In Britain inequality has returned to levels not seen since the 1930s.After steadily rising between 1600 to 1913, Britain’s wealth as a share of the global total peaked and then began falling until the end of the1970s [ref required]. During this time, Britain became one of Europe’s most equal countries, even without the support of its Empire [ref needed]. Some argue this relative equality enabled Britain’s economic growth and international standing to keep pace with its European neighbours, despite the loss of imperial power [ref needed]. Duringthis period there was much upheaval in global monetary systems. More recently we have seen that trust has diminished, and inequality hasrisen, with social media perhaps acting as an accelerator.
The Social Cost of Inequality
Four decades later, the social impacts of rising inequality are becoming clear. Of the 14 million people living in poverty in Britain today, mostare in working families [ref needed]. Upward mobility is declining, as the continued dominance of the privately educated elite in top jobs hinders meritocracy [The Gender Wage Gap Among University Vice Chancellors in the UK 2022] . The lack of affordable housing and regulation in the rental market has led to increasing homelessness [ref needed]. And with the super-rich able to avoid taxes, the burden falls more heavily on lower income groups [ref needed].
When Inequality Declines, Life Improves
However, in societies that prioritize equality, life improves for all citizens. Infant mortality falls, lifespans lengthen, and population health increases [dorling, finland, ref]. Access to education rises,enabling greater social mobility [The Parenthood Effect on GenderInequality 2013 ]. With reduced poverty and homelessness, there is lesscrime and violence [ref needed].
Tackling Inequality
Dorling [oxford, reference] Tackling inequality requires recognising that excessive wealth concentration is detrimental to social cohesion and national prosperity. A modicum of inequality may be inevitable, butthe widening chasm between rich and poor in Britain has passed sustainable limits. With common purpose and political will, a more equitable path is possible. As inequality lessened for decades before, supportive policies enabled the rise of a thriving middle class [ThePersistence in Gendering: Work-Family Policy in Britain since Beveridge]. By pursuing greater fairness once more, Britain can regain its balance.
Anacyclosis
It’s interesting in the current global political moment to look briefly at Anacyclosis. This is a political theory attributed to the ancient Greek historian Polybius, which posits that political systems evolve in a cyclical manner. The theory is based on the observation that governments tend to progress through six stages, each corresponding to a specific form of governance: monarchy, tyranny, aristocracy, oligarchy, democracy, and ochlocracy (mob rule). These stages are organized into three pairs, with each pair consisting of a ’good’ form of governance and its corresponding ’bad’ form.
Monarchy (benign) → Tyranny (corrupt): Monarchy is the rule by a single individual, such as a king or queen, who is considered to be a wise and benevolent ruler. However, as the monarchy endures, there is a risk that the ruler becomes corrupted or that a less competent or tyrannical successor takes over. This leads to tyranny, the degenerate form of monarchy, where the ruler becomes oppressive and self-serving.
Aristocracy (benign) → Oligarchy (corrupt): To counter the tyranny, a group of nobles or elites may overthrow the tyrant and establish an aristocracy, which is the rule by a select group of individuals who are considered wise and virtuous. Over time, the aristocracy may become more focused on their own interests and power, leading to an oligarchy. This is the degenerate form of aristocracy, where a small group of elites control the government for their own benefit.
Democracy (benign) → Ochlocracy (corrupt): The populace, dissatisfied with the oppressive rule of the oligarchs, may rise up and establish a democracy, which is the rule by the majority of the people through voting and participation in the political process. Democracy has the potential to create a fair and representative system of governance. However, as the democratic process becomes more susceptible to demagoguery, populism, and factionalism, it can devolve into ochlocracy or mob rule, where the government is influenced or controlled by unruly masses.
According to Polybius, these stages form a continuous cycle, as one formof governance gives way to another, and each form eventually becomes corrupted and degenerates into its corresponding ’bad’ form. The theoryof anacyclosis suggests that political systems are inherently unstable,with each form of governance containing the seeds of its owndestruction.
The World Economic Forum
The World Economic Forum (WEF) is a non-governmental organization founded in 1971 by Klaus Schwab. It is well known for its annual meeting in Davos, Switzerland, where world leaders, CEOs, and various stakeholders gather to discuss global issues and potential solutions.Although the WEF does not have direct control over policymaking, its influence on global policy arises from its role as a platform for dialogue and idea exchange, as well as its ability to bring together influential individuals.
As unelected technocrats, the WEF’s impact on global policy can be observed through these aspects:
Convening power: The WEF’s Davos meeting is a high-profile event that attracts prominent political figures, business executives, and other influential individuals. This ability to assemble people allows the WEF to initiate conversations on global issues, create networks, and establish connections among key players. These interactions can lead to ideas and initiatives that might eventually shape global policy.
Knowledge sharing and thought leadership: The WEF produces a range of publications, reports, and research that provide insights into various global challenges. By disseminating this knowledge, the WEF contributes to the broader understanding of complex issues and helps to inform policymaking by governments, businesses, and other organizations.
Agenda-setting: Through its conferences and publications, the WEF identifies and highlights emerging trends, risks, and opportunities, which can help to set the agenda for global policy discussions. By bringing attention to specific issues, the WEF can indirectly influence the priorities of governments and other decision-makers.
Public-private cooperation: The WEF actively promotes collaboration between the public and private sectors in addressing global challenges. By fostering partnerships and facilitating dialogue between these sectors, the WEF can help drive the development and implementation of policies that require cooperation between governments, businesses, and civil society.
Despite its influence, critics argue that the WEF’s position as unelected technocrats raises concerns about the organization’s legitimacy and accountability. They contend that the WEF’s ability to shape global policy without being directly answerable to citizens canundermine democratic processes and result in policies that prioritizethe interests of elites over the broader public. However, others arguethat the WEF’s role in facilitating dialogue and collaboration is essential for tackling complex global challenges that require coordinated action across sectors and borders.
Interesting for us the WEF recently released its annual Global RisksReport,which highlights various threats and challenges facing the world today,and which intersect with all of the narratives in this book. The reportdiscusses issues related to cybersecurity, public trust, and social cohesion, and underscores the importance of a comprehensive approach to addressing these challenges.
The WEF’s founder, Klaus Schwab, has previously argued for a “great reset” in society and the economy, which involves revamping various aspects of our lives, from education to social contracts and working conditions. This reset would require the construction of new foundations for economic and social systems.
The WEF Global Risks Report 2022 focuses on five main categories, which are also part of their “Great Narrative for Humankind” initiative:
Economy
Environment
Geopolitics
Society
Technology
The report emphasizes that the erosion of social cohesion has been a significant global issue since the start of the COVID-19 crisis. Inaddressing these challenges, the WEF suggests that public-private collaborations are necessary to ensure effective decision-making and to safeguard the future of humanity.
The report also highlights the increasing digital dependency that intensifies cyberthreats, as the WEF has long warned of the potential for a significant cyber pandemic. The rapid spread of a cyber attack with “COVID-like characteristics” could potentially cause more damage than any biological virus.
The WEF Global Risks Report 2022 delves further into the potential consequences of a cyber pandemic. In a section titled “Shocks to ReflectUpon” the report explores the possibility of a wide-ranging and costly attack that could lead to cascading failures in systemically important businesses and disrupt services, ultimately undermining digital transformation efforts made in recent year.
The report also emphasizes the need for governments to address cyberthreats and warns that without mitigation, the escalation ofcyber warfare and the disruption of societies could result in a loss oftrust in governments’ ability to act as digital stewards.
To better understand the risks associated with technology, the WEF report explores the concept of the fourth industrial revolution, whichSchwab believes will lead to the fusion of our physical, biological, and digital identities. This fusion will be facilitated by technologies suchas artificial intelligence, internet of things-enabled devices, edge computing, blockchain, and 5G. You can see they’re examining similar things to this book.
As explaining in this work, these technologies present numerous opportunities for businesses and societies, they also expose users to elevated and more pernicious forms of digital and cyber risk. The report also discusses the potential emergence of the metaverse, which could create new vulnerabilities for malicious actors by increasing the number of entry points for malware and data breaches, again a central theme of this text.
In light of these risks, the WEF report suggests that users will need tonavigate security vulnerabilities inherent in complex technologies characterized by decentralization and a lack of structured guardrails or sophisticated onboarding infrastructure.
The report also touches on the issue of digital identity as we do. Theyview digital identity is a crucial component of accessing products,services, and information in a digital world, but again, this raises concerns about privacy, security, and the potential for misuse.
Finally, the WEF Global Risks Report 2022 addresses the issue of publictrust, noting that the growth of deepfakes and disinformation-for-hirecan deepen mistrust between societies, businesses, and governments. Wecan already see this starting to happen as Musk’s defence lawyers pointto possible deepfakeusearound video comments he is alleged to have made with regard to Tesla’ssoftware safety. To rebuild trust and social cohesion, the report callsfor leaders to adopt new models, look long term, renew cooperation, andact systemically. Quite what they think they can do in the face ofimages like the recent memes of the Pope is unclear9.1.
It’s absolutely crucial to note that the WEF is a powerful organisation,with global sway over policy, and is an enormous concentration of powerin the hands of unelected technocrats. The authors are very sceptical ofthe WEF, but this report highlights what both technocrats and policymakers are thinking. ![]./assets/pope.jpg Midjourney 5 fake images of The Pope Francis which are circulating as memes and show the power and the danger of the technology even at this early stage.
Money and The State
It seems a pretty reasonable that the best ‘systemic’ approach is a separation between major centralising forces such as state, church, and money. In practice we can see that globally, this isn’t the case, withbad hotspots of high corruption where all three meld together into kleptocratic dictatorships, or theocracies. For our purposes in the UKit’s useful to look at the concept of ‘austerity’.
Austerity is a term used to describe a set of economic policies that aimto reduce government spending and debt, often through cuts to public services and welfare programs. The concept of austerity has its originsin the 1920s, following the end of World War I and the economic crisisthat ensued. In the wake of the war, many Western European countrieswere struggling with high levels of debt and inflation. In response,governments began implementing policies to reduce spending and balance their budgets.
We have seen in the previous chapter that the concept of inflation itself is complex, and somewhat argued about still. Globally, on aggregate, the efficiencies of increasing technology are thought to be deflationary to the tune of between 3 and 5 percent annually, though this may radically spike up in the era of AI which will be covered later. This is counter to the current need for inflation to maintain debt repayments at a national level. Central banks manipulate interest rates to control inflation, aiming to keep it at sustainable levels.This process is necessary because as national debt and deficits grow,governments need inflation to prevent these debts from spiralling out of control. Higher inflation results in higher nominal GDP, which in turn increases the tax base, providing governments with the revenue needed topay down debt. To achieve this. The natural progression of humanity inherently deflationary, which forces central banks to print more money and further manipulate the monetary system in order to generate the desired inflation. This can be seen as a hidden tax on citizens, as itdevalues their money over time. The negative effects of this system are disproportionately felt by lower-income groups. As inflation rises, the cost of living increases, and many households struggle to make ends meet. This has led to a situation where households need multiple incomesto maintain their standard of living, forcing individuals to work longer hours and take on multiple jobs. As a result, people have less free time and energy to engage in rewarding activities or spend time with their families. This need for constant economic growth, as measured by GDP,has led to an environment where individuals are pushed to be more productive at the expense of their well-being. This has resulted in a society where many people are overworked and struggling to keep up with the rising cost of living. Booth discussed this at length in his book‘The Price of Tomorrow’. His is a rare thesis based around the ideas that technology is deflationary, that the marginal cost of goods trends over zero over time, and that the current system of debt and inflation are inherently unsustainable in the face of exponential technology improvements and automation. We discuss the concept of inflation and deflation, and both their risks throughout the book, but Booth has been very clear on this for many years. He thinks the current global monetary system ill-suited to handle the challenges and opportunities presented by deflation. He suggests that embracing deflation is the key to unlocking a prosperous and sustainable future. The book delves into the implications of deflation on various aspects of society, including wealth distribution, job markets, and the role of governments in shaping economic policies..booth2020price
In the 1920s, Keynes was one of the first to argue against the austerity measures which seem part of the cyclical play book around debt and inflation. He argued that that cutting government spending during a recession would only worsen the economic downturn. Instead, he advocatedfor increased government spending to stimulate economic growth and reduce unemployment. Despite this, many governments continued to implement austerity policies throughout the 1920s and 1930s.
In the post-World War II period, the rise of the welfare state and the adoption of Keynesian economic policies led to a shift away from austerity in many countries. However, in the 1970s, a new economic crisis led to a resurgence of austerity policies, particularly in theUnited States and United Kingdom. In the 1980s, the rise ofneoliberalism and the influence of economists such as Milton Friedman led to further cuts to government spending and the rolling back of the welfare state.
Today, the concept of austerity continues to shape economic policy,particularly in the wake of the 2008 financial crisis. Many governments,particularly in Europe, have implemented austerity measures in response to the crisis, leading to cuts to public services and welfare programs.The effectiveness of these policies remains a contentious issue, with some arguing that they have helped to reduce debt and stabilize economies, while others argue that they have led to increased inequality and hindered economic growth. Looking around at the state of the world,and the widening gap between the rich and the poor, it is possible tohave some sympathy with those who see patterns in the bahaviour of political leaders and the controllers of Western capital and global resources. The system seems engineered to reward a few. It is possibleto view ‘austerity’ as a means of political control of economic levers,in order to de-democratise populations. This mantra of ‘do more, consume less’ has perhaps become a defacto methodology to constrain popular ideas, diverting capital back into the hands of incumbents, land owners,and the politically and economically motivated.mattei2022capital It seems that the controlling nexus of this political framework globally isthe concept of the central bank, unelected technocrats whose tenures span across political administrations. Again, this can be traced back to the 1920’s. Hawtrey’s 1925 “Currency & Public Administration” asserts that a central bank should it“Never explain; never regret; never apologise.”, and speaks glowingly of the selfish market.hawtrey1925currency This economic model is referred to asDirigisme and feels increasingly the global norm.balassa2013theory Wecan perhaps here see the divergent point at which the lionization of the market began. Again, to be clear, the authors are not economists, but it does seem that in a global digital society there is room to explore moreequitable models of global value, governance, and trust.
Remember that these centrally planned national and global actions provide liquidity to the private banking sector. Like the digital money analogues discussed earlier in the book private banks operate fractional reserve banking. This is a banking system where banks hold only a fraction of the deposits they receive as reserves, while the rest is lent out to customers. This means that the money supply in an economy can be increased through the lending activities of banks (itself a complex inflationary force which devalues money over time, feeding back into the policy directives of the central banks. The fractional reserve system is useful for capital creation in times of growth, but relies on the confidence of the depositors. Historical examples of bank runs which threatened systemic risk or caused failures of the banking system include:
The Bank of United States crisis in the 1930s: This was the largest bank failure in American history and was a result of a bank run caused by rumours of financial mismanagement.
The Savings and Loan crisis of the 1980s: This was a result of a large number of failed savings and loan associations in the United States, which were caused by a combination of factors including poor management, risky lending practices, and a decline in real estate values.
The Nordic banking crisis of the 1990s: This crisis was caused by a combination of factors including a real estate bubble, high levels of debt, and a lack of regulation. It resulted in the collapse of several major banks in Sweden, Finland, and Norway, and had a significant impact on the economies of the region.
The Bank of Japan crisis in the late 1990s: This crisis was caused by a combination of factors including a real estate bubble, high levels of debt, and a lack of regulation. It resulted in the collapse of several major banks and had a significant impact on the Japanese economy.
The Asian Financial Crisis of 1997: This crisis was triggered by a devaluation of the Thai baht and quickly spread throughout the region, causing a number of major banks to fail. The crisis was largely a result of a lack of transparency and poor regulation in the banking industry.
The 2008 financial crisis in Iceland: This crisis was caused by the collapse of the country’s three largest banks, which had been engaging in risky lending practices and had accumulated large amounts of debt. The crisis had a devastating impact on the Icelandic economy and resulted in a severe recession.
The Global Financial Crisis of 2007-2009: This was a result of a widespread failure of the global banking system, caused by a combination of factors including the housing market collapse, risky lending practices, and a lack of regulation.
The collapse of Banco Popular in Spain in 2017: This was one of the largest bank failures in European history, and was caused by a combination of factors including a large amount of bad debt and a declining real estate market.
There were many bank runs on smaller rural banks in China during 2022. The financial conditions of Chinese banks are somewhat reminiscent of the 2008 American landscape.
In response to the Global Financial Crisis, many measures have been taken to shore up the banking system, including the creation of new regulatory bodies, the implementation of new regulations, such as theDodd-Frank Wall Street Reform and Consumer Protection Act, which increased the regulatory oversight of the banking industry. The introduction of stress testing for banks, to ensure that they have enough capital to withstand financial shocks, globally, has radically deleveraged banks from around 1:40 fractional reserve, to around 1:10.
There is increased political pressure to regulate the banking industry and prevent another financial crisis. However, there is also political opposition to excessive regulation, as some argue that it may stifle economic growth. There are concerns about rising levels of debt and the potential for another financial crisis.
It’s interesting that Brett, a former FDIC regulator believesthatthe 2008 US bank run was sparked by YouTube posts of queues forming at banks. He says those that formed the initial lines carried memories of the great depression, but that once YouTube started showing the footage more broadly the contagion struck. In the world of instant messaging media today we can perhaps see how this might happen again. More recently, the 2023 ‘wobble’ in global banking caused by the collapse ofAmerica’s 5th largest bankSVBhas precipitated strong intervention by the federal government, who haveopted to ‘backstop’ investor deposits. In the midst of this potentialcrisis it it notable that TikTok (now arguably the world’s most popularsearchengine)is carrying millions of hashtag references tobankruns. Senator Kelly inthe USA allegedlyinquiredabout the potential for limiting such references on social media, and aUK minister is asking for securityservicesto examine the risks of the Chinese application. The perhaps reflects concern about algorithmically driven geopolitically motivated threats tothe banking system.
There is a growing awareness of the role of banks in the economy, and agrowing desire for greater transparency and accountability. There isalso a growing mistrust of banks, particularly in light of the GlobalFinancial Crisis. As we have seen, the advent of new technologies, suchas blockchain CBDC, and fintech, is changing the way that banks operateand interact with customers. This presents both opportunities andchallenges for the banking industry. As a final controversial aside,there is industrysuspicionthat the collapse of SVB has been used as cover to close the final USbank servicing crypto, effectively decapitating the banking rails of the industry, and forcing it overseas. Were it not for the credibility ofthe people making these claims, this would seem pretty wild, but the prevailing winds are surely blowing against the disruptive potential ofa money system which is beyond the control of legislators.
Government over-reach through bureaucracy
As an contextual example of the soft power which political apparatus uses to influence emergent human behaviour and their markets it is useful to look again to the USA. In 2013, the Obama Administration,faced with a divided Congress, resorted to using the banking system as a means to implement policy through non-traditional channels. This effort,known as Operation Choke Point, was a continuation of their success in cutting off the offshore online poker industry from banking services.Initially, the crackdown was aimed at the payday lending industry, but it soon expanded to include gun sales and adult entertainment, and eventually up to 30 different industries.
The rationale behind Operation Choke Point was to target banks that facilitated fraud, as indicated by a high ratio of fraud and disputes.However, the operation soon evolved into a redlining of industries basedon nothing more than the perceived risk of reputational harm. Financial institutions were investigated without any evidence of losses.Throughout the entire operation, there was no new legislation or written guidance issued. Banks were simply warned of increased regulatory scrutiny if they did not comply.
Major banks continue to deny services to industries such as firearms and fossil fuels, and they continue to assign higher risk ratings to industries that may face government criticism, even in the absence of any official guidance. This utilisation of the financial system as a means of driving change is seen by some as a legitimate, if not ideal, mechanism; as just one more type of market actor. Regardless of one’s political perspective, it is important to consider the moral hazard of bypassing traditional political channels and using bureaucratic mechanisms as a means of affecting change in the free market. It is important to consider how the power of these tactics might be used in the future by opposing political groups. For example, supporters of Operation Choke Point who were in favour of increased financial pressure on the oil and gas industry may not feel the same if the same techniques were applied to organizations like Planned Parenthood. From this perspective, the tactics used by Operation Choke Point can be seen as undemocratic, regardless of who is deploying them. Bringing this back to our study of new financial tooling in crypto we can look to recent events:
January: Some banks start to wind down activity in the crypto industry
January 21st: Binance announces its banking partner, Signature Bank, refuses to process Swift payments for less than $100,000
January 27th: Federal Reserve denies Custodia Bank’s application to access Federal Reserve System
January 27th: Federal Reserve denies Custodia Bank’s application for a master account
January 27th: Federal Reserve releases statement discouraging banks from holding crypto assets or issuing stable coins
January 27th: National Economic Council issues policy statement discouraging banks from transacting with crypto assets or maintaining exposure to rypto depositors
February 2nd: DOJ announces investigation into Silvergate Bank over dealings with FTX and Alameda Research
February 6th: Binance announces suspension of USD bank transfers to and from offshore exchange
February 8th: Binance announces search for another banking partner
February 7th: Fed’s policy statement enters Federal Register as a final rule
Two outstanding applications for National Trust Bank licenses from Anchorage and Paxos likely to be rejected by the OCC
Banking services becoming increasingly difficult for crypto firms, some startups will likely now not make the attempt
It seems that in the absence of democratic the SEC is attempting to use their tools to control and centralise the ‘ramps’ into and out of digital assets, and the rules around holding them for investors. The SEC has proposed a new rule that would require registered investment advisors to use qualified custodians for all assets, including cryptocurrencies. The intention behind this proposal is to improve investor protection by mandating that custodians hold customer assets in segregated and identifiable accounts. However, critics argue that this proposal would limit the number of qualified crypto custodians and deter investment advisors from advising their clients on crypto. The few banks with the necessary technical capabilities and regulatory approvals will have a monopoly on crypto custodial services, while exchanges without a banking license or trust bank will likely lose out. The proposal assumes that crypto assets are securities without going through a process to determine that. The outcome of the proposal will depend on the stringency of the SEC’s qualified custodian registrations. The proposal is currently in a 60-day public comment period before the Commissioner should another vote on whether to pass the rule.
Caitlyn Long explains that the proposed rule would not necessarily kill crypto custody, but would be a move against State Charter trust companies. She points out the big issue with the proposal, which is the requirement for custodians to indemnify for negligence, recklessness, or willful misconduct. This would apply to all asset classes, including commodities and crypto, which could kill the custody business broadly. The SEC proposal would apply the custody rule to all asset classes ,including commodities and crypto, which is okay, but the SEC also wants custodians to indemnify the full asset value for losses in which the custodian played any role, even for physical assets like oil, cattle, and wheat. This would upset long-standing insurance terms and could cause huge pushback from the banking, Wall Street, commodities, and crypto industries. Sarah Brennan believes that the proposal represents continued governmental efforts at denial of service attacks on crypto, and that the SEC’s approach only seeks to chill digital asset markets. She and the Republicans on the House Financial Services Committee are urging stakeholders to submit public comments on the proposed amendments to ensure the custody rule for investment advisors is modernized appropriately. The U.S. Internal Revenue Service plans to hire nearly30k new staff and technology over the next two years, spending $80 billion to improve tax enforcement, much of it focussing on crypto markets. It might be that the industry follows the prevailing winds and pivots to the East. As usual, none of this particularly impacts our use case and thesis.
Global monetary policy
The term “don’t fight the Fed” has been used in trading circles for many years. Owing to the pre-eminent role of the dollar in global market sactions of the political and central banking bodies which impact the dollar always have global reach. It is worth knowing that these decisions are usually contested, and worse, the power of the decision makers seems rooted in their narrative impact. It’s a pretty terrible system given the impact on billions of lives. The Federal ReserveSystem, which is comprised of a Board of Governors, 12 regional banks,and an Open Market Committee, is a privately-owned central banking system in the United States. The member banks of each Federal ReserveBank vote on the majority of the Reserve Bank’s directors and the directors vote on members to serve on the Open Market Committee, which determines monetary policy. The president of the New York FederalReserve Bank is traditionally given the vice chairmanship of the OpenMarket Committee and is a permanent committee member. This means thatprivate banks are the key determinants in the composition of the OpenMarket Committee, which regulates the entire economy. The FederalReserve is an independent agency and its monetary policy decisions donot have to be approved by the President or anyone else in the executive or legislative branches of government. The Fed’s profits are returned tothe Treasury each year, but the member banks’ shares of the Fed earnthem a 6% dividend. The 2008 financial crisis and subsequent bailouts exposed the fundamental conflicts of interest at the heart of theFederal Reserve System, where the very banks that caused the crisis were the recipients of the trillions of dollars in bailout money. These conflicts of interest were baked into the Federal Reserve Act over 100 years ago and are a structural feature of the institution. The concentration of power within this group is staggering.
