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"What the FTX!?": examining emerging money storage, payment, and banking technologies like Bitcoin

You’ve probably seen the financial news outlets blowing up about the latest “end of crypto” moment and you may be wondering if there’s anything you need to know or do regarding this dynamic space. Before you jump to the (potentially very costly) conclusion that your communities and consumers can just stick with the Fed’s electronic dollar, let’s briefly examine what we’re learning from the scandal with FTX and its cryptocurrency FTT and how that relates to emerging money storage, payment, and banking technologies like Bitcoin.

Enter Michael Saylor

Bitcoin maximalist Michael Saylor responded to the initial developments by saying that he and other Bitcoiners would like to break up with their dysfunctional significant other, cryptocurrency.

His reasoning? The implosion of FTT is just what we should expect from coins other than Bitcoin, which is systematically designed to prevent it. Saylor put the point bluntly: “The crypto industry just reinvented fiat currency. FTT is just another currency, with a centralized exchange […] it’s a reminder of why Satoshi gave us Bitcoin in the first place.” Saylor then mentions the “White Paper” in which Satoshi lays out the Bitcoin alternative.

In calling FTT “just another currency,” Saylor refers to the fact that FTX manipulated the supply of FTT—just like central banks do—via, among other things, its Buy and Burn program (see here and here). And the fact that FTX is a centralized exchange means, among other things, that what happens to depositor funds is entirely managed by one person or group, in this case, FTX CEO wunderkind Sam Bankman-Fried. Which is why Bankman-Fried could mismanage the exchange in a way that prevented it from being able to pay its users precisely when they were spooked by his decisions. More or less a bank run.

James Mackintosh at the Wall Street Journal interpreted the situation nearly identically to Saylor (though, incredibly, he implies that the solution is having a central bank to mop up such centralized mismanagement, as if central banks are incapable of their own centralized mismanagement). As Mackintosh observes, what caused FTX’s downfall “isn’t crypto in itself. If everyone hewed to the suggestion made by the pseudonymous Satoshi Nakamoto in crypto’s 2008 founding document [i.e. the “White Paper”], all would be fine (if much less exciting).” What Mackintosh doesn’t say is that FTX crashed because of problems inherent to the dollars, euros, pounds, yens, yuans, rupees, rubles, reals, and rands we use every day. In creating and manipulating FTT, FTX merely concocted a digital form of ordinary money, bequeathing to it all the problems from our everyday currencies that Satoshi was trying to leave behind in making a cryptocurrency to begin with.

Almost certainly a pseudonym, “Satoshi Nakamoto” refers to the single individual or group who unleashed Bitcoin onto the world along with a white paper explaining what it is, how it works, and why it’s so valuable that, even at less than a quarter of its peak market price from a year ago, people are still willing to pay more than 15,000 USD for a single coin.

This white paper is technical, but there are three things from it that you need to know to make your financial institution stay relevant in the coming years:

  1. Bitcoin is not primarily an asset; it’s a network.

  2. With friends like these, who needs an overlord?

  3. When something’s capped, it doesn’t get bigger.

Bitcoin Is Not Primarily an Asset; It’s a Network

Members of our media and government primarily speak of Bitcoin as an asset, usually a “highly speculative” one. Calling it an “asset”—or even a highlight speculative asset—is not entirely false, especially given the way uniformed buyers have been treating it. But it’s like calling the U.S. dollar a highly speculative asset—which, to be fair, seems like a less and less ridiculous statement after the last two years.

But in terms of both the intention and the potential of Bitcoin, “asset” is a misleading label. In fact, the words “asset,” “store of value” (or even “store”), and “property” do not even occur in Satoshi’s white paper. “Resources” occurs once but not in referring to Bitcoin itself. And while the paper does, once, suggest that owning Bitcoin amounts to “wealth,” it does so only by way of implication. Contrariwise, it refers to what Bitcoin offers as a payments “network” more than twenty times.

Here’s what it says about that network:

  • It requires only minimal structure.

  • It’s made up of peers who validate transactions by solving cryptographic (which is where the “crypto” in “cryptocurrency” gets its name) puzzles in a process called “proof-of-work” and record them in a chain that cannot be changed without re-doing the proof-of-work.

  • It allows individual peers to join, leave, and rejoin it without issue.

But—you may be thinking—what does this have to do with the fact that I can buy one bitcoin at, currently, a little over fifteen grand?

Read on.

With Friends Like These, Who Needs an Overlord?

Okay, so Bitcoin is a payments network. But we’ve already got systems that do this; why do we need another?

Well, remember the “minimal structure” and “peers” part? As Satoshi explains, the only reason we have payments systems at all is to prevent payers from spending money in their account and then spending it again somewhere else before it has had time to leave the account from the first purchase. This is called the “double-spend problem.”

The way we usually solve this problem is to have a trusted third party—or, really, parties, i.e. a couple of banks along with Visa or Mastercard, etc.—keep an eye on things to make sure the double-spending doesn’t happen. Strike CEO Jack Mallers bro-ingly mocked the absurdly unnecessary inefficiency of this process in a talk at the Bitcoin 2022 conference. (I’ll spare you a transcript here, but it’s worth a listen.)

At the end of the talk, Mallers outlines what a network would need to look like to avoid having all these parties go back and forth to vet your ability to buy lunch without paper money. Among the key features are: 1) The initial electronic communication to the merchant (roughly, the “swipe” at the point-of-sale) would, itself, be the settlement, rather than just the first in series of communications to vet the transaction in advance of a settlement. Relatedly, 2) the settlement would be instantaneous. And, finally, 3) the whole thing would be “as close to free as humanly possible.”

The punch, he says, is that, although it would require utilizing the Lightning Network (a “layer two” solution that requires its own article), Bitcoin—the network—has all these features.

So, what Bitcoin really offers is not just a different currency for purchasing things but a way to cut out all these transactional middlemen that bog down settlement, making it take several days and cost more than it should. The buyer, the merchant, the buyer’s bank, the card network, and the merchant’s bank no longer have to communicate back and forth for several days.

Instead, the Bitcoin network of peers simply confirms that the money (bitcoin) the buyer wants to spend has not already been spent. The confirmation happens via solving the cryptographic puzzles. As Satoshi puts it, “The problem of course is the payee can’t verify that one of the owners did not double-spend the coin. […] To accomplish this without a trusted party, transactions must be publicly announced, and we need a system for participants to agree on a single history of the order in which they were received.”

The bottom line is this: If we form a network of peers vetting our purchases, the parties who currently do so at disproportionate time and cost become unnecessary. Bitcoin is thus cheaper, easier, and freer than the way we currently do it. That’s why the people who know about it like it and it’s why at least some of the money is going out of your financial institution into Bitcoin.

When Something’s Capped, It Can’t Get Bigger

Just like the way most sports approach salaries, Bitcoin has a cap. And just like the caps in those sports means the salaries can’t get any bigger than a specified amount, Bitcoin’s cap means the total amount of bitcoin “out there” can’t get any bigger than a specified amount. Satoshi discusses this only briefly, but it’s essential to the whole proposition of the White Paper. Here’s the relevant declaration: “Once a predetermined number of coins have entered circulation, the incentive can transition entirely to transaction fees and be completely inflation free.”

Leaving aside the point about incentive (which, like Lightning above, requires a separate article), the crux is that having a predetermined cap of the network’s coins renders the monetary system of Bitcoin “completely inflation free.” Why? Because Satoshi designed the network with a cap of 21 million coins, thereby preventing an analog of the money supply expansion effected by central banks.

A crucial point to observe here is that, as Michael F. Bryan notes in the Federal Reserve Bank of Cleveland’s journal Economic Commentary, the word “inflation” originally referred to the expansion of the money supply itself, with its concomitant effect on prices. But, he observes, once “Keynesian economic theory challenged the direct link between money and the price level, inflation lost its association with money and came to be chiefly understood as a condition of prices,” i.e. as a “rise in prices.” So, the latter definition is derivative but, unfortunately, so currently widespread that employing the original, more illuminating definition is liable to confuse. Thus, it is the more obfuscatory but contemporary definition that is operative in what follows.

Even so, many economists still cite the expansion of the money supply (the original definition) as a major cause of “inflation” as we now use the term. Several other factors can also contribute to inflation and, therefore, it isn’t necessarily true that getting rid of even a major one among them will result in a “completely inflation free” scenario. Nevertheless, given how large a role money supply expansion plays in inflationary economies, capping the supply of Bitcoin stands to render it all-but-immune to the continual devaluation most modern currencies experience over time.

In other words, if Bitcoin were to become a dominant medium of exchange, the problems inherent to overmanaged currencies would not arise all over again for Bitcoin, as they have for every other form of money except gold.


Given that more and more people, especially with the current inflationary highs, are finding Bitcoin’s inflation-resistance attractive, do you want your financial institution exclusively tied to the system they’re leaving?

Credit unions began as a strategy for farming communities to obtain the resources for which banks wouldn’t loan them the capital because they weren’t enough of a cash cow. Today's climate of instability and uncertainty about traditional currency instruments presents a similar challenge: The actions of central banks and centralized currency managers like Bankman-Fried still disadvantage those who diligently “bank” their deposits. If community cooperative institutions are to continue fulfilling their mission, they will need to consider researching and investing in strategies that provide a more stable and endurable storehouse for the fruits of the labor spent in their communities.

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