference to other creditors of the issuer). The bankruptcy remoteness of the Libra foundation, or even the general recourse Libra holders would have to the reserves of the Libra foundation are currently unclear. For the stablecoins used in cryptocurrency trading such as Tether and the Gemini Dollar there are varying degrees of bankruptcy remoteness. In the USC model, Fnality funds would be set up in a bankruptcy remote structure. JPM Coin (or almost any commercial bank issued stablecoin) is supported by the overall balance sheet of the bank. Holders of JPM Coins would most likely be treated like any other bank account holder.

For any stablecoin to remain truly stable it would need an issuer willing to buy and sell the stablecoin at par, or a very small spread above and below par. Even existing stablecoins with better controls that Tether such as Pax or the Gemini Dollar shows significant fluctuations in price. Convertibility on demand causes challenges for stablecoins, it would increase the probability in most jurisdictions that issuers would need to treat the owners of their coins as their customers for AML/KYC purposes. It would also cause challenges in terms of liquidity management. According to the Libra white paper, only specified liquidity providers will be able to buy and sell Libra directly with the Libra foundation. Other holders of Libra will not be able to redeem their Libra directly. JPM Coins will simply be transferred to or from client’s existing J.P. Morgan bank accounts.

Auditing of the reserves and the controls that are put in place to ensure the reserves are segregated from the issuers other liabilities is another fundamental feature required for maintaining price stability against the assets pegged against. One of the major reasons for the volatility of Tether was the lack of a recognised audit of their reserves and the worry, subsequently proved to be correct, that the Tether was not fully backed by reserves held as bank balances.7

Payment and Settlement Processes

For stablecoins to be effective as a part of conventional Financial Market Infrastructure as opposed to just being a tool to support cryptocurrency trading, they need to support the following fundamental processes that involve the transfer of money, either one way movement or synchronised with the movement of money or securities in the other direction.

Domestic PaymentsPayments in between two parties in the same jurisdiction in the local currency.
International PaymentsInternational payments typically involve a foreign exchange transaction as the sender’s home currency is converted in the recipient’s home currency. In many cases such as cross-border payments within the Eurozone there may be no need for a foreign exchange transaction.
DVPDelivery versus Payment is the synchronised exchange of a security for cash. DVP is used in both the settlement of purchase/sale of securities and the temporary exchange of cash in securities in areas such as Repo and Securities Lending. In conventional financial markets. Currently DVP requires the use of a trusted third parties such as a Central Securities Depository/Securities Settlement System e.g. DTCC or Euroclear or a custodian.
PVPPayment versus Payment, is the synchronised exchange of two different currencies. PVP is used for the majority of transactions by volume in the foreign exchange payments using the services of CLS Bank.
CustodyHolding a financial asset on behalf of the economic owner of the asset. Custodians provide of a variety of services in addition to basic safe keeping of assets including, lending securities, financing long positions and dealing with corporate actions and events.
CollateralTemporarily delivering financial assets to another party to offset credit risk is fundamental part of the operation of most financial markets. Collateral in the form of money, securities or other financial assets may be delivered to the counterparty, a central bank, a tri-party agent or a CCP depending on the nature of the transaction
NovationNovation is the transfer or contractual obligations and rights from one of the original parties to a contract to another party.


Domestic payments between customers within the same bank are always the most technically and operationally simple to process. Most banks should have little difficulty in processing payments in anything less than a few seconds and at minimal cost. Fundamentally all users of a particular stablecoin will essentially have an “account” at the same virtual bank, or in the case of JPM Coin or Signet, the same actual bank. Even if a bank has archaic batch-based or even paper-based solutions for internal transfers, using DLT is just one of many possible approaches to speeding up transfers.

Domestic payments between parties that bank use different banks is more considerably more complicated than payments within the same bank because of the need for banks to manage intra-day liquidity in order to avoid running out of the funds required to meet their liabilities.

However huge progress has been made in this area over the last two decades. Payments between parties that bank at different banks has been made close to instant in most developed countries through the implementation of low cost and efficient Real-Time Gross Settlement (RGTS) systems and internationally via initiatives such as SWIFT gpi.

Previously settlement of domestic payments was based on systems that used Deferred Net Settlement (DNS), basically settlement of payments was made at the end of the day after all payment instructions had been received and the net amount each bank owed each other was calculated. The existence of RTGS in over 90 countries has demonstrated that making payments instantly and settling in central bank cash does not remove the problems of liquidity or even credit risk. Central Banks have found the need to implement additional measures to avoid problems resulting from the “lumpy” nature of payments flow between banks, stress conditions and banks passively releasing their own payments after receiving payments from other banks.8

To deal with these issues central banks introduced a variety of mechanisms including Liquidity Savings Mechanisms (LSM), which group together payments before releasing to get smoothing payment flow, targets for the proportion of payments released immediately, and lower fees for the releasing payments earlier during the day. Stablecoins, if they reach sufficient scale, would not get rid of any of these problems and it is likely they would have to replicate the same mechanisms. It is worth noting that as part of its experiment with DLT in domestic payments (Project Ubin) the Monetary Authority of Singapore implemented an LSM using DLT.9

While small scale international payments for many countries can take minutes, wholesale payments can still take days, particularly if they involve the settlement of a related foreign exchange transaction. Based on analysis by SWIFT some of the key sources of delays in international payments include, errors within the systems and processes of both the sending and recipient banks, the need to carry out checks for Anti-Money Laundering (AML) and combatting the financing of terrorism (CFT) and in some countries the operations of exchange controls.

Stablecoins do not innately solve any of these issues, particularly where the desired end result of a payment in a deposit in the bank account of the ultimate recipient in the appropriate currency. More retail-focused stablecoins such as Libra may simplify international payments if Libra is used to directly purchase goods and services. However, holders of Libra (assuming Libra is backed by assets in a basket of currencies) will be exposed to the market risk of fluctuations in exchange rates. It is also unclear what the costs will be on converting into and from Libra.


The need for payment-versus-payments is an essential need for wholesale FX trading, to avoid settlement or “Herstatt” risk. This is risk that one party to an FX transaction delivers the currency they have sold but the other party does not deliver the currency they are owed, for example due to bankruptcy.

PVP currently requires a trusted third-party to manage cash flows including the release of funds when both parties have delivered the required currency. The majority of foreign exchange transactions are settled through CLS Bank, which provides multilateral netting and connections to the RTGS systems of 17 central banks. On a typical day CLS settles $5 trillion of transactions. The ability to net settlements on a multilateral basis for over 90 of the world’s largest financial institutions allows CLS to reduce the net amount of funds that have to be transferred by 96%.10

The potential opportunity claimed for some stablecoins is the ability to implement a PVP mechanism without the need for having a third party involved and a shorter (if not instant) settlement cycle. The mechanisms required to support PVP using a stablecoin depend on where and how the two currencies are represented. Excluding cryptocurrency related stablecoins such as Tether or Pax, there are the following combinations.

  • Scenario 1 – Currency 1 and Currency 2 are stablecoins created by the same issuer
  • Scenario 2 – Currency 1 and Currency 2 are stablecoins created by different issuers
  • Scenario 3 – Currency 1 is a stablecoin and Currency 2 is a fiat currency

Scenario 1 – USC is currently planned for up to 5 currencies and also plans to have separate ledgers for each currency. Therefore to achieve PVP they would need to create smart contracts that operate on two ledgers simultaneously. Fnality plans to use an architecture called Ion produced by Clearmatics but this is still a work in progress.11 Ion is also planned to support PVP between different ledger technologies such as Ethereum and Hyperledger Fabric.

A more commonly discussed model for dealing with assets on different ledgers, potentially ledgers implemented using different DLT is the “Atomic Swap” where a smart contract on one ledger will only allow the transfer of funds if funds have been transferred on the other ledger:

“Atomic swaps solve this problem through the use of Hash Timelock Contracts (HTLC). As its name denotes, HTLC is a time-bound smart contract between parties that involves the generation of a cryptographic hash function, which can be verified between them. Atomic swaps require both parties to acknowledge receipt of funds within a specified timeframe using a cryptographic hash function. If one of the involved parties fails to confirm the transaction within the timeframe, then the entire transaction is voided, and funds are not exchanged.”12

All the proposed technical models for achieving PVP for ledger-based assets are in the early stages of development. In some proposed stablecoins the degree of centralisation of the stablecoin would make it easier to use an established technology and process design to achieve PVP.

Achieving PVP between a stablecoin and a conventional currency, without involving an intermediary is considerably more problematic. The nature of conventional forms of money mean they are inherently centralised either as a record at a commercial bank or a central bank. Possible models of interaction with existing payment infrastructure is described in the next section “Interaction with Current Financial Market Infrastructure.”

In terms of shortened settlement cycles, stablecoins used for PVP are likely to come into competition with services such as CLS Now, which allows same day settlement of FX transactions using PVP for Canadian dollars, Euros, Pound Sterling and US dollars.

Interest Charges and Payments

It is very easy in a low interest rate environment to forget stablecoins are likely to need some capacity for the payment and collection of interest on balances. This is a particularly strong requirement even now for stablecoins that are proposed to be based by central bank reserves.

For currencies (at time of writing) where the central bank has negative interest rates on balances in reserve accounts (for example the -0.5 % charged by the European Central Bank), it will be necessary to pass on the charge to the holders of stablecoins otherwise the issuer of stablecoins will rapidly become involvement. The issuer of the stablecoins (who holds the backing funds in a reserve account) will need to carefully track who held what balances for what time periods and charge relevant holder, deducting interest owed from balance in the stablecoin or be able to charge interest directly if there are insufficient balances in their stablecoin wallet to pay interest. This inherently introduces and element of credit risk.

Similarly, where a central bank pays interest on reserve accounts it will be necessary for interest to largely be paid on to the relevant stablecoin holder otherwise there is a major disincentive (even at low positive rates) for firms to hold balances in stablecoins for anything other than the shortest possible duration.


Delivery versus payment is the synchronised exchange of a security for cash. DVP is used in both the settlement of purchase/sale of securities and the temporary exchange of cash in securities in areas such as Repo and Securities Lending. Currently DVP requires the use of a trusted third parties such as a Central Securities Depository (e.g. DTCC or Euroclear or a custodian).

DVP presents many of the same challenges and opportunities as PVP. Three key scenarios would need to be dealt which are similar to the PVP scenarios.

  • Scenario 1 – Stablecoin and securities are both created by the same issuer that contains the same overall network but data is stored on different ledgers
  • Scenario 2 – Stablecoin and securities are recorded on different ledgers run by different organisations and potentially using different forms of DLT.
  • Scenario 3 – Stablecoins would need to be exchanged for securities where ownership is recorded on a central database controlled by a Central Securities Depository or a Share Registrar.

Neither Fnality, JP Morgan, nor Libra have currently announced plans to issue securities on the ledgers they are planning to build to support their stablecoins. This currently leaves only scenarios 2 & 3 as plausible short-term possibilities. Scenario 2 raises the same challenges described for PVP but assumes a significant number of securities would be available as securities that are initially issued as on a distributed ledger or are tokenised versions of conventional securities.

A “tokenised” security is one where the original security is “immobilised” i.e. held in trust by a third party such as custodian and economically and legally equivalent representation of the security is recorded on a Distributed Ledger. There is currently only a small number of securities either issued on distributed ledgers or tokenised. Those that have been issued are typically small scale pilots. Interacting with a CSD to achieve DVP is problematic for the same reasons as trying to achieve PVP between a stablecoin and a conventional asset.


In the existing financial world, financial assets are held in the name of a third party for a variety of reasons including security and the desire to gain access to the range of service offered by custodians. Custodians provide a range of services that go beyond simply safe keeping of assets. These include operating lending programmes for securities, lending funds against the security of assets held and the processing of corporate actions on securities.

Keeping cryptocurrencies and other crypto-assets with a third party has grown in popularity because of the inherent vulnerability to theft of that most cryptocurrencies and crypto-assets. Obtaining a private key is all that is necessary to transfer all the assets associated with that key.

It is nearly impossible to cancel ore reverse transactions if assets are stolen or even sent to the wrong party by mistake. This is a feature included in cryptocurrencies such as Bitcoin, by design. Reversing transactions in the event of crime or area depends on either law enforcement seizing the private keys or other parties co-operating to return assets (which may have costs) – This is due to lack of central control. Anyone can attempt to “fork” most blockchain based systems but this technical process which basically comes down to re-writing history and pretending certain events did not happen is dependent on the co-operation of a critical mass of infrastructure providers called “miners.” And the loss of the private key means the assets are essentially gone for ever and impossible to retrieve.

Custody of most crypto-assets means handing over the private keys to a third party and attempting to ensure that private key is not used by the third party or their staff to steal. With some custodians, private keys are printed on paper and kept in physical safes. Private keys are broken up into pieces and distributed across multiple systems. In the worst case this simply increases the risk of losing access to the crypto assets.

The need for this form of custody essentially depends on the extent to which a stablecoin is operated on a decentralised ledger. For Libra the extent of decentralisation is currently unclear. For Fnality and JPM Coin the high degree of central issuance makes it unlikely that cryptocurrency type of custody would be required. It is likely that organisations wishing to hold wholesale forms of stablecoins may wish a third party to hold their balances in order to outsource the processing of stablecoin transactions, including payments, receipts and conversion to or from conventional currencies.


The final area of processing that stablecoins would need to support is the ability to give or receive them as collateral. Collateral is provided either to a counterparty or trusted third party such as tri-party agent or CCP to offset the credit risk arising from other financial transactions such as derivatives trades. In principal there should be no major issues providing stablecoins as long as the recipient has the technical infrastructure to process stablecoin transactions, value stablecoins and the ability to represent them correctly in systems such as their risk, finance, accounting and operational systems.

Inter-Operating and Competing with Existing Infrastructure


Stablecoins that are designed to appeal to a wider range of users than cryptocurrencies have to be capable of integration with existing financial market infrastructure. To be accepted by regulators they also need to comply with the appropriate regulations for each jurisdiction. This section describes the types of market infrastructure that will need to be integrated with and the challenges that creates.

The Challenge of Integration

One of the major and inherent weaknesses in the design of cryptocurrencies is the problems that arise when a new form of financial infrastructure is designed without giving any thought to how to integrate with existing infrastructure, whether in terms of market level infrastructure or internal to financial services firms.

The current cryptocurrency industry did not grow to its existing size by operating as a parallel payments and banking system that provides alternative ways to make payments or store value. It grew by throwing away the basic principles of decentralisation and disintermediation by recreating centralised systems (i.e., intermediaries) that kept a parallel record of cryptocurrency holdings to that stored on the ledgers of the relevant cryptocurrency. The repeated hacks, thefts, and other failings consistently demonstrated that this centralised infrastructure to support decentralised assets was seldom built with any regard to meeting the BIS Principles, or even in some cases local laws.13

Challenges to integration largely arise from the factors present in most forms of DLT:

  • Lack of central control over the operation of the system
  • Lack of central control of the deployment of changes to code
  • General inability to stop transactions
  • General inability to reverse transactions
  • Global visibility of all transactions
  • Owners not identifiable
  • Dependence on a cryptocurrency to pay for processing of transactions

Many of these features have been abandoned or worked around as the various forms of DLTs have evolved but to vary degree represent challenges both in terms of integration to FMI and the operation of the key processes related to settlements and payments. Sometimes to the point where it is questionable why a form of DLT makes any sense at call compared to conventional Centralised or Distributed Systems.

Forms of inter-operability

The following are the potential conventional forms of infrastructure that the next generation of proposed stablecoins will would potentially need to interact with.


In the following section we focus on the conventional types of financial market infrastructure described below that would be significantly impacted by the more widespread adoption of stablecoins.14

Payment Systems (PS)“A set of instruments, procedures, and rules for the transfer of funds between or among participants; the system includes the participants and the entity operating the arrangement.” This includes the various RTGS.
Central Securities Depositories (CSD)“An entity that provides securities accounts, central safekeeping services, and asset services, which may include the administration of corporate actions and redemptions, and plays an important role in helping to ensure the integrity of securities issues (that is, ensure that securities are not accidentally or fraudulently created or destroyed or their details changed).”
Securities Settlement Systems (SSS)“An entity that enables securities to be transferred and settled by book entry according to a set of predetermined multilateral rules. Such systems allow transfers of securities either free of payment or against payment.”
Central Counterparties (CCP)“An entity that interposes itself between counterparties to contracts traded in one or more financial markets, becoming the buyer to every seller and the seller to every buyer and thereby ensuring the performance of open contracts.”
CLS“CLS Bank (CLS) is a limited purpose bank for settling FX, based in New York with its main operations in London. It is owned by 69 financial institutions which are significant players in the FX market. It currently settles trades in 17 currencies. CLS removes principal risk by using PVP – you get paid only if you pay. On settlement day, each counterparty to the trade pays to CLS the currency it is selling – eg by using a correspondent bank, as with the example in the previous box. However, unlike the previous example, CLS pays out the bought currency only if the sold currency is received. In effect, CLS acts as a trusted third party in the settlement process.”16
Internal Financial System InfrastructureThe core internal infrastructure of banks and financial institutions. This includes systems used for risk management, P&L calculation, transaction execution and accounting

Payment Systems (PS)

Stablecoins that are backed (in whole or in part) by bank balances at commercial or central banks will need some degree of integration with a payments system or the payments infrastructure of a given bank. This will be necessary to process the receipt of funds that preceded the issuance of new coins, outgoing payments when there is a redemption and potentially payments or receipts of interest on stablecoin balances. A stablecoin based on central bank reserves would generally need to be connected to some of Real-Time Gross Settlement system to minimise delays in the issuance of new coins.

Such integration is generally straightforward assuming the issuer of stablecoins is allowed to access directly relevant payment systems.  A more interesting question is the impact of stablecoins as a competitor to conventional payment systems.

A stablecoin denominated in a single currency needs to demonstrate it has some form of superiority in terms one or more of the following

  • Transaction Speed
  • Transaction Cost
  • Reduced Operational Risk
  • Ability make payment conditional on other parts of a financial transaction (as in the case of PVP, DVP etc.)

While at the same time dealing with the challenges of ensuring there is sufficient liquidity in the stablecoin network for parties to meet their obligations. The experience of introducing RTGS in over 90 central banks since 1980s demonstrated that allowing a pure system of gross settlements in payments, with participants free to release payments at any time can cause liquidity issues that need to be dealt with by technical changes, such as the implementation of Liquidity Saving Mechanisms (LSM).17

To quote the New York Fed:

“Liquidity-saving mechanisms (LSMs) are queuing arrangements for payments that operate alongside traditional real-time gross settlement (RTGS) systems. LSMs allow banks to condition the release of queued payments on the receipt of offsetting or partially offsetting payments;”18

Some central banks also created rules/targets for when payments should be released or financial incentives for early release of payments.

Retail focused stablecoins need to be able compete with faster payments, credit card and debit card networks. Payments mechanisms that can be highly efficient in many economies. In cross-border payments, stablecoins need to be able to demonstrate they are a more efficient mechanism for dealing with the major areas of delays and costs such as compliance with AML rules and in some markets exchange controls.

Central Securities Depositories & Securities Settlement Systems

For infrastructure such as Euroclear, DTCC, ASX’s CHESS system or Takasbank in Turkey to perform delivery versus payment, they need to have access to a security register to update ownership records and a funds belonging to participants, either held directly at the FMI or at a Central Bank. They also need to be able to provide trade capture, matching and netting capabilities.

For a stablecoin to be used in the DVP settlement, the FMI needs to be able to directly access stablecoin balances belonging to the participants in trades, either directly or on behalf of participants by a third party. This would require work by both the CSD/SSS and the stablecoin provider. There is no obvious benefit from this arrangement. Other systems belonging to the CSD/SSS would need to be modified to represent what is effectively a new currency. For countries that have long established infrastructure in this area, it quite likely adding an additional currency would require additional effort.

Central Counterparties (CCP)

Any organisation likely to acquire large balances in high quality stablecoins is likely to want to be able to provide those stablecoins as collateral in bilateral transactions, with central banks and with Central Counterparties. Should CCPs chose to accept stablecoins they would need to make significant changes to their systems to interact with the relevant distributed ledgers and set them up as new currencies or asset classes within their systems.


CLS is such a fundamental part of the global financial market infrastructure that any stablecoin that is used on a very large scale is likely to need some degree of integration. It should be remembered though that the vast majority of currencies (by number not importance) are not supported by CLS. Potentially a stablecoin could be added as another CLS currency allowing the benefits of multilateral netting and integration into the core global FX processing. However it would depend on a very high degree of demand and a many regulatory approvals.

In many ways stablecoins compete directly with existing CLS services so it is also questionable the extent to which CLS may support their adoption.

Interoperability with Financial Sector Internal Systems

There are two main areas where the internal systems of financial sector firms would require modification. Their outward facing interfaces that would need to interact with a range of distributed ledgers (unless they outsource this interaction to third parties – essentially creating a new class of correspondent bank) and modifications to inward facing systems such as those belonging to the risk, finance, trading, operations and treasury departments. Perhaps the closet analogy was the creation of an offshore version of the Chinese Yuan, commonly known as “CNH.” Though no wholescale re-engineering was required, it did commonly require changes to be made across a great many systems to recognise the difference between CNH and the on-shore version of the Yuan, “CNY.” This had a particularly large impact for those banks offering services in CNH.

Having two versions (or more) of essentially the same currency creates a great deal of scope for confusion in trading, treasury and support processes. Subtle differences in liquidity and conversion costs also mean that the different versions of the same currency have to be treated differently in many different ways including charges, interest rates and the curves used in pricing positions.

Interoperability with Distributed Ledger Based Infrastructure

Interoperability with emerging infrastructure based on DLT is also likely to create a number of challenges.

Some forms of Market Infrastructure in-progress (or beta) such as ASX’s CHESS system (for securities settlement) and the HQLA-X system for exchange of High-Quality Liquid Assets for lower grade assets are essentially centralised systems that use elements of DLT as part of the overall system design. Interfaces would need to be like any other form of FMI. Those interfaces would need to take into consideration security, privacy and the need for agreed data standards. There would also be the complications of adding what is effectively a new currency.

One of the proposed methods of allowing interaction between different types of ledger or even different instances of the same DLT but recording different assets or used by different parties, is the Atomic Swap. Using this method, funds on the two different ledgers are only released when both parties acknowledge that assets have been transferred. If the two acknowledgements are not received within the agreed time, the assets will be transferred back to the original addresses.

Atomic Swaps are still an emerging technology that have been widely tested in cryptocurrencies. However on a theoretical level they raise governance issues. If assets are on ledgers ultimately controlled by two different parties, whose has governance over the transaction? It also provides an element of optionality to each party to change their mind about whether to go ahead with the transaction. They could simply not deliver and have their asset returned to them. There are similar problems in the current world. Some counterparties have high rates of settlement failure on securities related trades because of issues in their operational processes or systems. Others at times have financial incentives to allow trades to fail, which had created significant problems in the operation of the Repo market.19 This has resulted in stricter rules and fines in many jurisdictions.


Creating stablecoins as forms of either financial market infrastructure (i.e. used by multiple financial bodies in the case of USC or as essentially internal systems, as is in the case of JPM Coin, Wells Fargo Digital Cash or Signet) clearly does not require the use of any form of Distributed Ledger Technology. Most of the use cases ultimately involve some form of book transfer of funds within essentially the same systems. Allowing customers of the same bank to transfer funds between each other in real-time 24*7 at little to no cost is a service provided by many banks today. The only bottleneck to allowing this in other banks is either a lack of willingness to provide the service or the use of antiquated systems that rely on batch processing.

Liquidity issues out of hours

At the market level, real-time payments within a currency bloc, that settle in central bank money have been implemented using Real-Time Gross Settlement Systems in over 90 countries to date. Some of those payments systems such as the Eurosystem’s TARGET2 have been extended to support securities settlement (T2S) and smaller scale instant payments (TIPS). For the cross-border market CLS connects together the RTGS of 17 currencies to allow PVP settlement against central bank reserves.

The challenges faced in creating creditable stablecoins that can grow beyond simply supporting speculation in cryptocurrency trading are large. Stablecoins backed by Central Bank reserves require the explicit backing of the relevant central banks. Stablecoins such as Libra have attracted extreme scrutiny if not outright opposition from Central Banks and politicians both because of concerns over the stability of the financial system and a lack of trust by some politicians in Facebook as an organisation. Any stablecoin that is regarded as a key part of Financial Market Infrastructure is likely to be required to meet strict regulatory controls, reflecting the principles laid out by the BIS in “Principles for financial market infrastructures.”

Creating interoperability between the infrastructure on which stablecoins operate and existing infrastructure, not to mention potential future infrastructure that runs on different versions of DLT is a non-trivial task, not made any easier by the use of DLT. Such interoperability will be vital if stablecoins ever hope to be anything more than parallel RTGS systems.

Finally the obstacles that have been encountered by RTGS in managing liquidity are unlike to be removed by the use of DLT. In many countries the introduction of RTGS, identified the need to create mechanisms to ensure firms did not hold back payments, creating intra-day funding needs, intra-day credit risk and general systemic risk. If is very likely that if stablecoins were used in a significant volume of transactions there would be a need to introduce many of those measure described that had to introduced for RTGS such as Liquidity Savings Mechanisms.

Then there are the challenges with DLT. None of the various forms of DLT have proven themselves at scale and in a regulated environment and it is questionable whether they a better form of technology, even for implementing stablecoins that existing technologies.

Stablecoins may succeed in the long-run if they can demonstrate an ability to support better ways to manage liquidity including broader, if not continuous, settlement cycles for both money and securities. Finally one of the key concepts between more advanced forms of DLT such as Ethereum or Fabric was to allow parties to agree bilaterally or in groups to deploy agreed business logic in the form of “Smart Contracts” that can be executed when transactions are processed. This type of flexibility could be a potential path to the a higher degree of standardisation in processing financial transactions without the need to have a central, and inherently slow moving body, setting standards for a whole area of business or jurisdiction.


  1. Financial TimesFacebook’s Libra currency draws instant response from regulators” 18th June 2019 []
  2. Investigating the impact of global stablecoins” by G7, IMF, and BIS []
  3. As it is for state-issued currencies. The RTGS Dollar in Zimbabwe was pegged in value to the U.S. dollar but lacked sufficient reserves causing it to crumble in the face of market forces. []
  4. Tether (the company) changed its statements about the backing of Tether the current early in 2019. []
  5. Libra whitepaper []
  6. The World’s First Central Bank Electronic Money Has Come – And Gone: Ecuador, 2014-2018 from Seeking Alpha []
  7. Tether Lawyer Admits Stablecoin Now 74% Backed by Cash and Equivalents from Coindesk []
  8. Liquidity Saving in Real-Time Gross Settlement Systems – An Overview from B. Norman []
  9. Project Ubin: Central Bank Digital Money using Distributed Ledger Technology from MAS []
  10. CLSSettlement []
  11. Ion: The Vision []
  12. Atomic Swaps Defined []
  13. Principles for financial market infrastructures – from CPMI and IOSCO []
  14. The complete list of FMI’s listed by the Bank for International Settlement includes Trade Depositories  – “an entity that maintains a centralised electronic record (database) of transaction data” []
  15. Definitions/Descriptions quoted from BIS “Principles for financial market infrastructures” and BIS Quarterly Review, September 2008 []
  16. Extract from page 57 of BIS Quarterly Review, September 2008 []
  17. How has the Liquidity Saving Mechanism reduced banks’ intraday liquidity costs in CHAPS? from Quarterly Bulletin []
  18. An Economic Analysis of Liquidity-Saving Mechanisms from Martin and McAndrews []
  19. Why $200bn in US trades are failing each day from Financial Times []

Global Fintech Investments (pre-COVID)

[Note: this memo was written for the IIEL Issue Brief Series for Seminar on Sustainable De-Fi]

It’s been about six years since I began tracking the fintech space through my market research role at a couple of different firms.  Fads have come and gone, a few have stayed.  For instance, in the United States, P2P lending was all the rage in the early part of the last decade but has wasted away, despite a growing economy.  In China, P2P lending became intertwined with the informal ‘shadow’ banking sector which not only blew up, but led to now notorious multi-billion dollar Ponzi schemes.

We can partially see this illustrated via The Disruption House (TDH), a data and benchmarking analytics firm focused on the financial sector, which found that some of the fintech exuberance peaked almost five years ago.


While this is not a fully comprehensive or exhaustive survey (TDH primarily focuses on wholesale capital markets), what has led to this particular decline?  Part of it is unrealistic expectations that promoters failed to manage during the initial marketing phase… such as blockchains killing banks!

Another recurring issue is capital costs.  Contrary to the narrative that a couple of bros with laptops in a Silicon Valley café can whip together an app that finally crushes too-big-to-fail banks, most, if not all of the fintech sectors require large capital investments to build out and eventually integrate Widget X, or Base Layer Y, into the existing financial infrastructure.

For example, last fall Apple humblebragged about its partnership with Goldman Sachs for the Apple Card, where on the one hand Apple tried to take credit for creating the product as a tech company but didn’t mention that Goldman also spent $300 million to develop it.

In response, Yakov Kofner, a managing partner at Gartner who focuses on payments and fintechs in general, mentioned last month that: “FSIs love to PR its Agile culture and open banking scale, but when it comes to launching a new product it somehow still requires hundreds-of-million budget and thousands of developers.”

Most startups, irrespective of geographic region, simply do not have the runway to build out these types of products, at least if we’re talking about apps with actual users and not mockups solely intended as Powerpoint viewership.

Another recurring issue is, even after launching a product, a lack of continued traction.  Typically, a company that is actually experiencing real continual growth will boast specific metrics, milestones, and KPIs.  But in the fintech world, we often see obfuscation:


In some corners of the financial press (like Alphaville), fintech became synonymous with simple user-interface facelifts, or at worst scams.

Despite this possibly cynical take, there are some bright spots of actual engagement.  For instance, a couple weeks ago Zelle announced that it processed $56 billion in payments involving 230 million transactions during Q4 2019.  This amounted to growth of 14% and 17%, quarter-over-quarter.  Altogether they processed $187 billion in payments involving 743 million transactions in 2019.  This amounted to growth of 57% and 72% year-over-year.

Yet according to a payments expert, Zelle may be double counting some send-receive volume and that growth is mostly legacy transfers moving to a new rail rather than some new payment use case or business model.  In addition, in the United States, Venmo (and others including Square Cash) which is slowly catching up to Zelle in volume, arguably created a new use case, payment model, and improved customer experience (CX).  Will these apps eventually vacuum in other features, pulling a reverse of what WeChat did over the years?

To be holistic, let’s look at some other relevant charts from other regions.

Source: CB Insights

CB Insights is an analytics company that, like TDH, tracks venture funding into startup ecosystems.  In contrast to TDH, CBI saw increased activity globally in 2018, largely due to the Ant Financial raise.  According to an analyst at CBI: “Fintech deals are down year over year, and the deals happening are at later stages.”  Note: TDH looks narrowly at the European market whereas CBI’s remit is wider.

Lest we be accused of having an American-centric view (which obviously we do), FTPartners provided some already dated numbers… because the UK is no longer part of Europe as of a few days ago.  Will Brexit impact local fundraising?

Source: FTPartners

An easier way to visualize this is via colorized bar charts:

Source: FTPartners

And how does European fintech deal activity compare to the rest of capital raises in other sectors throughout Europe?

Source: Dealroom

According to Dealroom, since 2013 fintech-related companies have “created over 2x more value than any tech sector in Europe.”  That is interesting considering that venture rounds (and valuations) in Europe are often stereotyped as lagging their peers at the same stage in the United States.

But as we see below, for the past few years, that stereotype appears incorrect.

Source: Dealroom

It bears mentioning that the Dealroom stats do not include biotech in health.

And what happens with these companies in the long-run?  What’s the exit?

Source: Dealroom

According to Dealroom, traditional banks are not able to acquire their way into fintech because “they do not have the mandate as their valuation multiples are too low and synergies are likely limited.  Instead, financial institutions and other corporates are more involved via partnerships or by investing in minority stakes.”

As someone who has previously worked for a company (R3) that became bank (majority) owned, I find it unusual that some of these companies aren’t fully acquired by a bank or two.  But we’ve been told, especially in terms of lending platforms, that some banks – at least in the short run – have found it as an alternative source to try and generate revenue from.  So maybe this is just an experimental era?  It also bears mentioning that the track record of such acquisitions, or setting up captive fintech subsidiaries, is abysmal, with many ending up being shut down altogether.

China is a touchstone today, more so than other times because of the ongoing coronavirus epidemic.  This has also turned a bit personal as my wife is from northern China, as is our au pair.  While we are all hoping for the best and for a speedy recovery, it is likely that deals and deal flow this year will look a lot different than they have in the past few years.

Source: CB Insights

Perhaps the most well known of the most recent exits (and coincidentally largest) is ZhongAn, an insurance company, who exited at an inflated valuation.  How do we know?  Because it has lost more than 60% from its peak after going public in late 2017.

We could, but won’t, go into the topic of P2P lending, but we’d like to give readers an idea of what happened aside from the aforementioned Ponzi schemes.  According to the South China Morning Post: due to rampant fraud, all of China’s 427 remaining P2P lenders (from 6,000 back in 2015) will have to either close down within two years or become qualified small loan financial institutions.

Worth pointing out that this sector, P2P lending, meant the original fintechs before that word became popular.  While they all started as P2P, they quickly pivoted to institutional capital.  Many of them also promised incredible data insights by using social media feeds only to later default back to good old credit scores and cash flow analysis.

Does that mean all of the companies in the CBI chart above will suffer the same fate?  No, but remaining grounded and realistic in the face of relentless positive press releases might be the balanced approach.

To round out this important region, let’s look at a larger breakdown.

Source: FinTech Global

According to FinTech Global, fintech investments between 2014-Q1 2019 in China reached a cumulative $60.1 billion.  The largest aggregate was payment and remittances companies, which received $24.7 billion in funding.  It’s also worth pointing out that one company, Ant Financial, distorts the overall number as it raised $14 billion in its series C and is currently valued in the private market at around $150 billion.  Is this another WeWork valuation or a more legitimate Plaid valuation?


From the charts above it appears we are too early to say much other than the fintech world as a whole has a lot of work to do to deliver the claims it made to users.  Capital seems ample but identifying legitimate operators, as in any sector, appears to be one of the largest ongoing challenges.

It is generally faux pas to add a new factoid in the conclusion of an article, but we’ll self-certify this exception.

Source: CBI

The spastic world of cryptocurrencies and blockchains arguably has yet to deliver on its ballyhooed promises beyond speculation, ransomware, and get-rich-quick schemes.  

In aggregate, despite the billions in deals, as shown in the diagram above, there is a marked decrease in the word “blockchain” during earnings calls in 2019 compared to the previous year.  

Why?  Hype is subsiding.  If we measure success based on user growth, increased revenue, and acquisitions (or public listings) we do not see much new activity outside the realm of mining, trading on exchanges, and throwing large conferences.  And most activity targeting “the enterprise” is hovering around the relatively mundane documentation management and provenance arenas.

To be fair, there is a fundamental difference between conventional fintechs and the wild anarchic world of cryptocurrencies. There are definitely fintechs which brought massive value – and markedly improved CX – to businesses and consumers, including Lemonade, Next Insurance, and of course Ant Financial.  Besides, valuations may not be the best measurement of the success of an industry.

Let’s follow-up in a couple of years to see what infrastructure is used and sustainable business models have silenced critics.  Until then, a healthy dose of skepticism is warranted and seems justified in an era of anonymous twitter accounts reliably documenting… VCs congratulating themselves.

Have PoW blockchains become less resource intensive?

More than a couple of people have asked for an update to a popular post published 14 months ago.

What has changed?

Before we begin, a quick reminder: the basic security model behind proof-of-work (PoW) blockchains is to make it economically costly to successfully rewrite the chain’s history. Finite resources, whether it is in the form of electricity or semiconductors, have to be consumed.

Therefore, a PoW chain such as Bitcoin, cannot simultaneously be secure and inexpensive to operate. Because if it was inexpensive to operate it would also be inexpensive to successfully attack.

proof of work, ethereum, mining, blockchain
Source: Crypviz


For Bitcoin, Bitmain announced its S17e system which can churn out 64TH/s.  Each machine consumes ~2880 watts at the wall.  The first of these units are scheduled to be shipped to customers in November (however other less powerful variants shipped during the summer).

The current Bitcoin hashrate has been oscillating around 100 million TH/s the past few weeks.  

[Source: Blockchain.info]

If the entire network was comprised of the unreleased S17e-based machines, there would be around 1.56 million of them. In a given year these would gulp down about 39.4 billion kWh. But we know that is not the case yet. Thus, this will serve as our lower bound.

Bitmain is also shipping several other newly released systems, including the T17e.  Like its cousin above, the T17e also consumes about ~2880 at the wall. But it is not as efficient per hash: creating only 53 TH/s with the same amount of electricity.  

Why manufacture and sell two (or more) different machines that draw roughly the same amount of power?  

Cost.  the T17e costs $1665 and the S17e is $2483. The target market for the T17e is supposedly for miners who have low or no electricity costs.

How many T17e’s would it take to generate the 100 million TH/s network hashrate?  About 1.88 million; or an additional 300,000 more machines than the S17e.

A quick pause. these types of bulk purchases are not idle speculation. In the middle of last summer, during a two-week period of time, the equivalent of 100,000 mining machines was added to the Bitcoin network (likely early variants of the S17). This is a reversal from last November, wherein the equivalent of ~1.3 million S9s were taken offline during one month.

Again, we know that in practice that there are many more less efficient miners still online.  But crunching the numbers, 1.88 million machines each pulling in 2.88 kWh over one entire year results in…  ~47.6 billion kWh annually.

Another Bitmain machine purchasable today is the new T17 that generates 40 TH/s, drawing about 2200 watts at the wall.  It would take about 2.5 million of these to generate the Bitcoin hashrate all while consuming…  ~48.2 billion kWh per year.

To be thorough, Bitmain released the S9 SE in July which generates 16 TH/s, drawing 1280 watts.  It’s unclear how many of these have been sold but if the entire network was comprised of these: 6.25 million would need to be used.  And they would collectively guzzle ~70 billion kWh. This would be a plausible upper bound.

For comparison, if Bitcoin (T17) were its own country it would at minimum consume roughly the same amount of electricity as Romania or Algeria. If the network were comprised of just S9 SE’s, that’d be about the energy footprint of Austria. In either case, very little is value is produced in return… aside from memes and lots of social media posts. And no, despite historical revisionism by maximalists, “hodling” is not what Bitcoin was originally designed for.

As mentioned in the previous post: no other payment system on earth uses the same amount of electricity, let alone aggregate number of machines, as a PoW coin network. That is a dubious distinction.  

In looking at my previous post you will see a similar figure.  In August 2018, using the (older) S9 machine (~13 TH/s) as a baseline, the Bitcoin network consumed about ~50.5 billion kWh / year.1 Some of these types of machines (like the S9 SE) are still on.

Thus whenever you hear a PoW promoter claim that:  

  • Bitcoin doesn’t use much electricity; or
  • Bitcoin’s electricity usage will naturally decline over time; or
  • Bitcoin is more efficient than traditional payment systems

You can rightly tell them all of those claims are empirically false. In fact, the only way for the resource demands of a PoW coin to decline is if there was a long decline in the coin price.

What do taxpayers – who underwrite the state-owned utility companies – get in return for subsidizing these energy guzzlers? New economic zones of growth and prosperity?

Nope.  According to Chainalysis, in a given day more than 90% of activity on the Bitcoin network is simply movement from one intermediary to another. 2 Coin trading is by far the largest category.


And since most of these coin intermediaries increasingly require some form of KYC / AML compliance, the Bitcoin network has morphed into a expensive permissioned-on-permissionless network that has the drawbacks of both and the benefits of neither. There is no point in using PoW in a network in which all major participants are known: Sybils no longer exist.

A common refrain by PoW promoters is, Christmas lights and set-top boxes also consume huge amounts of energy!

First of all, that’s a whataboutism.  But it also ignores how several Bitcoin mining manufacturers have actually tried to embed chips into these wares.

For instance:

  • Bitmain has a couple of routers called the Antrouter that will mine either BTC or LTC for you.  
  • Bitfury has marketed Bitcoin mining light bulbs.

As you can imagine, a fixed unit of labor eventually becomes unprofitable once difficulty levels increase.  It’s the same fundamental problem that faced the 21.co toasters. Thus neither of these took off (the light bulb didn’t ship) even though retail users often keep both their home routers and living room lights on all day.   Historically PoW equipment becomes e-waste fast and the last thing consumers want is embedded e-waste that guzzles electricity.3

We haven’t even touched on other PoW coins such as Ethereum, Bitcoin Cash, or Monero…  but it is worth pointing out that nearly all of the money going to miners via the block reward is value leaking from the system, either to semiconductor manufacturers or state-owned utilities.

This isn’t idle speculation either, as Nvidia counted on massive consumption of its GPUs in early 2018 which didn’t materialize due to the crash in coin prices. This led to a glut of high-end GPUs in its channel partners, which hit Nvidia’s bottom line and was later reflected by a 50% decline in share prices (the same phenomenon impacted AMD too):

Source: TechSpot

Apart from a couple of small investments, the value that a couple of semiconductor manufacturers or a clique of state-owned utilities receives via mining is money that is not being invested towards developing the chain itself.    

And some of these mining manufacturers have privatized gains at the expense of taxpayers. For instance, Bitfury, used its political connections to obtain cheap land in the Republic of Georgia where it setup massive mining farms:

 “The efforts have given Georgia, with 3.7 million people, a dubious distinction. It is now an energy guzzler, with nearly 10 percent of its energy output gone into the currency endeavor.”  

In Kyrgyzstan, 45 “crypto” mining firms consumed more energy than three local regions combined:  

“[They] consumed 136 megawatts of electricity, which is more than the amount consumed by three Kyrgyzstan regions: Issyk-Kul, Talas and Naryn.”  

Uzbekistan’s Ministry of Energy has introduced a new bill that would dramatically increase the electricity price to miners who are viewed as being “very energy intensive.”

We could probably create an entire post on these types of stories too.

At least Bitcoin is “decentralized,” right?

While the farms may be geographically dispersed to areas with the cheapest electricity, the mining pools, mining manufacturers, and other infrastructure participants are a small and centralized enough group that they can fit into a hotel for regular conferences.

Source: Twitter

Time to look at other chains.

Bitcoin Cash

Because it is nearly identical to Bitcoin (albeit with a few changes such as a larger block size), we can pretty much do the same set of calculations as we already did above.

Source: BitInfoCharts

Unlike Bitcoin, Bitcoin Cash has seen a dramatic decline in hashrate since it peaked at over 5 million TH/s earlier in the summer. It is now oscillating around 2.5 million TH/s.

For Bitcoin Cash, with a Bitmain S17e system, remember it generates 64TH/s and consumes ~2880 watts at the wall. If the entire network was comprised of the unreleased S17e-based machines, there would be around 40,000 of them. In a given year these would use about 985 million kWh. This will serve as our lower bound.

Bitmain’s S9 SE generates 16 TH/s, drawing 1280 watts. It’s unclear how many of these have been sold but if the entire network was comprised of these: ~156,000 would need to be used. And they would collectively use ~1.75 billion kWh. This would be a plausible upper bound.

Not counting e-waste, that would put the energy usage of Bitcoin Cash somewhere around 150, between Benin and The Bahamas. Compared with last year (when it was around 122), this decline is largely due to the nearly 60% price decline in BCH. This once again illustrates that hashrate follows price (e.g., miners expend capital chasing seigniorage).


Coupled with “the thirdening” in February (in which block rewards declined from 3 to 2 ETH), and an overall decline in ETH prices, hashrate also declined over the past year:

Source: Etherscan

According to Coinwarz, the hashrate is oscillating around 200 TH/s, about 1/3 it was when the previous article was written.

A proposed ASIC from Linzhi that hasn’t been built or shipped aims to generate 1400 MH/s with an electricity consumption level of 1 kWh. As the story goes:

To put those figures in perspective, NVIDIA’s GTX TitanV 8 card is now one of the most profitable piece of equipment on the ethash algorithm, able to compute 656 MH/s at an energy consumption level of 2.1 kWh, according to mining pool f2pool’s miner profitability index.

There are a couple of other ASICs on the market including one from Innosilicon and another from Bitmain. The previous post looked at the same Innosilicon A10 on the market, so to simplify things and because the Bitmain machine is roughly just as efficient, let’s reuse it here.

The A10 generates 485 MH/s and consumes ~850 W. The Ethereum network is around 200,000,000 MH/s. That’s the equivalent of 412,371 A10 machines.

Annually these would consume about 3.1 billion kWh per year. Around 132, about as much as Senegal or Papua New Guinea.

If we used the GTX TitanV 8 card, as described in the article above, we find that 304,878 GPUs would be used. These would consume 5.6 billion kWh per year. That’d be around the same amount that Mongolia does annually.

This is one of the reasons why Ethereum is transitioning over to proof-of-stake. As Vitalik Buterin said last year:

I would personally feel very unhappy if my main contribution to the world was adding Cyprus’s worth of electricity consumption to global warming.

Will the nebulously defined “DeFi” on an actual proof-of-stake system change the usage dynamics in the future?4


Litecoin, better known as Bitcoin’s other testnet, has seen its hashrate decline along with its price.

Source: BitInfoCharts

For simplicity sake, let’s call it an even 300 TH/s which coincidentally it was at 14 months ago too. CoinWarz says it is also currently around that, who are we to argue with them?

As mentioned in the previous article, Bitmain’s L3+ is still around. It generates ~500 MH/s with ~800 watts. A slightly more powerful L3++ is on the market as well.

There are the equivalent of about 600,000 L3+ machines generating hashes.

As an aggregate:

  • A single L3+ will consume 19.2 kWh per day
  • 600,000 will consume 11.5 million kWh per day
  • Annually: 4.2 billion kWh per year

It would be placed around 124th, between Moldova and Cambodia.

According a distributor, the Antminer L3++ specifications:

  1. Hash Rate: 580 MH/s ±5%
  2. Power Consumption: 942W + 10% (at the wall, with APW3 ,93% efficiency, 25C ambient temp)

If only L3++’s were used, the outcome would be about the same. 5

This consumption is pretty absurd once we factor in things like how there is only a couple of active developers who basically just merge changes from Bitcoin into Litecoin.6 In other words, one of the largest PoW networks has very few users or developers, yet consumes the same amount of energy as Moldolva. How is that a socially useful innovation?

Note: an easy way to double-check our math on this specific one: the price of LTC is nearly the same today as it was 14 months ago. Ceteris paribus, miners will expend capital no higher than the coin price, to ‘win’ the seigniorage.


In terms of mining, it appears that several decisions makers (administrators?) in the Monero world really dislike ASICs. So much so that they routinely coordinate forks that include “ASIC-resistant” hashing algorithms. Stories like this are mostly just PR because we know that any PoW coin with a high enough value, will eventually become the target of an ASIC design team.7

Source: BitInfoCharts

From the chart above, you can clearly see when the forks occurred that added “ASIC-resistance.”

Compared with the previous article, the hashrate has declined by about 1/3rd to about 325 MH/s. And it is believed that most of this hashrate is generated by GPUs and CPUs.

There are lots of how-to guides for building a Monero mining rig. Rather than getting into the weeds, based on this crazy 12-card Vega build, the user was able to generate 28,100 hashes/sec and consume 1920 watts. That’s about 2341 hashes per card (more than 10% faster than the one used in the previous article).

That’s about 138,829 GPUs each sipping 160 watts. Altogether these consume 194 million kWh annually. That’s likely a lower bound for GPU mining.

If we reused the Vega 64 mentioned in the previous article, there would be about 162,500 GPUs at the current hashrate. These would consume around 228 million kWh annually.

Not surprisingly, coupled with the “ASIC-resistant” fork and a coin price decline of nearly 50%, this resulted in about 1/3 energy used from the previous year. But this is still not an upper bound because it is likely that CPUs contribute to a non-insignificant portion of the hashrate via persistent botnets and cryptojacking.

Based on the same electricity consumption chart as the others, Monero would be placed somewhere above Grenada and the Mariana Islands. Perhaps a bit higher if lots of CPUs are used. Remember, this is called CPU-cycle theft for a reason.8


In aggregate, based on the numbers above, these five PoW coins likely consume between 56.7 billion kWh and 81.8 billion kWh annually. That’s somewhere around Switzerland on the low end to Finland or Pakistan near the upper end. It is likely much closer to the upper bound because the calculations above all assumed little energy loss ‘at the wall’ when in fact there is often 10% or more energy loss depending on the setup.

This is a little lower than last year, where we used a similar method and found that these PoW networks may consume as much resources as The Netherlands. Why the decline? All of it is due to the large decline in coin prices over the preceding time period. Again, miners will consume resources up to the value of a block reward wherein the marginal cost to mine equals the marginal value of the coin (MC=MV).9

This did not include other PoW coins such as Dash, Ethereum Classic, or Bitcoin SV… although it is likely that based on their current coin value they each probably consume less than either Litecoin or Bitcoin Cash.

Thus to answer the original question at the beginning, the answer is no.

PoW networks still consume massive amounts of electricity and semiconductors that could otherwise have been used in other endeavors. Some of these power plants could be shut down entirely. PoW-based cryptocurrencies crowd out and bid up the prices of semiconductor components.10 Apart from a few stories designed to pull on our heartstrings, little evidence exists (yet) for PoW coins creating socially useful economic output beyond moving coins from one intermediary to another.

And because most coins are mined via single-use ASICs, they generate large amounts of e-waste which leaks value from towards a small clique of semiconductor manufacturers and (mostly) state-owned utilities, neither of whom typically contribute back to the coin ecosystem.11 Will this change in the next 14 months?

Related links


  1. I – and many others – have written about this before. PoW mining is a Red Queen’s race — miners are incentivized via block rewards to expend additional capital on mining, but the total reward available to miners is fixed. Thus while chip efficiency may increase each generation, miners as a whole increase capital outlays for equipment rather than reduce. []
  2. According to The Token Analyst, nearly 7% of all mined bitcoins reside in exchanges. []
  3. Another way some have used to describe Bitcoin is an ASIC-based proof-of-stake. But really it is DPOS but not with the “D” that you may be thinking. Since mining equipment rapidly depreciates (with a typical lifespan of less than 18 months), Bitcoin arguably uses depreciating proof-of-stake. []
  4. According to both DappRadar and State of the Dapps, there has been about a marketed increase in “users” and Dapps (although they combine all Dapp platforms, not just Ethereum). []
  5. Although obviously, as in all examples above, there are loses in efficiency as the energy travels from the power plant all the way through the grid and into a home or office. []
  6. If there is only one actual developer maintaining the Litecoin codebase, how is this ‘sufficiently decentralized’ or not an administrator under FinCEN’s definition? Even the “official” foundation is basically out of funds. []
  7. Wouldn’t it be interesting if a few botnet operators or sites like The Pirate Bay were moonlighting as Monero developers, so they could directly benefit from CPU mining? []
  8. Outright theft continually takes place. For instance, a Singaporean allegedly stole $5 million worth of computing power to mine bitcoin and ether, and “for a brief period, was one of Amazon Web Services (AWS) largest consumers of data usage by volume.” []
  9. See Bitcoins: Made in China and The Marginal Cost of Cryptocurrency by Robert Sams []
  10. During the most recent bubble, DRAM prices soared in part because of demand from cryptocurrency mining. []
  11. Emin Gün Sirer has done a good job explaining this ‘leakage.’ Recommend watching his Devcon 5 presentation on Athereum. []

Systemically important cryptocurrency networks

[Note: this article was first published at FintechPolicy on November 2, 2018]

For self-serving reasons there has been an enormous amount of revisionism that Satoshi built Bitcoin in direct response to the Great Financial Crisis.  But Satoshi explained that the coding for it began in mid-2007, which was months before any of the now notorious investment banks faced the brunt of the crisis or grappled with existential issues.

Either way, Bitcoin itself does not directly solve any problem that Lehman or Bear Sterns had, or for that matter, anything that mortgage loan originators had as well.  The two behemoths did not collapse because of a payments (transactional) problem.  Or a double-spending problem between pseudonymous participants.  There wasn’t even a problem with digital signatures being reversed or some other strange technological edge case.  

Instead it was a combination of many “off-chain” issues: lax lending standards, over leverage, unrealistic valuations, rubber stamp ratings, improperly assessed risk models, lack of proper documentation, special interests lobbying, imprudent oversight, and a laundry list of other culprits.  None of those were things that Bitcoin itself could have fixed.

Perhaps hypothetically an industry-wide blockchain or some kind of commonly used distributed ledger could have maybe sorta helped with reducing reconciliations which could have maybe sorta lead to quicker identification of rehypothecation, but it is not accurate to say that a cryptocurrency like Bitcoin would have prevented the GFC.  Let’s put that faux narrative to rest.

Garbage in, garbage out: blockchains cannot magically fix the underlying information — behind the representations — being inserted into blocks, that’s not what they are designed to ameliorate.


A year after Lehman collapsed, leaders from the G20 and several other international organizations met in Pittsburgh to reflect on and iron out additional methods of shoring up the decentralized yet highly concentrated and intermediated financial system.  One of the decisions – potentially fatal in the long run – was to require that all standardized derivative contracts be cleared through what are known as central counterparties (CCPs), frequently referred to as clearing houses.  Unlike exchanges, most CCPs are not common household names, but they are an order of magnitude systemically more important than even the largest of traditional exchanges.

Some of the older CCPs absorbed the additional derivative clearing routes and simultaneously new clearing houses were created around the world.  Most legacy market infrastructure providers were welcoming to this new mandate as it meant additional business lines and fees.  Regulators were also – at first – welcoming to this set of clearing requirements too because it meant that they could more easily observe and measure aggregate values and risks in just one or two physical places.

But being the bright reader you are, you are a step ahead and realize that the unseen consequence is that CCPs have actually created additional concentration of risk in a market with scarcely a few single points of trust.  Some of these CCPs are to date, arguably undercapitalized relative to the risks they bear.  If even one of them collapsed, you probably would not have time to sell your magic internet coins on the KYC-less exchanges you love to use before the shockwaves reached it first.

But this article isn’t so much about traditional systemically important financial institutions and infrastructures so much as it is about the topic everyone reads fintech zines for: coin scuttlebutt.

Matryoshka Stablecoins

“Stablecoins” have become a catch-all term for a type of coin or token that is marketed as having parity with some kind of exogenous unit-of-account, typically the USD.  In some cases the issuers are unlicensed e-money transmitters, although most market participants (traders) do not seem to care.

What problem are they solving and for whom?   Is it for banks?  

Probably not.

When speaking with banks about back-end payment issues, they do not lack general solutions either in-house or via 3rd party.  From a compliance standpoint, some of their challenges are how to build solutions that satisfy AML regulations.  One of the biggest unknowns about online-only money transmission businesses (e.g., PayPal, Transferwise) is whether they have not been in AML news because:

  1. they are much better at building those solutions 
  2. because they are still small enough to stay under the radar 
  3. have been getting breaks by regulators and law enforcement

But regardless of fintech, the creation of a stablecoin doesn’t automatically improve AML surveillance by and for government agencies.  

In fact, stablecoins as an aggregate may actually be expanding obfuscation of identity across borders because many exchanges, especially outside of the US, do not require stringent KYC, AML, and CTF checks.

The funny thing about the current mania around stablecoins is that a small group of us talked about and gestated their warts and all back in 2014 and 2015.  For example, during that time Vitalik Buterin penned a comprehensive post on the topic and Robert Sams authored a short paper entitled “Seigniorage Shares” which a couple current stablecoin projects have unceremoniously cribbed on.

But the 50-odd proposals that are currently floating around in one form or fashion aren’t actual solutions to existential questions around intermediation and finality.  At best, they are quick fixes to the desirability of reducing volatility whilst day trading in coin bucketshops.  At worst, they create a new systemic risk to both cryptocurrency markets and traditional financial markets.  And we know this because of who the credit risk is: commercial banks.

You see, contrary to the cartoonish explanations on cryptotwitter, today there is probably just one form of money: reserves sitting inside a central bank.  Everything beyond coins and notes and money equivalents is arguably a credit risk.

Even a deposit made by companies into a commercial bank account ultimately bears the credit risk of that specific bank: it could collapse, force a haircut onto depositors, freeze assets at the request of the court, decide to shut down accounts, and at least a handful of other issues.  We all witnessed the consequences of these risks first hand with the sorrowful collapse of retail and commercial banks during 2008 – 2009.

In contrast, the only potential stable form of currency within an economy is the one that a central bank issues and/or fully backs.  But in order to access this today, you have to be an approved bank.  On the wholesale side – with the advent of central bank digital currency (CBDC) and central bank digital account (CBDA) – who has access to these reserves could begin to include non-bank organizations and enterprises.  It is unclear if or when a retail equivalent will exist, although several Narrow Bank proposals effectively provide roughly the same utility.  

It is probably a little unfair to say that all cryptocurrency-focused venture funds would invest in a rope-making startup that could hang the entire economy so as long as they could get a quick exit.  But it is clear that every VC firm that has invested in “stablecoins” is wanting to extract and privatize specific rents called seigniorage.  

These VCs would like a healthy cut of the cash flow that a central bank would normally collect and remit to the national treasury which then pays for social services.  In the case of VCs, it would flow through the management structure and then to the LPs who then would reinvest into increasingly cleverer sounding stablecoins.  Just like Matryoshka dolls.  


Source: Larry Cermak

The line graph (above) represents a one year chart showing weekly exchange traded volume (measured in USD) of three stablecoins:  Tether, Dai, and TrueUSD.  Note: there are allegations that Tether’s volume are manipulated (e.g., trans-mining), but that is a conversation for a different article.

Too big to fail anarchic chains

If you are a developer or investor and you really wanted users to have access to stability without reintermediating the payment system, you should explore alternative platforms that have access to CBDCs, CBDAs, and Narrow Banks.

But that is annoyingly time consuming, right?  Who wants to spend time sitting around with some fuddy duddy suits when you could be spinning up tokens with coinbros and “thought leaders” at coin festivals?  

Last year I penned an accurate prediction of what would happen this year: the cryptocurrency world would become increasingly reliant on the unit-of-account of actual money, in this case, the USD.

We see this desirability for a stable U-o-A with the dozens of aforementioned stablecoins that have been concocted, some with the approval of state regulators.  And all attempt to maintain parity of some kind relative to a traditional currency.

Consequently, we see the confluence of the problem highlighted in the section above, namely credit risk, with Tether (USDT).  For those unfamiliar with Tether Ltd, it is a company that issues USDT which are – depending who you talk to at the company – supposedly pegged 1:1 to USD held in reserve somewhere.  Ignoring the likelihood that they are not in full compliance with the BSA regime, Tether Ltd and its owner Bitfinex, keep losing access to commercial banks.  Their accounts are shut down and as a result, the peg breaks because it is not a real peg.

While Tether currently trades at a credit discount arguably it still serves its original purposes (e.g., quasi-cash leg, tax free harbor for intra-day gains).  But an ongoing issue is that the quality remains transparent to insiders and opaque to outsiders.  Another issue is that aside from the lack of end-to-end KYC and AML surveillance, it really serves no purpose that couldn’t be better offered by collateral management solutions.

While everyone likes to claim that newer fully collateralized stablecoins that have been approved by state agencies are going to be better because they comply with BSA and BSA-equivalent surveillance requirements, this is untrue for at least two reasons:

  1. The credit risk still involves commercial banks, not central banks (there is a difference).
  2. The chains they reside on do not provide definitive legal settlement finality.

If you have read my material in the past you probably think I sound like broken record.  But consider that about half of the 50+ stablecoin proposals exist as ERC20 tokens on Ethereum.  The remaining half piggy-back on top of Bitcoin or other anarchic cryptocurrency.

None of these chains are unforkable, by design.  That is to say, they only provide probabilistic finality.  And that presents an existential risk to not just the everyday user transmitting coins, but also any derivative – like stablecoins – that sits on top, reliant on a functioning unforked network below.  This is not a new observation, I even wrote a lengthy paper about top-heavy issues three years ago.  To put it another way: by design, block producers on these anarchic networks are rewarded an endogenous value (seigniorage) to secure the network.  Adding ad hoc exogenous value atop of the network weakens and dilutes the overall security of a network which could lead to a compromise or fork. 

At this point, if Bitcoin and other cryptocurrencies somehow disappeared, there will likely be no systemic impact because they do not yet have a large functioning ecosystem of derivative instruments and leverage behind it.  So it is a bit of a moot point for now.  But if the demand for stablecoins – which parasitically sit atop of anarchic chains – grew and expanded significantly to include credit, the chances of related 2008-like crisis within the cryptocurrency world would seem much higher.  It is still a matter of debate as to how a cascading failure of these parasitic assets from a forked network would impact the traditional financial system.  

Recall that for obvious reasons there is enormous amount of oversight for financial market infrastructures (FMI) like payment and clearing systems.  If they ever achieve the critical size that VCs publicly claim they will, could cryptocurrencies such as Bitcoin that process and secure transactions for stablecoins eventually be considered systemically important and thus fall within that regulatory mandate? 

According to the latest FSB report, Bitcoin and other “crypto-assets” do not pose risk to financial stability at this time.  In the future, crypto-assets may pose risk to financial stability (see Appendix 1 of the report), but that would not, by itself, bring within scope of regulatory mandate.  Obviously one critical issue with Bitcoin is – what jurisdiction does this fall within? ASIC in Australia is already developing an approach that touches on this.

In the event that occurs, this could turn these anarchic networks into expensive chimeras, permissioned-on-permissionless chains.  But that is a topic for a different article.


Cryptocurrency promoters often speak nostalgically of how the Great Satoshi solved a sundry of computer science and economic problems on Halloween 2008.  But on closer examination, Satoshi proposed one way of transmitting e-cash and bypass existing payment providers without having to comply with the BSA-regime. 

When she disappeared in late 2010, the cryptocurrency world up to that point was still relatively disintermediated and decentralized.  There were a couple of semi-pro mining pools and deposit-taking exchanges as well as a few custodial wallets, nearly all of which got hacked and pilfered.

Those first victims had no legal recourse and probably didn’t care enough at the time to sue anyone because just about everyone playing around with Bitcoin and its clones understood that there were no terms of service or end user licensing agreements, it was (and is) caveat emptor.

Fast forward 10 years and what is commonly referred to as the “cryptocurrency space” is heavily intermediated.  The vast majority (80%) of all transactions last year flowed through some kind of third party.  Nearly everyone hedges their trading positions in just a couple of underregulated exchanges.  And it is rumored that the main reason the largest off-shore exchanges have not been shut down is because of the access they provide to certain law enforcement agencies regarding suspicious accounts involved in illicit activities.

In other words, while Satoshi had attempted to create an alternative payment system, her followers have not only recreated the same concentration of risk and intermediation as the financial world she apparently wasn’t a fan of, but this new one lacks nearly all of the safeguards, accountability, recourse, and broad oversight that civilization has collectively placed on SIFIs.  

The Black Mirror episode we live in today is even more strange and perverse once you account for:

  1. the environmental toll, the negative externality that proof-of-work mining creates… where seigniorage gains are privatized and the degradation is socialized 
  2. the same nouveau riche coinbros and broettes who enriched themselves off unsophisticated retail investors by publicly shilling and flipping ICOs last year are now funding more than a handful of coin lobbying organizations to convince regulators to keep their statist hands out of this highly centralized yet opaque market

Creating systemically important cryptocurrency networks is likely the most ironic phenomenon to have arisen from an anarchic experiment started on a mailing list ten years ago.  Yet here we are.

If you are interested in participating in something that doesn’t merely enrich existing coin holders at the expense of society and the environment, highly recommend reading Ray Dillinger’s recent interview and also looking into dFMI.  And then circle back to the CBDC report from the BIS this past March. 

Evolving language: Decentralized Financial Market Infrastructure

[Note: this was originally published at Diar.co]

Beginning in late 2014 through early 2015 a small group of startups in the US and UK independently began to lay the ground work for what is often marketed as “permissioned” distributed ledgers.  Or DLT as it became known.

I am acutely aware of their journey because I wrote the key, widely cited paper that unfortunately popularized that exact term (a term first invented by Robert Sams from Clearmatics). 

I say unfortunately because that DLT acronym – while well-intentioned – quickly became a gimmicky “marketing term” by many of the large consultancies around the world trying to capitalize – and frankly scare – clients into buying high-priced toys, none of which gained any meaningful traction.  Conjoined with images of a Candyland nirvana, there were (and are) a slew of “me too” vendors that flooded the market in late 2015 and early 2016 all searching for big pay days and funding from deep pocketed enterprises that had no clue as to what DLT as an acronym actually meant; subsequently some of these flash-in-the-pan ambulance chasing vendors have repivoted to doing things like an ICO or just fading away entirely.

How to visualize this?  If shrink-wrapped box packaging was still en vogue, we could imagine “Now with DLT!” brightly stamped in neon colors on the side of the latest version of some wares. 

For example, some finger-pointing can be done at various software companies, though not all of them.  Lured by a number of their clients who wanted to remove reconciliation but maintain the same intermediated business model, more than a few vendors deconstructed the concept of a byzantine fault-tolerant, globally shared state capable of enabling P2P transfer of value into something arguably less meaningful: bilateral states using the same old financial intermediation to solve the double-spend problem.  In some cases it was boiled down to digitally signed message passing integrated into legacy market structure.  Useful yes, but not revolutionary.  Calling it a “distributed ledger” makes boring software products sound sexy but it ultimately confuses anyone who makes the effort to figure out what it all means.

And because there’s plenty of blame to go around: various coin maximalists religiously latched onto and dutifully created umpteen strawmen arguments using contorted disingenuous views of what DLT meant to them.  The two specific cartoonish examples that stick out the most are the horse-buggy meme and the naive “sewer rat” analogy that is occasionally regurgitated on reddit.  Why are these shortsighted?  Because at the time of their genesis, they both assumed that the only type of blockchain (or distributed ledger) that can or should exist, is the Bitcoin blockchain or derivative thereof.  It is entirely self-serving, dogmatic, and void of empirical reflection.

In all instances – big consultancies, starry-eyed startups, large software companies, and ideological zealots – they eventually butchered the acronym into an indistinguishable pile of mush.  By late 2015 as this was happening, I explained that it was basically the same thing that happened during the “no gluten” marketing mania of the early-2010s.  No one could really tell you what gluten is, but every food vendor was quick to add that their products do not have it.  A bit like cloudwashing endured too.

Due to their collective inability to manage expectations, by mid-2017 nearly the entire “DLT” ecosystem found itself in the abyss of the trough of disillusionment.  A handful never fully fell in and a couple have clawed their way out, without the aid of retail coin flippers or religious troll armies.  Others attempted quick fixes or rebrand such that they were no longer classified as a DLT company hoping that definitionally they couldn’t be in the trough of disillusionment.

A good couple books could be written on the trials and tribulations of the vendors that made the headlines during these first few years.  Eventually the DLT term has fallen out of disfavor for something only slightly less abused: “enterprise chains.”  It’s only marginally better than DLT in that it is shorter when written out and hasn’t been gentrified by VCs or demonized by coin peddlers.  But it’s not really accurate because the tools that are being built, aren’t just for use by enterprises. 

|| Onwards and upwards

This brings us to: DLT is an acronym that has served its initial use and should evolve with the times. 

What then, can we use to describe the utilization of technology to re-architect organizational processes and business models?  Automating networks is generic and while accurate, is not nuanced enough.

While it would take a bit more length than this article form allows for, there are some salvageable ideas worth transplanting in the years ahead. 

For starters, there is something rather mundane but simple: automating the principles for financial market infrastructures (PFMI).  As I – and others – have described elsewhere, PFMI are decades old standards by which operators (and overseers) of financial market infrastructure ought to follow; in most jurisdictions operators are legally required to follow them.  Basically a list of do’s and don’ts for running systemically important things like payment and settlement systems.   Like, how to identify risks and hold those who touch risk accountable when something goes wrong.  This is a bundle of seemingly boring but existentially important frameworks.

Which principals can be automated or should be automated?  Unfortunately, that’s beyond the scope of this short article.

What is being briefly proposed – and built – is what can be labeled “dFMI”: decentralized financial market infrastructure.

Funnily enough, FMI today is typically distributed and not fully centralized.  In the case of the EU there is a supranational payment system, but this is an exception to the rule that each developed, and most developing, country has one or more payment, clearing, and settlement system for both cash and securities.  The majority of these systems were set up and created heavy intermediation (single point of trust) due in part to technological limitations of the 1970s.  The CSDs such as DTCC and even exchange operators exist the way they do today – as systemically important institutions – partly because of an era in which mainframes and ‘minicomputers’ were the only available options.

What if we could safely and securely disintermediate market structure, reduce single points of trust, and remove monopoly rents, all while following PFMI?

It is a bold vision, but one that does not involve standing on tables saying it is the greatest thing since the invention of the internet or preying on unsophisticated retail investors in order to flog the coin-of-the day to some other retail punter.

It’s easy to be cynical towards an ecosystem that has proportionally attracted as many snake oil salesmen as the various coin groups have the past few years.  And it is hard to fulfill the promises that are hyped at events.  For example, the Sibos “New Kids on the Blockchain” video from 2015 is illustrative of those difficulties: just a couple of the panelists still work for the same company they did at the time and all of the groups represented in the video have had uphill battles to stay afloat today.

In conclusion, instead of playing identity politics with lightning bolts in a social media handle, motivated developers genuinely looking to help transform market structure can crack open a copy of the PFMI handbook and immerse themselves with a world that keeps civilization from falling apart. 

Coupled with tools and libraries first conjured up within the ill-defined drama-filled blockchain world, real market structure changes can be made and society will be better off for it.  Best of all, it doesn’t need to involve burning mountains of coal to secure either.

It’s not sin to still use DLT as a term-of-art but dFMI is arguably a more expressive acronym, providing more context for both practioners and users alike.

Sufficiently Decentralized HoweyCoins

[Note: this was originally published at Diar.co]

SEC Director Hinman gave a public speech about three weeks ago which was subsequently affirmed by testimony from Chairman Clayton the following week.  A key point in his speech for many was his observation that ether (ETH) was no longer a security because it had become sufficiently decentralized.

In Hinman’s speech, he also provided an ad hoc checklist for issuers to go through to make sure they do not fall afoul of securities registration requirements.

But in doing so, the guidance does not really seem helpful as it raises more questions than answers which are discussed below.  Note: the discussion for how – if at all – the rules are updated or changed is not within scope of this short article.

|| Forks

The first is technical and pedantic: ETH as we know it, is actually the first major fork of Ethereum Classic (ETC).  Recall that following The DAO attack (hack) in June 2016, key participants in the Ethereum ecosystem coordinated a hard fork which resulted in two separate chains – what we now call ETH and ETC – and that ETC represents the original chain.  So transitively, does Hinman actually mean ETC is sufficiently decentralized too?  Or is it just a property for the fork, ETH?

While most people are aware that it was the exchanges — specifically Poloniex — which decided to recognize and associate specific chains with specific ticker symbols, exchanges were also key – existentially critical — during the first moments after The DAO attack (hack) was discovered.

How integral were they?  And how did they coordinate? 

A public chat log from June 17, 2016 details the coordination between core Ethereum developers and exchanges.  One such dialogue is the following:

Source: https://pastebin.com/aMKwQcHR

The specific passage highlighted above shows how key developers requested that exchange operators stop trading ETH and after some discussion, the major exchange operators – such as Poloniex – temporarily acceded to the request.  It bears mentioning that the chat above is missing some additional context around locked DAO tokens (which were still locked up for several more weeks) and that this provisional trading freeze was being done to protect all coin holders.

This wasn’t the first time that core developers attempted to coordinate with exchanges after a mistake has occurred.  In March 2013, a group of Bitcoin developers, miners, and exchanges did something perhaps more glaring – coordinated off-chain to stop a hard fork — in an IRC chat room during an unintended hard fork of Bitcoin.

If you follow the dialogue in either chat room, it is clear that a relatively small set of participants has influence and especially in the Bitcoin fork instance, arguably administrates the chain and its governance during these critical time periods.

And at least one question arises from this: is the ongoing success of the system (and the token’s value) reliant on the ongoing efforts of others?  If not, why not.

Arguably the answer is yes for most of these public blockchains.  And based on the handy “arewedecentralizedyet” chart we can see that similar – and probably more – types of centralization exists for many other cryptocurrencies too.

But recall that Hinman’s speech seems to assume that ether was a security at one point and then through some process that is still not explained, is no longer a security.  What day did that transition take place?  Was it before or after the ICO in 2014?  Before or after the coordinated hard fork in July 2016 (as a solution to The DAO attack (hack))?  Before or after <insert other milestones or forks>. 

For those counting at home, following the July 2016 hard fork, this means that the ETC chain was actually created twice and in both cases was the work of a small group of known people, some of whom continue to maintain it.  After all, blockchains don’t automagically fix themselves.

Is it possible for a coin or token to become un-decentralized?  And if so, do the maintainers get something like a 90 day grace period to make it re-decentralized otherwise the coin is sent to some kind of securities purgatory?

While we wait for more clarity and specific answers to these questions, another potential issue is with HoweyCoins.

|| Parody

HoweyCoins is a parody ICO website published by the SEC on May 16, 2018 – right smack in the middle of “Blockchain Week” in New York City.  The website is supposed to serve as a lampoonish illustration to coin issuers of what not to do when fundraising – and also serve as a warning to investors for what to look out for as red flags such as early participation discounts.  It’s definitely good fun – my friends and I frequently refer to it in jest.

And while Hinman’s speech explicitly punted on how Ethereum was initially funded, the Ethereum public sale back in July 2014 also relied on discounts (or bonuses) to early investors during its six week sale.  The first two weeks, participants received 2,000 ETH per BTC, which linearly declined until the final epoch in which investors received 1,337 ETH per BTC.  Were the designers of the HoweyCoins website aware of this discounting?

In looking at the actual HoweyCoins whitepaper there is no technical meat that issuers or investors alike can count on for guidance.  That is to say: there is no technical attributes describing the functionality of how HoweyCoin mechanically works.  In its 8 pages it describes a couple use-cases but – like most ICO whitepapers – is very vague at how it will accomplish or achieve them.

But ignoring the Ethereum initial fundraising period and its Terms and Conditions, a problem that is not resolved in either Hinman or Clayton’s recent speech and testimony is that HoweyCoins, for all of its vague promises of high yield returns is a strawman that does not really help provide guidance as it relates to the facts and circumstances around how Ethereum – or any crowdfunded coin – can become sufficiently decentralized

After all, what is to stop someone from spinning up their own blockchain called “HoweyCoins,” raise ~$17 million through a public sale  and 12 months later, formally launch the mainnet (as Ethereum did)?

The wording and justification for why Ethereum is not still a security – that it somehow at some point became sufficiently decentralized – seems ripe for debate and will surely be gamed by future coin and token sales.  Without explicit parameters, if Ethereum is sufficiently decentralized, then so to – at some point in the future – could HoweyCoins.  And then it’s no longer a parody.


A third and final point is that while Hinman alluded to them, even if these chains are finger quote “decentralized,” and thus not falling strictly under the “common enterprise” in the literal sense (i.e. where there is literally a single legal entity determining the success), how does a “community enterprise” present less risk to investors?   Tangentially, isn’t this the same type of argument that mob bosses frequently used and as a result RICO Acts were created to pierce through?

If we take the view that the spirit of the regulations (1933, 1934, 1940 Acts) which led to the Howey ruling was actually to protect small investors, does a non-singular, and quasi-independent, but systemically important influential organization actually reduce risk? 

If that is the view that they are taking, it would be helpful to see how the commission has come to that conclusion.   

After all, it is plain as day to see that most coin foundations are heavily influential in the maintenance and success or failure of a coin.  And representatives from investment groups like DCG are routinely making statements which have the single effect of moving the price and/or direction of coins such as ETC.  Even if these groups are superficially independent of the mining and operation, on the day-to-day they are directly traceable to the volatility in the market and to a large extent the success or failure of projects. 

Most, if not all of the coin foundations, market and advertise milestones which depend on the coordinated effort and work of developers that are paid with investors’ money.  Coin foundations typically register and own trademarks and other IP so (theoretically) they could force exchanges to associate a specific ticker symbol with a specific chain.  And often there is a hierarchy within a coin foundation with respect to the “community” it manages and oversees: it owns IP, controls investor funds, manages the verified social media accounts, and empirically calls the shots. 

Look no further than Nano and dozens of other coin projects that have been hacked or “exit scammed” because of how centralized the command and control structures typically are.  Another instance just last week, EOS block producers got on a conference call and paused their network (and later proposed scrapping their constitution).  Ignoring their year-long $4 billion ICO, is that series of actions sufficiently decentralized?

|| Conclusion

To be fair, the SEC has an unenvious role to try and regulate something (a network-based coin) in just one jurisdiction whereas these coins are also trading and custodied in other jurisdictions.  For instance, the FCA doesn’t currently regulate tokens (e.g., that are not equity or debt instruments).  And the Howey test is not applicable in the UK. 

Perhaps opening a public comment period to provide suggestions could be helpful in conceptualizing objective measurements and quantifying decentralization (assuming it is not an oxymoron).  Though, that inbox would likely just get spammed so maybe just start with credible opinions such as those of the BIS.

In closing, a hypothetical HoweyCoins and its benevolent overseers and thought leaders at the HoweyCoins Foundation could mimic other sufficiently decentralized projects and host an annual HoweyCon; simultaneously emceed by none other than Howie Mandel and Howie Long.  If and when this occurs, is the only thing that HoweyCoins did “wrong” was promise to provide discounts to early investors? 

Maybe not, at least if they donate some of their proceeds to coin lobbying groups to help explain to policy makers and regulators that HoweyCoins is not a security, because it is sufficiently decentralized (e.g., more than one Howie exists).  Either way, I bet there will be some amazing schwag at HoweyCon, really looking forward to it.  There may also be an announcement about the forthcoming HoweyCoins Classic fork. 

Stay tuned.

Bitcoin’s PR challenges


Source: agmarketing.com.au

What kind of feedback has my book received over the past week?  Here are a few threads on reddit:

I am called any number of names on these threads and stylistically was equated with “Gish Gallop” and a “word soup” thesauri.

Hass McCook (“Bit_by_Bit”) weighs in at one point in the first thread saying that these claims are only valid in August 2014.  McCook had similar sentiments as noted in Chapter 3.  However, no word on the MV=MC issue that was brought up in that same chapter, it will always apply no matter what the efficiency of the mining equipment.  This cost basis was also independently confirmed by a miner.

Today a friend pointed to a new post by Mircea Popescu which takes aim at me (not my book): “No, you don’t have something to say on the topic.”  In it he claims I am a “boneheaded teenaged male approach to learning.”  Not a word about the marginal costs of mining.  In fact, he also claims that there is no data “per se” in the book which is curious since there is actually a lot of data in the book.

This is a common rejoinder; some vocal advocates not looking at actual data from the blockchain.  In some ways their timeline looks like this:

  • 2007: First lines of BTC code written
  • 2008: Whitepaper revised and published
  • 2009: Blockchain put into production
  • 2009 – 2014: data created, but the only valid data is fiat prices, the rest is not real data “per se”

Other responses

Aside from the ad hominem’s above what has been the criticism?

Peter Surda, a researcher, disagreed with my points on inelastic versus elastic money supply but didn’t go into many details in a short email exchange.

I received a number of encouraging emails from a variety of readers and was named one of thirteen “Big Thinkers” in this space, though I doubt some of the other candidates would like me to remain in company with them.

I have had some responses with a couple others, including L.M. Goodman (creator of Tezos), on Twitter this past weekend — though this is largely unrelated to the book itself.

What does this mean?

Partisanship may be impacting scholarship, especially the Myth of Satoshi variety.

No, Leah Goodman did not uncover who Satoshi was.  But one thing was clear from that episode in February was that some partisans do not want the individual who created Bitcoin to be taken down from the pedestal they have put him on; they want their caricature to be immutable.  Just like some historians have tried to revise history to make their heroes look impeachable, so to has the veneration of Satoshi.  If Bram Cohen had anonymously released BitTorrent a decade ago, would BitTorrent have had a similar following due to its mysterious beginnings?

I hold no ill-will to the person or group that comprised Satoshi, but it is clear from the evidence cited in chapters 9 and 10 that he, she or they did not consult an actual economist or financial professional before they created their static rewards and asymptote money supply.  This is a mistake that we see in full force today in which the quantity of money available has shrunk due to theft, scams, purposeful burning, accidental destruction, etc.  Satoshi recreated a deflationary inelastic economy and much to the chagrin of the self-appointed purity police, it is not being used the way he expected it to (actual commerce) and is instead being used for things it is relatively useful for (e.g., donating to Wikileaks, gambling).

What other economic and environmental issues are still being ignored?

Jake Smith, creator of Coinsman recently published a new article on mining in China.  Yet despite being, in his own words, a “true believer” and interviewing other “true believers” in the mining space, he missed the unseen calculation, the economics of extracting and securing rents on this ledger unit which consume scarce resources from the real economy.  This is not something that it is unknown, there is an economic formula to explain it: MV=MC (as described copiously in Chapter 3).  There is nothing magical or mysterious about mining as other people in the reddit thread point out how mining is currently an environmental albatross or as Fred Trotter dubs it, a “black hole.”

Moving forward

Today the Consumer Financial Protection Bureau (CFPB) issued its Consumer advisory: Virtual currencies and what you should know about them.  The advisory (PDF) gives a cursory look, in layman’s terms of what are the challenges and risks of participating in this space.

What does this mean?

While it is unclear as to the motivations of some of the “true believers” are, they collectively did underestimate the costs of consumer protection and/or did not put it as a top priority for mass consumer adoption.  But why would they?  Consumer protection is usually expensive, its unglamorous and its centralized (which apparently is a “no-no”).

For example, generally speaking, most people do not like having their possessions stolen.  And in the event something is stolen, in practice, individuals prefer to take out insurance and even sue those responsible for damage (torts). If instead of promoting and building illicit markets (like Dark Market and Dark Wallet), these same developers and early investors had funded a start-up that helped track down these stolen funds, or start a non-profit to help get stolen coins, it would have been an amazing public relations coup.

To be balanced, theft takes place across the spectrum of services.  It also happens on the edges of Visa’s network. The difference is Visa offers insurance which is built into their cost structure (highly recommend reading Richard Brown’s recent post).  Insurance alone is just another product and has nothing to do with the protocol.  And this specific point (for the individual user) could be resolved sooner or later (e.g. Xapo already offers some home-made insurance).  However, insurance does not change the economics behind Bitcoin, especially since lost coins are permanently and constantly removed from the money supply.

Then again, there is a built in incentive to allow this theft to occur — stolen coins need mixers and exits which could potentially benefit developers and investors of those services; and simultaneously as more coins drop out of circulation this increases the value for those holding the remaining supply.

In addition, a vocal group of these “true believers” do not think Bitcoin has an image problem.  Yet it has a massive PR problem, for similar (albeit smaller) reasons that Tylenol had in 1982: customers and their families do not like getting burnt.  The only group I am aware of that tried to immediately help the victims of the Mt. Gox debacle was Goxcoin (here’s the LTB interview of it).  In contrast, thread after thread on reddit was filled with bullies saying “no big deal.”   It is a big deal to normal people with real responsibilities beyond downvoting skeptics on reddit and pumping stories about Bitcoin curing cancer and ending wars.  And Mt. Gox liabilities won’t be resolved for at least another year.  Instead of cyber bullying merchants into adopting bitcoin payments, these same hectors could have created a company catering towards recovering stolen property (e.g., loss recovery specialists).  It was a lost opportunity.

my wallet transaction volume

Source: Blockchain.info

In contrast, Blockchain.info has a mixing service called SharedCoin based off the CoinJoin feature from Greg Maxwell.  Blockchain.info recently crossed the 2 million ‘My Wallet’ mark but as I noted in Chapter 4, the vast majority of these likely go unused.  This past spring, one of their representatives claimed that they receive about 15 million visitors a day, but what this actually is, is largely API traffic (external websites pulling charts from their site). They probably do not have close to 2 million users let alone 15 million visitors.

How few?  We have an idea based on their own internal numbers, MyWallet transactions is flat over the past 12 months.  If there were 2 million or 15 million users, we would probably see a gigantic uptick in usage elsewhere on the blockchain (e.g., TVO would skyrocket, tx fees to miners would skyrocket, etc.).

What this all means is that, while they do not release actual user numbers, that at least a minority of wallets are probably ‘burner wallets,’ dumped immediately by individuals wanting to mix coins.  This is great for those who need to mix coins but not so great for consumers who just had their coins stolen.  How to resolve this going forward?

Incidentally in May, Roger Ver (an angel investor including in Blockchain.info) was extorted by a hacker who had figured out a vulnerability in Ver’s security.  Ver put a 37.6 bitcoin bounty on the hacker and the hacker eventually backed down; Wired and CoinDesk each did an article on it.  Yet during the same month, coins were stolen from others and when the users came to reddit for help, they were ridiculed for not having done the 27 steps to make a paper wallet.  No Wired article was written for them and in turn — speculatively — their coins could have been mixed on a site like Blockchain.info.  As a result, why would normal consumers ever want to use Bitcoin after that experience?

Perhaps user behavior and therefore the data will change in the future.  Consequently blockchains in general will probably find other niches beyond what Bitcoin is being shoehorned to do today.  This includes, other chains and platforms that may be able to help firms like Wageni Tech accomplish its goals in Kenya by helping farmers move, manage and track produce to market in an attempt to bypass middlemen and introduce transparency.  Bitcoin may be able to do that one day, but maybe not at the current $40 per transaction cost structure.  Start-ups such as Pebble, Hyperledger, Tezos, Tendermint, Dogethereum (Eris), Salpas, SKUChain, Stellar and several other funded projects in stealth mode may be able to as well (remember, Google was the 15th search engine and the iPod was at least the 9th MP3 player).

This is not to say that “Bitcoin” has collapsed or will collapse, nor is this to single out Ver (he has done a lot to try and create value in this space and even donated 1,000 bitcoins to FEE last year).  Instead it may continue to evolve into is something called Bitcoin-in-name-only, (or BINO as I refer to it in chapter 16) and it probably will continue to be used for what most risk-tolerant consumers use it for today: as a speculative commodity and as a way to pay for things that credit cards cannot be used for.

Many thanks to those who have helped provide feedback

It is pretty easy to find people who are strictly bullish or bearish on a particular asset or idea (or philosophy).  It is another to find people who take the time to look at the details and also give of their time to help educate you.

Over the last few weeks, I’ve had the fortunate chance to speak with a diverse group of experts, entrepreneurs and educated contrarians.  And without their feedback, my thought processes and writings would be much weaker, poorly structured and lacking data.  This is not to say I am correct in my analysis — perhaps just slightly less wrong!

Below is a list of these individuals.  I should point out that their inclusion does not mean they endorse my own views, in fact several strongly disagree.  These are the people who are creating or trying to create the future in the roller coaster world.

  • Taariq Lewis
  • Petri Kajander
  • Jonathan Levin
  • Dave Babbitt
  • Dave Hudson
  • Jack Wang
  • Ron Hose
  • Raffael Danielli
  • Preston Byrne
  • Oliver Bruce
  • Chris Turlica
  • Karl Holmqvist
  • John Ratcliff
  • Adam Stradling
  • Robert Sams
  • Robby Dermody
  • Joseph Chow
  • Andrew De Gabriele
  • Peter Todd
  • Mike Hearn
  • Andrew Poelstra
  • Bryan Vu
  • Steve Kirsch
  • Ryan Orr
  • Matt Wilson
  • Daniel Cawrey
  • Pamela Morgan
  • Pete Rizzo
  • Jon Southurst
  • David Shin
  • Sidney Zhang
  • Stephanie Murphy
  • Adam B. Levine
  • Greg Simon
  • David Mondrus
  • Andrew White
  • Martin Harrigan
  • James Duchenne
  • Mark DeWeaver
  • Byron Gibson
  • DC, Cukeking and David S

Cryptocurrency in the news #15

Need to close some tabs, here are some links of interest:

Decentralized storage on the horizon

In addition to existing projects such as Tor(oken) and FreeNet and future developmental projects like Bitcloud and StorJ, there is a new decentralized system being released in the next few months: MaidSafe.

I have a new piece over at Bitcoin Magazine that discusses some of how it works.  Suffice to say, if they can execute on the targets outlined in the article, it could have long-standing ramifications for a plethora of industries (e.g., SaaN providers, ISP margins, start-up costs, Dropbox-style companies, reduced overhead at NGOs/NPOs, etc.).

Neologisms and wordsmithing

An old business school student I used to teach in Anhui recently sent me an email about economic development and created a new word that actually makes a lot of sense.  See if you can spot it.

On the other hand, some claims made by others include the assertion that releasing the city’s burden cannot solely rely on moving big companies out. It is a convenient life that drives people to live in downtown, such as easy access to educational resources and health care. However, this alone is not convincible, especially in the fast developing society, it unlikely to become a problem to build up those necessary facilities in a new community.

I recommend Language Log if you enjoy the twists, turns and the art of wordcrafting.