The bombshell release of the Pandora Papers provided, in staggering scope, a picture of the world’s rich and powerful using their exclusive access to shady if vaguely legal obfuscation schemes to evade taxes and perpetuate humanity’s gaping inequality.

The blow to public trust this could foment in the institutions of the legacy financial system – along with credibility issues at the U.S. Federal Reserve following revelations of unseemly stock trading by top Fed policymakers – is the topic this week of both our newsletter column and the “Money Reimagined” podcast. The question: Does it create opportunities for the alternative system posed by crypto developers?

For the podcast episode, Sheila Warren and I bring in Michael S. Derby, a reporter at The Wall Street Journal who broke some of the stories on Fed officials' equity trading, and Maya Zehavi, a crypto entrepreneur known for her sharp insights into regulation and the future of money. Have a listen after reading the column.

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First, there was a series of disclosures about monetary policymakers’ stock trading activity, a controversy that contributed to the resignation of the presidents of the Federal Reserve banks of Boston and Dallas and has put Fed Chairman Jerome Powell’s renomination in jeopardy.

Then, last weekend, the International Consortium of Independent Journalists dropped the Pandora Papers. That trove of 11.9 million confidential documents revealed how “35 current and former world leaders, more than 330 politicians and public officials in 91 countries and territories, and a global lineup of fugitives, con artists and murderers” have shifted assets into offshore havens, shell companies and trusts to hide their business dealings and evade trillions in taxes.

You might be tempted to dismiss these revelations as nothing new, as mere confirmation of what you’ve already known. Others might be inclined to take the – in my opinion, naive – view that “well, all these actions aren’t technically illegal, so what’s the problem?”

But it’s important to take stock of these new developments. They force us to confront the harsh reality that there are two sets of rules for society: one for a narrow group of people with access to the levers of power, the other for the rest of us. Given the challenging economic and social backdrop of 2021, the reminder of this unfair dichotomy can do nothing but hurt public confidence in the centralized institutions that control our economy.

It also raises questions about what this kind of institutional confidence blow means for crypto and for the prospects of an alternative, decentralized financial system that its proponents are seeking to build. We’ll address that lower down.

Trust under threat

These revelations come amid a global health and economic crisis in which the poor have suffered enormously while the wealthy, at least in financial terms, are markedly better off. They sit alongside the image of politicians too gripped by partisan divisions to enact regulations that enable productive innovation and sustainable growth. And they put more than a decade of central banks’ “quantitative easing” measures into a more cynical context, implying that a monetary policy of questionable efficacy is being administered in the narrow interests of those institutions’ officials rather than those of the wider economy.

What matters here is the core question of trust.

Money, as we’ve discussed in past Money Reimagined newsletters and podcasts, is a collectively imagined concept. A currency only works if there’s shared belief among its users that the system it’s built upon is serving the common interest. It requires faith in the rules, protocols and institutions that run that system.

We’ve seen what happens when the bedrock of trust breaks down: the hyperinflation of Weimar Germany, of Zimbabwe and of many Latin American countries; the ingrained, self-reinforcing disdain for government that makes it impossible for failed monetary systems like Argentina’s to break a cycle of repeated crises.

Until now, we have seen no such breakdown in the dollar-centric global financial system. Despite domestic and geopolitical challenges to U.S. leadership, most of us still trust that system sufficiently to not abandon it.

But that trust is not infinite. At some point, if people see enough evidence that the system is working against them, that faith will evaporate. If an appealing, alternative model starts to arise, people may gravitate toward it.

That, of course, leads us to the aspirations of the crypto community, which wants a system that employs a decentralized protocol to set rules and execute transactions rather than relying on a corruptible centralized intermediary such as a bank or a government. Given that it’s impossible to create an infallible human institution, the idea is to defer our trust to infallible math.

Continue reading this column here.

–Michael J. Casey

Bitcoin’s price has had a much better start in autumn than its performance through most of the summer. There are various reasons for that. One explanation that caught my eye lay in an article by new CoinDesk mining industry correspondent Aoyon Ashraf, who reported on production updates from public mining companies Riot Blockchain, Marathon Digital Holdings and Hut 8 Mining Corp. to reveal that they’ve been hoarding their earnings rather than selling them.

So, I asked Shuai Hao to pull a chart from Glassnode data on the changes in bitcoin miners’ net positions over time. Sure enough, you see the industry reducing its drawdowns (red) as the price started to rise toward the end of September and then shifting to net accumulation (green)right as it took off in October.

The previous period of net accumulation throughout July and August also correlated with a rising price, in this case with the rebound from the mid-2021 lows below $30,000. Before that the one other accumulation period showed a different pattern: The first half of that period coincided with the jump to record highs just below $65,000 in May, but then the miners continued to accumulate even as the price fell sharply. The reason may be that even at $50,000, miners were profitable and did not need to sell to raise capital. The pattern may also have been complicated by the Chinese government-induced shutdown of mining operations in its country over the summer.

This, 6529 argues, is the way in which we not only break down the monopolies of the FAANGs (Facebook, Apple, Amazon, Netflix and Google) but preserve free economic agency without the risk that a dictator will take over the trusted third party databases and control our lives.

6529 has one caveat to an otherwise expansive vision: that the industry resists regulators’ efforts to control DeFi because the NFT-based model of free enterprise depends on preserving people’s capacity to own and directly custody their own digital assets.

The thread blew up, big time. Here’s one of more than a thousand “must read this” quote tweets:

There wasn’t much disagreement, but I thought this pushback was interesting, made in response to 6529’s assertion the disruption of the art market that’s the current main use case for NFTs is just a small part of its potential because art is a “subset of societal intangible.”

One reason crypto prices rose this past week is that there were some positive regulatory signals, for once, in the U.S.

It started with a simple, straightforward message: Fed Chairman Powell saying he has “no intention” of banning cryptocurrencies, as Cheyonne Ligon reported.
Then there was congressional testimony from SEC Chairman Gensler, which could have unleashed another barrage of negative news for crypto, given that man’s recent track record. But in the end, it was all rather “meh,” with Gensler refusing to be drawn into his views on particular tokens’ legal status and instead deferring to previously stated general positions on the applicability of the SEC’s gold standard: the Howey test. In the end it was not what Gensler said, but what he didn’t say that mattered to markets. Here’s Cheyonne Ligon again, with a handy breakdown of the testimony.
Meanwhile, amid great anticipation for a forthcoming Biden administration regulatory proposal for stablecoins, this thoroughly sourced scoop from Nate Di Camillo hints at where the government’s thinking might be going: using the hook of deposit insurance by the Federal Deposit Insurance Corporation to bring stablecoins into the banking framework.