Monero, privacy coins and the dog that didn’t bark

 

I think we are seeing the first signs of how regulators and bankers will be trying to choke cryptocurrencies. It is unlikely that they will directly ban bitcoin or most of the cryptocurrencies. More likely, their attack on censorship resistance of cryptocurrencies will take place along two main vectors:

Financialization

Central bankers actually want to financialize crypto as much possible, make it very ‘liquid’ tradeable asset with lots of derivatives and margin markets. ‘Liquid’ is in quotation marks, because true liquidity for crypto would be widespread use to pay for goods and services. Lots of exchanges with leverage and shorting is fake liquidity that dries up exactly when you most need it.

At first, the above point seems paradoxical. Why would they want to financialize crypto? Isn’t it clear that cryptocurrencies are the enemy of the current global dollar based financial system? That they provide a viable transparent alternative to the world of fiat currencies. Fiat money is created in secret, unaccountable to anyone, even to democratically elected governments. So, why would they be trying to financialize bitcoin?

To find your answer, look at gold. Gold with its fixed supply should be a check on fiat currencies, a barometer of price levels in the economy, keeping the central banker honest. But it hardly moved during the past 9 years. These 9 years were a period when gold should have exploded higher due to the sheer amount of monetary supply that flooded the system. But all that supply was channeled into financial assets other than gold. So, we did witness the creation of the largest central bank bubble of all time during the past 9 years. And gold did not budge. Rather, like the dog in Arthur Conan Doyle’s Silver Blaze, it simply did not bark. The reason is quite simple. Gold was way too financialized. Consider, for example, the aftermath of Brexit. Financial markets were rocked violently, volatility shot up. Gold was on a tear upward as safe haven asset, gaining 5% within hours. However, someone stepped in and ‘sold’ an equivalent of 186 metric tons of gold on Comex (see more here) in a matter of minutes. After that, despite markets gyrating violently, gold remained in a very narrow range.

I wrote ‘sold’ in quotation marks, because nobody really sold any gold. These were just net short positions of players who do not really have to own physical gold to sell it. But because gold is primarily traded on non-transparent exchanges that allow shorting with huge leverage, there are players that will be able to drive the price down.

Divide & Conquer

The second way in which central banks will attack cryptocurrencies is to try to fracture the space and propel those more amenable to centralization forward. For example, Japanese regulators are quietly pushing exchanges to drop Monero, Dash and ZCash. This is the roadmap for the rest of the world. First, suppress truly private cryptocurrencies like Monero. Then push Bitcoin into a more centralized posture, force the devs to give up at least some of its censorship resistance. If that doesn’t work, propel something like Ethereum forward. Vitalik Buterin clearly does not view censorship resistance as a crucial feature of crypto, he is quite amenable to centralization, because he doesn’t see globalist government power as a threat to humanity.

So, what can we do to counter this game plan to take away our freedoms? All believers in censorship resistance should support privacy coins by using them and pushing more and more vendors to accept them. Monero which uses ring signature has the highest standard of privacy of the coins above, but ZCash and Dash, when used properly, also have strong privacy features.

Paradoxically, regulators may be doing us a favor by pressuring exchanges to drop privacy coins. They may make them less prone to paper speculation, so their volatility may be dampened in the long run. This would create conditions under which they could become reliable payment methods, giving us some protection from those who use George Orwell’s 1984 as a manual.

 

 

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About the Author: Daniel Satchkov

Daniel Satchkov, CFA is the winner of the 2015 Peter L. Bernstein Award given for the best article in industry-leading Institutional Investor Journals. He is also a winner of 2010 Emerald Literati Outstanding Author Award for his work “New Paradigm of Risk Management”. He publishes regularly in scientific and popular publications.

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