Let's talk about the mechanism by which government regulation will effectively kill cryptocurrency. 🧵
Seems inevitable at this point that the US government and EU are going to clamp down hard on cryptocurrency because of three recent developments: (2/)
1) The ransomware pandemic is starting to threaten national security

2) Elon's wake of destruction caused hundreds of thousands of citizens to lose their life savings, and they're complaining to consumer protection bodies

3) Potential systemic risk to traditional markets

(3/)
If I were to put on my speculation hat and try to predict how things will go in the next six months, I suspect it will unfold something like the following: (4/)
The largest cryptocurrency exchange Binance will be shut out of any banking access in the western hemisphere. Neither payment processors or banks will touch them and without consumer inflows of Euros or Dollars and the "company" will collapse. (5/)
The regulatory perimeter around domestic cryptocurrency exchanges will go up and inflows and outflows will be strictly monitored and controlled. The US will enforce some variant of the FATF Travel Rule and Europeans will ban private wallets. (6/)
Likely 75% of tokens listed will be classified in the US as unlisted securities and either forced to register with the SEC or banned from being sold to US persons. (7/)
Most crypto users aren't interested in trading regulated securities and demand volume will decrease 90% as people lose interest, basically making the crypto markets a place for thinly traded penny stocks in shell companies with no revenue. (8/)
The shenanigans with exchange order book manipulation will be pushed out, wash trading will be banned, they'll be strict documentation requirements on price setting and formation, and some crypto variant on National Best Bid and Offer (NBBO) will be enforced domestically. (9/)
The compliance costs of these assets in regulated jurisdictions will become inordinately high and in turn passed down to customers as high transactions costs. On top of taxable events and capital gains it's not going to make sense for the average retailer to invest. (10/)
This will gate exchanges from international asset movement and segment the small markets into geographic regions, and bifurcate the crypto assets that are traded in regulated regions vs those traded in unregulated regions. (11/)
Bitcoin will probably still be traded, but will likely trade somewhere in the thousands of dollars and considered sort of a fringe asset class for libertarian digital goldbugs to speculate on to live out their weird little fantasies in a sandbox for childish ideas. (12/)
This basically turns cryptocurrency exchanges into bucket shops where people can gamble on the momentum of dog meme tokens. Now there's probably a market for that ... but after the prospect of getting rich quick from it is removed, it's probably not a huge market. (13/)
In countries with less tight regulatory regimes crypto will probably remain effectively an unregulated dark market economy with very little connection to the real economy or global markets. (14/)
Thousands of variants of mutual aid scams (like Russian MMM Ponzi) and pyramid flash-in-the pan pyramid scheme will go digital and plague low-income and low-information investors until crypto becomes synonymous with scams globally. (15/)
en.wikipedia.org/wiki/MMM_(Ponz…
There will continue to be a dark market for illicit substances and sanctions evasion but moving large amounts of money in or out of these thinly traded pseudo-assets will become challenging for criminals. Tokens traded on dark market will be untouchable by exchanges. (16/)
Some form of it will continue to exist, basically folded into the existing financial system as a sort of quirky asset class that we tried in 2010-2020 decade that didn't really work. (17/)
Crypto's upside beyond get rich quick schemes is entirely illusory, and it doesn't provide any benefit for legal uses that isn't better provided by some traditional service or asset class. (18/)
People will go back to putting the bulk of their money in productive assets like real estate and stock in real companies and mostly it will be a historical footnote in the history of finance. The End.

/fin

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More from @smdiehl

18 Jul
It may surprise people, but I actually have zero issues with a digital money market fund that theoretically used a cryptographic ledger for tracking investor holdings. Effectively a regulated "stablecoin".
Now I do think these things would have to be highly regulated, because opaque MMFs and shadow banking were a big component of why things blew up in in 2008. And we don't want a repeat of that.
And if they were as transparent as traditional funds, reported their portfolio holdings, bought sensible paper, followed all the FinCEN guidelines on withdrawals and transfers, and were set up as proper legal entities (i.e. not in a Caribbean tax haven).

fidelity.co.uk/factsheet-data…
Read 6 tweets
16 Jul
I've been hammering on this point for quite some time, but it's worth repeating in the simplest English possible that you could explain to a twelve year old.

Cryptocurrencies aren't currencies. They're investments, and pretty bad ones at that.
They may have started out with that idea to be magical internet money, but that idea failed.

Now most people they treat it like an investment. People want to get more dollars than they put in.
Unlike investing in shares in a real company which does something in the world, buying a crypto token doesn't do anything.

It's like a casino chip.
Read 10 tweets
15 Jul
Thinking a lot about the Jackson Palmer thread on my commute home. It's is a scathing and brilliantly written synopsis of one man's soul searching and conclusion of thinking through the consequences of actions.

Takes a lot of courage to do that in public.
There are probably tens of thousands of other people in exactly the same situation, they found themselves in too deep in what is very much a echo bubble that reinforces the normality of these scams and they just don't have anyone yet in their lives to convince them otherwise.
It takes a fair bit of research at the intersection of some very disparate fields to understand the core of why crypto is so harmful to society.

It's important to give people time and space to reach those conclusions. It's very much like cult or MLM deprogramming in some sense.
Read 6 tweets
15 Jul
I don't think it's widespread public knowledge how social media companies try and fail to protect against employees prying on users. But it's a lot more widespread than the public knows and it here's how it happens... 🧵
So basically social media companies have giant databases that store user accounts, messages, profiles and these are separate tables in the databases. Associated with each user is something called a primary key or unique user identifier.
Access to the databases for rank and file employees usually has some "safety pre-processor" where all queries (written in a language called SQL) are sent to it are scanned to determine if they are looking up a specific individual or doing bulk queries.
Read 7 tweets
11 Jul
If you're curious about the mechanism by which crypto exchanges act like Ponzi schemes, it's quite simple:

They take your real money and give you money on paper. You trade their paper money and put it in negative-sum lotteries run by their mates.

You think you're winning but..
... when you go to cash out your paper wins, your account is frozen, the wins evaporate, or you can never withdraw any real money.

In reality these exchanges have a massive liquidity problem where they comingle a very small pool of real money they have to prop up the illusion.
None of these token products the exchanges offer actually generate any real income because they're non-econmic, they just shift money around. The only way they continue to exist is they pay out early investors from later ones by recruiting more greater fools into the scheme.
Read 5 tweets
8 Jul
If I were to recommend four books to help deprogram friends and family who get sucked into crypto vortex it would be the following:
1. Attack of the 50 Foot Blockchain by David Gerard (@davidgerard) - A now classic book that humorously explains the history of and deconstructs the crypto phenomenon to show how stupid these ideas really are at their core.
2. Lying for Money by Dan Davies - A detailed dive into the various types of financial crime, their mechanisms, and what gives rise the motivations of criminals.
Read 5 tweets

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