“Who is John Galt?” Those are the first four words in the book Atlas Shrugged.
I first read Atlas Shrugged when I was in my mid 20s. I finished the 1,200+ page tome without a wink of sleep. I couldn’t put it down. So much of what I found in the pages of one of the best selling books of the 20th century confirmed what I still see in the modern-day world today; especially as it relates to individual rights and how governments often encroach on those rights. What was written almost 75 years ago has perhaps never been more true than it is today in the countries of the Western world.
John Galt was a fictional character in Atlas Shrugged, but with perhaps a bit of dramatic irony, no one really knows “Who is Satoshi Nakamoto?”
John Galt, one of the main protagonists in Atlas Shrugged, invented a motor that could generate an unlimited supply of energy from static electricity. If harnessed properly, Galt’s motor could wipe out famine and poverty around the globe. But Galt was so disgusted with the world around him that he abandoned his invention and instead focused his energy on convincing the most talented people in the world to leave society to hasten its collapse so they could start over. In Atlas Shrugged, John Galt said he would “stop the motor of the world.”
Ayn Rand, the author of Atlas Shrugged, was a libertarian and staunch defender of laissez-faire capitalism. Born in the former Soviet Union, when Rand was a young child her family was reasonably well off. Her father was a pharmacist and owned his own pharmacy. When Rand was twelve years old, the far-left communist Bolsheviks under Lenin confiscated the family business and the Rand family went from relatively affluent to near starvation. This experience informed most of her writings and Atlas Shrugged in particular.
But Rand wrote Atlas Shrugged from the late 1940s through the mid 1950s, before widespread computer technology even existed and the Internet wasn’t even a twinkle in anyone’s eye. She could never have foreseen the concept of digital money.
For all of the fictional John Galt’s brilliance, if Galt had a more intelligent, visionary cousin it would be Satoshi Nakamoto.
Satoshi Nakamoto’s invention of Bitcoin and its underlying blockchain technology will accomplish more in the next 10 to 20 years than all of a fictional Galt’s genius could in a lifetime. And do so without having to drive society to ruin. In fact, cryptocurrency will make the world a more fair and equitable place, regardless of geographic or political borders.
While there are certainly people that understand the technology and financial implications of Bitcoin and blockchain better than I do, with a background in computer science, game theory and finance, I do have some insight into what underlies one of the most game-changing innovations since the printing press or the Internet.
What is Money?
Before we explore what Bitcoin is and why its underlying blockchain technology is so important, we first need to understand what money is. Most people think they understand money, but they don’t. I know I didn’t. Once I began my journey down the rabbit hole of Bitcoin and blockchain I realized how little I knew about the true functions of money. In less than a month I devoured half a dozen books and at least 50 hours of videos and podcasts on the topic. I want to give my sincere gratitude to Andres Antonopoulos, Roger Ver, Phil Champagne, Michael Saylor, and a host of others who got me up to speed through their books, videos, and podcasts. There is a ton of fantastic content out there and most of it is free or inexpensive.
I came to understand that money is four things:
Store of value
Medium of exchange
Unit of accounting; and
System of control
If you ask a room of 100 people “What is money?” you will quickly get some answers that consist of the first three listed above. Almost no one offers up the last one; a “system of control.” When money is used as a system of control, the other characteristics no longer matter.
Richard Nixon signed the Bank Secrecy Act into law in 1970, and for the first time money became a system of control. Perhaps without intent, Nixon’s actions made the financial services industry a branch of law enforcement. Beyond borders, beyond jurisdiction, outside of due process, and beyond political and democratic control.
Money as a System of Control
When you can control who can send and receive money and to whom money can be sent, you control almost everything. This system of control has enabled the complete surveillance of all financial transactions worldwide. If you know where, when and on what someone spends their money, you know nearly everything about them. This concept has gotten scarier lately as Janet Yellen, United States’ current Secretary of the Treasury is pushing for the federal government to monitor transactions on all bank accounts with a balance over $600.
Similarly frightening, during the recent truckers’ protest in Canada, Canadian Prime Minister Justin Trudeau froze the bank accounts of protestors who donated to a cause he disagreed with politically. Millions of dollars raised on behalf of the trucking protesters through crowdfunding sites like GoFundMe and GiveSendGo were blocked from being distributed to the demonstrators. Hundreds of Canadians had their bank accounts frozen for either taking part in or supporting the protests. The Royal Canadian Mounted Police provided banks with lists of Canadians whose accounts the government wanted frozen.
This concept of control becomes even more alarming as governments around the world, including the US Government, consider launching their own Central Bank Digital Currency, but more on that later in this article.
A bank can seize or freeze your assets with absolutely no due process. So can a government.
In 2013, a number of banks in Cypress confiscated billions from their deposit holders. Overnight, a significant portion of some people’s life savings disappeared. In November of 2016 the Government of India announced the “demonetization” of ₹500 and ₹1,000 banknotes. 1.5 million jobs were lost, and numerous suicides were linked to the loss of people’s life savings that they had stored in hard currency that were now rendered worthless. Mexico has devalued its currency on a number of occasions, wiping out some of its citizens’ accumulated wealth.
Until more recently, most people in the US have believed that it can’t happen here. Our banks are FDIC-insured, right? As we have seen numerous times in our country’s history, particularly during the 2008 financial crisis, small failures can be insured against. Big failures are uninsurable. Sadly a financial crisis of these magnitudes could happen here too.
On a personal note, a few years ago I deposited two checks for a few thousand dollars each into my personal bank account. Without a single phone call or email from my bank, all of my accounts were frozen. It took me three days of phone calls between my bank’s compliance officer and the individuals who had written me perfectly normal checks to unfreeze my assets. Guilty until proven innocent.
Zero notice. Zero due process. Zero control.
I have a friend of mine who is a high-paid lawyer and makes over 7-figures a year. He was going through a nasty divorce and one day access to all of his accounts were frozen by his soon-to-be-ex-wife. He was relegated to borrowing money from friends and family for rent and groceries for weeks until his team of lawyers were able to get his accounts unfrozen.
Zero notice. Zero due process. Zero control.
Only about 20% of the world’s population have full access to the financial system. Over 1.5 billion people have no access to the financial system whatsoever.
As money’s use as a system of control expands, its ability to be an effective store of value and medium of exchange continues to erode. That is where cryptocurrency can be a game changer.
What are Bitcoin and Blockchain?
So, what is Bitcoin and how is its underlying blockchain technology going to change the world?
Bitcoin is a decentralized digital currency without a central bank or centralized control of any kind, that can be sent from user to user on the peer-to-peer Bitcoin network without the need for intermediaries. Transactions are verified by a network of over 50,000 nodes in nearly 100 countries around the world through a cryptography algorithm and those transactions are recorded in a public, unalterable, distributed ledger called a blockchain.
Bitcoin has many of the characteristics of traditional money: durability, portability, fungibility, scarcity, divisibility, and recognizability. But Bitcoin captures those properties based on mathematics rather than relying on physical properties, like gold or silver, or trust in central authorities, like fiat currencies or central banks.
But perhaps more importantly, Bitcoin is also trustless, immutable, and decentralized.
First, for any monetary system to function, it has to be based on trust. You have probably often heard that our monetary system is built on the “full faith and credit of the US Government.”
Normally a central authority is necessary so that you have something to put your trust in. With Bitcoin, each portion of the ecosystem validates the other parts of the system so that trust isn’t necessary. If a Bitcoin transaction is broadcasted, all nodes receive it and verify that those transactions are valid. If not validated, that transaction is discarded. Because everyone on the network has a copy of the ledger, no trust is required because anyone on the network validates against their own copy of the blockchain ledger.
Further, all the nodes on the network are rewarded with payments in Bitcoin for validating transactions. By this ingenious mechanism, game theory makes it clear that the incentive to cheat disappears. The inventor of Bitcoin said it well:
The incentive may help encourage nodes to stay honest. If a greedy attacker is able to assemble more CPU proof-of-work than all the honest nodes, he would have to choose between using it to defraud people by stealing back his payments, or using it to generate new coins. He ought to find it more profitable to play by the rules, such rules that favor him with more new coins than everyone else combined, than to undermine the system and the validity of his own wealth. — Satoshi Nakamoto
The elegance of this solution is stunning. Nakamoto designed a monetary system that doesn’t require trust to be trustworthy.
People complain that Bitcoin is “unregulated.” But it is regulated. It is regulated by an algorithm instead of being regulated by government bureaucracies. Unlike governments, algorithms can’t be as easily corrupted.
The second key element of Bitcoin is its immutability. Accordingly, Bitcoin must follow 3 principles:
It should be highly improbable to impossible to rewrite transaction history
It should be impossible for anyone but the owner of a private key to move funds
All transactions are recorded on the blockchain, which guarantees the above 2 principles
Normally, when we want to check how money has been spent from our bank accounts, we check our transaction history with the bank. We trust our banks not to make up transactions or manipulate anything in our accounts. If there are fraudulent or incorrect transactions, the bank needs to be trusted to fix any mistakes.
Because Bitcoin transaction records are public and unchangeable, the elements of centralization and trust are removed from cryptocurrency, there is no longer a need for trust in a third party. Although it isn’t technically impossible to change the transaction ledger, one bad actor would have to control over 50% of the nodes on the blockchain network, and cryptographic security makes that a practical impossibility. Further, modifying the ledger would undermine the entire system and make the fruit of the perpetrator’s efforts worthless.
The third and final element that makes Bitcoin so powerful is its decentralization. Let me provide a definition of being decentralized from Vitalik Buterin, the inventor of Ethereum, the second most popular cryptocurrency:
Blockchains are politically decentralized (no one controls them) and architecturally decentralized (no infrastructural central point of failure) but they are logically centralized (there is one commonly agreed state and the system behaves like a single computer). — Vitalik Buterin
Further, a decentralized system is:
Fault tolerant: decentralized systems are extremely unlikely to fail accidentally because they rely on networks of separate components.
Attack resistant: decentralized systems are more expensive to attack and destroy or manipulate because they don’t have vulnerable central points that can be attacked at a much lower cost than the surrounding system.
Collusion resistant: it’s harder for members of decentralized systems to act in ways that benefit them at the expense of others. On the other hand, corporations and governments collude in ways that benefit themselves but hurt others all the time.
With central banks and governments, the supply and creation of money and adjustments to interest rates are exclusively controlled by central banks. Users of fiat currencies are at the mercy of the central banks’ money-printing whims. Rarely has this been more true than recently here in the US. The shame of the massive “printing” of money is that the group it harms the most is the most vulnerable in our society – the poor. While this hidden tax technically affects everyone equally, a wealthy or even middle-class family might be able to absorb a 10% or 15% level of inflation for a period of time but that can prove disastrous to a family that is just making ends meet.
But What about FTX and Other Crypto-related Failures?
2022 has not been a good year for cryptocurrency for a variety of reasons. First, the price of Bitcoin (and most other cryptocurrencies) had already been dropping since the end of 2021. Bitcoin fell from a high of $65,000 in December of 2021 down to roughly half that price to about $32,000 during the summer of 2022. The drop in the price of cryptocurrencies was further impacted by the failures of BlockFi, Celsius, Voyager, and finally and most spectacularly, the recent collapse and bankruptcy of FTX.
Detractors of cryptocurrency point to these failures as evidence that Bitcoin and other cryptos are fundamentally flawed. Quite the opposite, these failures actually support the fact that decentralized cryptocurrencies will become critical and necessary to the ultimate success of any democratic society. But whenever there is a centralized entity involved, that entity must be extremely well regulated.
The failure of FTX and others like them was not because of issues with Bitcoin or blockchain, which are decentralized systems, but due to poorly regulated centralized apps, platforms, or exchanges where individuals at those organizations acted recklessly and, in some cases, criminally to “game” the system to make their organizations and themselves disproportional profits.
Without a monetary system that people can trust and rely on, no society can sustain itself. From the Great Depression to Hitler’s Germany to Mugabe’s Zimbabwe to Maduro’s Venezuela, problematic monetary policy contributed significantly to some of the greatest human catastrophes in recorded history.
Are Central Bank Digital Currencies (CBDCs) the Answer?
The short answer is “No.”
But first, what is a CBDC? A CBDC is a digital form of a country’s printed currency that is issued and regulated by a nation’s monetary authority or central bank. But unlike a cryptocurrency like Bitcoin, there is no limit on supply and it is completely centrally controlled. Thus, most of the benefits of digital money go away and most of what you are left with is a tool that can be used as a system of control.
And that is how CBDCs are most likely going to be used. Especially in more repressive countries. Imagine an authoritative country like China if there was no printed currency and the only form of money available to its citizenry was a CBDC. Effectively, citizens of a country could be de-platformed or banned from the monetary system in an instant. But even in a more democratic country like Canada, a government could outlaw the purchase of cannabis or firearms, not through legislation, but by making it so that government-issued digital currency couldn’t be used to buy cannabis or firearms.
There are some potentially valid use cases for a CBDC. For example, with government entitlement programs a CBDC could make a lot of sense. A CBDC would eliminate entitlement program money from being used differently than how it was intended to be spent. Whether the government-issued money was to be used for food, housing, education (imagine a CBDC “voucher” system for K through 12 education), transportation, etc. one could be nearly certain the money was being used exactly as intended. Further, because of the near-perfect, and rapid ability to audit all transactions on the blockchain, it would be relatively easy to eliminate fraud in these programs. In 2021 alone, it was estimated that there was $161 billion in welfare fraud in the US. That’s more than the total GDP of 65% of all the countries of the world.
Monetary policy and central banks, and the control it gives to governments, as well as the risks it presents to individuals, should be cause for alarm among anyone who values individual sovereignty and freedom. What we choose to gain in convenience is often a trade off of freedoms that we are unaware we will miss until they are gone. In this case, we can see a version of the future, and while the future is always difficult to predict, at least here in the US, I think, there are two viable paths that make sense for the majority of individuals.
The Two Paths Ahead
The first path, for more sophisticated and technically proficient individuals, is to have their cryptocurrency assets in what is called a non-custodial wallet. This allows for an individual to have 100% control over their cryptocurrency. Any individual anywhere in the world can set up a non-custodial wallet and so long as you retain your seed keys, or a string of 12, 18, or 24 words depending on the cryptocurrency, and a device that can connect to the Internet. You can store your seed key in a fireproof safe or safety deposit box or other safe location that only you know about. When you purchase cryptocurrency (generally through a centralized exchange linked to your bank account like Coinbase, but there are also ways for unbanked individuals to convert cash into crypto without a bank account) you would simply send your purchased cryptocurrency to your non-custodial wallet address. Once that cryptocurrency has been delivered to your non-custodial wallet it is completely in your control and no person or government can access it without your cooperation. On this path the only person you need to trust is yourself. For the 1.5 billion people in the world that are entirely unbanked, this is their only real way to access the financial systems of the world in any meaningful way.
This approach is not for the faint of heart and to do this in a truly safe and secure way does require a level of knowledge and sophistication that the average individual most likely does not possess. But even for those individuals that do have the expertise to hold much for their cryptocurrency in a non-custodial wallet, there is a second path that also makes sense for nearly everyone that is only recently coming online.
Over the last year or two, banks and credit unions are starting to integrate the ability for their users to buy, sell, and hold cryptocurrency natively into their banking systems. There are a small handful of companies that have built their technology into the financial institutions’ infrastructure layer. Full disclosure and small plug for my company here – CryptoFi is one of these companies. This integration enables an institution to essentially ‘turn on’ the ability for their customers or members to buy, sell, and hold cryptocurrency without having to deploy any development resources. What’s more, customers can do so safely and securely through a highly regulated and trusted entity where cryptocurrency holdings are 100% insured, without limit, against theft or hacking by being stored with a qualified custodian. Qualified custodians must have “dollar-for-dollar” proof of reserves, must keep customer funds in segregated accounts and are legally not allowed to lend out against their customers’ holdings. With a qualified custodian, even in the extremely unlikely scenario where a bank or credit union were to fail, a users’ cryptocurrency holdings would still be safe and secure and could be recovered by the individual from the qualified custodian.
Within the next 3 to 5 years, the majority of banks and credit unions will have added cryptocurrency capabilities for their users. This will open up the world of cryptocurrency for tens of millions of Americans that otherwise would never be able to safely hold this unique and powerful digital asset. For most users this will be the most convenient and safest path to cryptocurrency ownership. And for even the sophisticated consumer, it will still likely make sense to hold some of their cryptocurrency in a bank or credit union for proof of funds for a mortgage or other loan. Admittedly, this path doesn’t give individuals the same level of control that a non-custodial wallet does, but it is far safer and will become more widespread than any other method of owning and managing cryptocurrency, especially as distrust for centralized exchanges continues to grow in the wake of FTX’s downfall.
Conclusion
It took Microsoft and Apple over 40 years to become trillion-dollar companies. It took Google, Facebook, and Amazon over 20 years to become trillion-dollar companies. It only took Bitcoin 12 years to have a market cap of over a trillion dollars.
With over 300 million people worldwide who are holders of some form of cryptocurrency, crypto is here to stay.
But as with most innovations, they can be used for good or evil. Nuclear fission can be used to generate an unlimited supply of clean energy or in a nuclear bomb that can kill millions. The Internet can be used to provide access to the world’s information but also to facilitate various black market activities. Computer algorithms can be used to optimize tasks that no human could possibly do on their own or to control and suppress free speech.
The same is true for cryptocurrency. It can be used to provide access to financial systems and allow individuals to control their wealth or it can be used as the most draconian form of citizen control ever imagined. Fortunately, at least in free societies, and because of the cryptocurrency technology that already exists, the genie is already out of the bottle. Yes, there must and should be regulation, but individuals must control their own resources. We cannot truly be sovereign individuals without this being true.
Because cryptocurrency exists beyond a country’s physical borders, beyond political borders and without centralized control, cryptocurrency and blockchain technology will ultimately be the only way that individuals can truly control their own resources.
For those Atlas Shrugged fans out there, it seems clear that the John Galts, Francisco d’Anconias, and Hank Reardons have been replaced with the Elon Musks, Peter Thiels and Satoshi Nakamotos of the world.
But who is Satoshi Nakamoto?
