🕹️ Ready Player 1: Central Bank Strategies for the Bitcoin Gold Rush

Acquisition tactics and political deadlocks in the early days of a new era for money.

10 years on, the prescience of that bitcointalk thread shines through.

After much speculation on the not-so-secret (though mostly ephemeral) cyber-possessions of nation-sates, there's finally some decent evidence for coiners to latch on to.

They've fantasised about Bulgaria's 200k BTC confiscated from hackers and supposedly hoarded. They dug the minutiae of the American DoJ's multiple seizures. They gladiated over the ethics of North Korea's mining endeavours.

Can't blame the hornets. In shill they were drown.

Crypto-lobby goes far beyond throwing darts at presidential candidates — if you look around, there's even official, direct-to-the-point executive proposals for smaller CBs (like Bermuda's) to incorporate some satoshian stardust in their balance sheets.

Guess who…

Yet it was only in the end of October, 2020, that, for the first time, a Central Bank publicly signalled its cybercoinian flirt. There is no sort of "on-chain confirmation" out of Iran, so far. Although the message is loud and clear:

the Shāhs are bullish on the corn.

Absconding from moral judgements, I find 3 questions interesting to address:

  • How may central banks acquire BTC?;
  • What shall they do with the coins?;
  • Who's next in line?

🤝 On Political Motivation

From Iran to Belarus to Venezuela, there's a glaring commonality among state-level early crypto adopters. Exclusion. Institutional chastisement.

The world has /kicked them out of the room. There's no ball left to play with.

Left: less "economically integrated" regions, in gray. Right: non-members of the WTO, in red.

Marginalisation was also what originally lured individuals to Bitcoin, in the 10s. Cryptocurrency's public embracement was driven by need, above greed. By Charlie Shrems that'd been debanked. By WikiLeaks'es whose bloodline donations were withheld by PayPal.

The Alpaca socks shops were iconic, but a sidenote to BTC's financialisation.

"The pioneers were law offenders and opportunist adventurers" — nocoiners will forever point out. And that may be directionally right. It is not a stain on the satoshian legacy.

No more than the personal burdens of the Great Navigators are a scar on the heritage of Latin America.

Five centuries ago, there was this new hyped-up faraway land to explore — kinda like nowadays — , and, if you had nothing to losewhy not? Dissidents, exiles; hackers, deep-web'ers. The adjectives are irrelevant. In the end, history only took note of the gold they found.

Known efforts regarding government-issued cryptocurrencies; digital fiat R&D; and BTC. Source: Currency In The Digital Era (2018), Brazil Central Bank [adapted]

🏹 Acquisition Strategies

Event though Satoshium (as NoelJones wrote) is technically a commodity anyone can "extract", it ain't easy to find suitable analogies for the inter-state competition it may fuel.

When was the last time a society found on its frontiers such novel, virgin, explorable riches?

The comparison to the Great Navigations is riddled since BTC is globally distributed. Nobody has a shoreline that's closer to the promised land. The same is valid for equivalences to gold rushes. Bitcoin is everywhere. New mines can sprawl anywhere. There’s no sustainable geographic privilege in finding it.

The discovery of gunpowder, in ancient China? Strongly different in the sense that bitcoin was available to the world simultaneously; without specific actors having much time to develop a chronological advantage.

Is it accurate, then, to seek parallels for a potential Bitcoin Rush in the colonisation of outer space? There may be some similar degree of permissionless-ness to both. But the cost of owning a UTXO is ridiculous next to that of buying some cubic meters among the stars. Besides, space is infinite.

The only assumption going forward is that decisions in CBs of different scales are taken distinctively. Steering the glorious nation of Bermuda into a generational BTC long shall be cheaper than making Uncle Sam fill his bags.

Let's break down 4 general approaches towards state-level crypto acquisition:

🤴 1. The Colonialist's Way

The Colonialist's way consists of sending marginalised workforce (or the army) to explore the newfound land, under a heavy tax on anything produced. Usually accompanied by the faux promise of free enterprise.

This is what the Portuguese did in Brazil. The Dutch did in West Africa.

This is analogously how Iran is approaching the crypto-soil.

Individual entrepreneurs are "free" to dig Satoshium… as long as they sell all the proceeds directly to the Shāhs' wallets (it is still unclear how pricing is determined).

Judging by historical examples, we may expect Iran's domestic market of goods priced in BTC to soar. A lot of effort in colonial gold mines went into preventing smuggling and evasion — resorting to official casting houses, taxing whatever miners could bring in and out of mines (like unregistered cattle), and so on.

Analogous developments would be the de-fungibilization of coins mined in Iran (which also may happen regardlessly) and an increase in domestic financial surveillance — a negative externality of Bitcoin adoption.

When it comes to the Colonialist's Way, it's also important to look at the other side of the coin.

Some historians mention that the trade deficit of Portugal in relation to England (Google "Methuen Treaty") contributed to redirect much of the gold mined in Brazil during the 18th century to Britain. It may be worth considering that Iran's biggest creditors and suppliers are China and the UAE, hence most of its sats might end up being funneled to Arab princes or the CCP (more on that in the next section).

Photo by Sebastião Salgado.

😈 2. The Dictator’s Way

The Dictator’s way consists of outright confiscating existing coins.

This may happen inside the country. Or outside of its borders — in which case the approach could be better described as "The Pirate Way".

Normalising the appropriation of private goods is like pest control for entrepreunership — one can't expect local crypto-businesses to flourish in Venezuela, for instance.

No group survives in piracy forever, but, in uncharted waters, a single treasury may make the journey worth the hassle. There's always a chance to grab the loot of a lifetime, and never have to worry about money again (see the legend of Blackbeard; also Bulgaria's seizure of 200.000 BTC).

Rumors suggest North Korea has amassed over a billion dollars in crypto through hacking the cyber-ocean alone.

The most common manifestation of The Dictator's Way, however, is just plain old autocrats chasing miners' footprints and holdings. Some of the most adventurous dictators may even create their own "cybercoins" and try monetising them for a potential bitcoin conversion further down the road.

💸 3. The Financier's Way

The Financier's Way is probably the subtler. It comprises all the financially engineered incentives governments can put in place to stimulate free market agents to give them bitcoin.

Some states in the US have taken steps to subsidise hashrate within their borders — taxing in crypto, further ahead, could turn this into part of a wider acquisition policiy.

Selling bonds for cyberdust is another option. China's Construction Bank, one of the 5 largest in the world, is just attempting this (U$3B, in case you just want the number).

The Financier is interested in maximum returns with minimal risk — is there a surest path to do this than issuing fiat debt in exchange for digital gold?

No more than a clever, discreet, multi-generational rug pull, if you ask me.

👷 4. The Entrepreneur's Way

The Entrepreneur's Way is the most unlikely approach as it requires a humbling recognition of Bitcoin's superiority as a State. That is, assigning a non-zero chance to the probability that the network outlives the majority of countries on Earth.

Entrepreneurial states will sacrifice short-term political goodwill for the chance to thrive in a post-governance scenario.

They may export goods for bitcoin. China, the UAE and India have an open channel to test such ideas with Iran, heavily dependent on imports from them.

Entrepreneurial states may turn national banks into multi-sig custody partners for ordinary people, in exchange for a fee. They may put up a bunch of LN hubs. They may even declare the corn legal tender.

🏦 What to do With the Coins?

Acquiring bitcoin is step 1. But, once a Central Bank finds itself hodling… what comes next?

Hal's OG vision is still a bit far off, in 2020. Central banks are neither prepared nor interested in "offering a central authority for resolving bitcoin electronic checks".

Comparison in proportional scale: BTC's market cap VS. holdings of the 4 major Central Banks. Source: FED, BOJ, PBOC, ECB | Nov 2020

There's a bunch of other things to do with their coins, though:

  • Funding imports (Iran's stated plan);
  • Threatening the market — the network is immune to the concentration of wealth, although an irrational, desperate actor may wreak havoc in prices with a huge chunk of the supply in hands;
  • Establishing a sovereign version of Grayscale;
  • Issuing bonds at the LNRR.

The list is endless. One can also just hoard and risk getting filthy rich in the process. “Backing an un-redeemable stablecoin” sounds like a great excuse to do so.

🕹️ Ready Player 1: What Next?

What’s the following chapter? Which domino falls next?

I have no special insight in the inner workings of fiat plumbing, but here’s a simple heuristic to assess a country’s propensity to embrace the corn.

Think two main vectors: degree of marginalisation vs political independence. The first is how much it needs Bitcoin. The second is how much it has to lose.

Countries that rank high on both are next in line. Iran's footsteps will be followed first by monarchs, villains and misfits - in Western optics.

These will provide short-term entertainment, but the bigger picture is all about BTC as an increasingly important front in the sinoamerican cyber-war.

China's political stance on mining has been as bipolar as the moonsoons, but the empire is heavily long on bitcoin (through subsidised miners, CCP-friendly exchanges, etc).

Iran and Venezuela are two key, unpredictable crypto actors. Both seem willing to risk whichever regime legitimacy they've left to reclaim economic autonomy. It's not a stretch, at this point, to conceive a transaction settled in BTC between them. It would be symbolic to try this with oil.

By the way, the establishment of a crypto-OPEC is a wild idea that US policymakers have probably already incorporated in their threat models.

Other important neighbours to China and America are, respectively, Southeast Asian tech powers and the Caribbean. Politically independent, economically liberal, both financial hubs are used to frequent capital migration. This may intensify — and flow through the webz — as much as Beijing is willing to replicate what it did in Honk Kong, elsewhere.

The window of opportunity for the US to stop magic internet money quietly has closed (it has indeed done so, a couple times, before Bitcoin). The BitLicense will soon become a historical relic.

Today a former CoinBase employee is the Office of the Comptroller of the Currency. Bank discrimination against crypto-companies is being combatted. Incentivising hashrate to come to American soil is a digestible pitch among investors and politicians. Uncle Sam wants YOU to help him gain bit-terrain… in yet another fight against the East.

But any overtly enthusiastic step in Satoshi's direction… and the Leaders of the Free World may signal a loosening compromise with the dollar — increasing the rest of the world's propensity to dump it for corn.

This propensity lingers in the air. It may fall whenever the US moves boldly to protect the USD from crypto-adversaries. It may spike whenever it acts bluntly to guarantee any perceived influence over Bitcoin.

The longer we spend in-between — in this limbo of so-many adjacent possibles for the future of electronic money — the more time the Bermudas, Maltas and Bulgarias have to find their seats, before the music turns off.

Collecting mental models ~

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