Meltem Demirors questions Wall Street’s involvement in crypto

The union of cryptocurrency and Wall Street is much like a Medieval arranged marriage: A little bit of wealth is at stake but everyone seems miserable and most people involved are in need of a bath. Few are as upset about the whole thing as those who are involved in crypto for ideological reasons—or, at least, those who say they are.

That brings us to Meltem Demirors, chief strategy officer at CoinShares. A newly posted 37-minute in-depth interview with her on financial news channel RealVision [subscription required] is worth watching in its entirety even if one reaches different conclusions because she’s an articulate proponent of her viewpoints. Sure, her firm is all about offering products for those who want to trade in crypto in much the same way they trade other assets. However, Demirors repeatedly throws some shade at the “financialization” of digital assets.

“If we take 50% of the world’s Bitcoin and we put it in custody with a custodian that’s regulated by the New York Department of Financial Services, the Fed and all of the powers that be,” pondered Demirors 18 minutes into the video, “and we take these bitcoins, and we put them in a vault somewhere… and then we issue Bitcoin depository receipts—pieces of paper that allow us to trade the underlying bitcoins sitting in a vault somewhere—but we never actually exchange bitcoin on the Bitcoin network, is that still bitcoin?”

“These are the types of questions I want us to be asking,” she said. “By the way, as an asset manager, we are a part of the problem. I don’t claim to have a grand solution, but I think it’s important to ask ourselves as the industry grows, as the industry matures, and particularly as many Wall Street types come into the industry who don’t share our values, who don’t share our principles, I like to say they’re LARP-ing—they’re live action role playing.”

In other asset classes where paper is traded, such concerns generally aren’t on the mind of investors. For example, few would ask if grain futures that settle for cash are edible any more than they would question whether the underlying asset isn’t. Yes, gold bugs will shout from rooftops that the SPDR Gold Shares ETF (GLD) is merely paper gold and not the real thing—and one can’t watch Fox News or listen to conservative podcasts without hearing a pitch for services offering physical gold (at a markup, of course). But for the most part, such worries are not keeping traders up at night and GLD’s net assets are around $44 billion at the moment.

What makes Bitcoin and other digital assets so different? Perhaps it’s their history.

At the start of the interview, Demirors offered a long and interesting take on the role of cryptocurrencies as seen through the lens of Polybius’ anacyclosis theory of how political structures are sequenced (For those who want the Wikipedia version, it’s “1. monarchy, 2. kingship, 3. tyranny, 4. aristocracy, 5. oligarchy, 6. democracy, and 7. ochlocracy.”).

According to Demirors, we’re at “ochlocracy or ruled by mob, which is [when] the loudest voices are really ruling. That’s the age I think we’re in now with Twitter and social media and the way information spreads… most ‘information’ is factually incorrect, or based on assumptions rather than corroborated fact.”

“Think about [Bitcoin] through that lens of how humans organize and the tools we need to enable these different phases of human social organization,” she then said, “because it started with libertarians and anarchists.”

That’s a darker view of the current state of the world given just how good things really are. Also, it’s missing an important point as it relates to gold.

Later in the interview, Demirors was asked about the similarity between gold and Bitcoin. Both are subject to the “3Ds” she said—demand, depletion (that is, future mining), and a relationship with the U.S. dollar—in other words, the opportunity costs of holding one in place of keeping cash.

“What I think is really interesting about gold and Bitcoin as analogs is gold has value in the physical world,” said Demirors. “It has this cultural cache, and so much of gold is not just about this 3Ds, but it’s also the psychology of it, and the role that gold has in our history as humans, the role it has in our society and culture and the physicality of it.”

“I think Bitcoin is digital gold,” she declared. “It’s the digital analog to gold.”

And while that sentiment is almost a mantra in the cryptoverse, the two are barely comparable.

Gold’s key part in wealth in our society came only after its utility proved its value. It’s a malleable metal that doesn’t rust and looks pretty. For our primitive ancestors, that was like magic from whatever heathen gods to whom they sacrificed their children. It’s why they mined it and ultimately valued the yellow metal so much, something that persists to this day.

Bitcoin, on the other hand, has gained in value solely for its potential—but not yet established—utility.

Anecdotes about Venezuelans using crypto in the face of hyperinflation or Chinese billionaires secretly buying bitcoins to escape capital controls still haven’t really proven how Bitcoin replaces fiat as the go-to method of getting paid for most of the world. In theory, it should. But it hasn’t, much the same way as you could have an affair with Beyoncé because she is alive on earth and so are you—yet it’s not happening any time soon.

As the price of bitcoins fell in 2018, so too did the use of the cryptocurrency to pay for things. But what didn’t go down were transactions using Visa that year. That’s not a sign of a successful revolution that will change the way we store, account, and spend our wealth unless that revolution is one run by Woody Allen’s Fielding Mellish.

It’s worth noting that the interview with Demirors was released just as the G7 issued a report critical of stablecoins.

“The first wave of cryptoassets, of which Bitcoin is the best known, have so far failed to provide a reliable and attractive means of payment or store of value,” the report said. “They have suffered from highly volatile prices, limits to scalability, complicated user interfaces, and issues in governance and regulation, among other challenges. Thus, cryptoassets have served more as a highly speculative asset class for certain investors and those engaged in illicit activities rather than as a means to make payments.”

Stablecoins, on the hand, are a “more readily usable as a means of payment and store of value, and they could potentially foster the development of global payment arrangements that are faster, cheaper and more inclusive than present arrangements,” it added.

Yet the report spends 28 more pages spelling out all the trouble with stablecoins. In other words, crypto’s more compelling byproduct has its own headaches.

Critics will argue that the G7 is merely a pile of bankers and politicians white-knuckle-grasping the current economic system as the glorious cryptocurrency revolutionaries sharpen their guillotines.

Further, they’ll cite Wall Street and other big businesses’ dalliance with blockchain as proof this is indeed the future. JPMorgan Coin and Facebook’s Libra come to mind. And central banks have been poking around the idea of applying the technology to what they do.

Yet these are relatively minor investments compared to their total assets. Perhaps it’s a hedge just in case the overthrow really does happen. Or it’s a way to tell clients and customers that they’re on top of the latest trends in technology.

Or—most likely—there’s indeed some value in distributed ledger technology but only in instances where an Excel spreadsheet or, say, a LAMP stack wouldn’t be secure enough. Co-opting the best parts and leaving everything else in the dust is how successful businesses move forward.

And there’s one final problem with the gold-Bitcoin analogy and it’s one the “self-sovereign” types who embrace cryptocurrencies refuse to recognize.

When discussing the post-War Bretton Woods System based on the gold standard, one doesn’t say it “went away.” Instead, one says it “collapsed.” The U.S. was spending extravagant amounts on guns and butter and couldn’t stabilize things using price controls. And once the system collapsed, inflation soared.

But then a funny thing happened. Over time, inflation came under control. The dollar devalued but the economy in real terms grew over the decades. And when the Big One came—the Financial Crisis—the world didn’t end. Quantitative Easing may have flooded economies with cash but runaway inflation didn’t happen as feared by many (including this writer).

The first Bitcoin block included a message, “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” Many took that as a symbol for why Bitcoin was needed. Yet Bitcoin launched to solve a horrible problem that never came about—namely, a complete and irreparable economic breakdown.

Money supply, it turns out, can grow with an economy over the long run and it doesn’t always lead to people walking around with wheelbarrows full of paper currency to buy a loaf of bread. Meanwhile, price controls with a finite asset—such as gold— backing the currency aren’t the greatest bargain either.

In a world where Bitcoin replaces all currencies, however, that’s essentially what maximalists envision. And in that world, the current order of things—who has the most wealth—is replaced by a new order, where the early adopters then become the wealthiest. And if anyone has ever been to a party where they’re cornered by a Bitcoin maximalist, it’s like listening to a cult member talk about how they’re going to be saved and you won’t, because they saw the light before you did. No one likes those people, and most would rather be in an economic Hell so long as they don’t have to grant power to such annoying people.

So perhaps instead of lamenting or worrying about the “financialization” of crypto, Demirors should be singing hosannas to it. Speculation in Bitcoin—and it’s becoming almost entirely Bitcoin again—is what keeps its value there. It attracts capital in projects that may otherwise not get funding. It keeps interest alive in hopes of finding that one thing that will survive even if every other aspect of digital assets were to be abandoned.

Wall Street isn’t the enemy of cryptocurrency and blockchain technology so long as investors and speculators hope financial types will find something to gain from it. It’s the biggest thing keeping the whole project going right now.