5 min read

Vellir #6 → Politics, power and crypto

The geopolitical case for crypto and web3 – protecting freedom of speech and promoting the rule of law
Vellir #6 → Politics, power and crypto
Photo by NASA / Unsplash

In June 2013, my friend Alec Ross and I wrote an article for The Daily Telegraph about the emergence of Bitcoin, and the challenge it presented for the G7 nations gathering that year in Loch Erne, Northern Ireland.

We had spotted an advert, placed in the official Summit Brochure by Mt Gox, then the dominant Bitcoin exchange, handling more than 70 per cent of all global Bitcoin transactions. Bitcoiners have never lacked ambition for the cryptocurrency, and taking an advert in the G7 brochure was a statement of intent which, Alec and I suggested, merited serious attention.

Eight months later, however, Mt Gox abruptly stopped trading, brought down by poor security and the theft or loss of huge quantities of Bitcoin from its accounts. Some of the buzz around Bitcoin dissipated in parallel, and the early excitement about a crypto disruption of global financial systems faded too. Our advice to G7 policy-makers that they should take decentralised money seriously sounded, well, a bit naive.

Nine years on and cryptocurrencies are firmly back on the agenda: they advertise at the Superbowl, sponsor F1 Grands Prix and, at the end of 2022, the world's biggest sporting event, the FIFA World Cup. On this evidence you might well think that crypto has gone Main Street and mainstream, like McDonalds and Coca-Cola, but you would be wrong.

In most of the G7 nations, policy-makers like many others have been grappling with new issues as the value of cryptocurrencies and the new businesses built around them have surged to eye-watering levels, literally minting hundreds of new billionaires, before falling precipitously again as they have done in the past six months (see Vellir #5 for commentary on the most recent crypto crash).

The policy response has been schizophrenic, as competing interests and political agendas wrestle with new technologies, new asset classes, and new business models (some of which, until last week at least, defy orthodox economics), and others carrying the vague whiff of illegality that lingers from Bitcoin's early reputation as a safe harbour for criminals. Why, then, do we think it is so important that the 'G7 industrialised nations', who have in some instances fallen behind their G20 counterparts, get their acts together in 2022, and begin taking crypto more seriously?

Well, our answer might not be the one you'd expect. Despite the turbulence of the past week, the crypto market is exploding, attracting new users at a faster rate than the internet did in the 90s. Adoption is rapid in all geographies and demographics. And with this comes very real risks for consumers, as the collapse of the Terra stablecoin this week shows, to say nothing of the possible systemic risks presented in the medium term by a huge new asset class that is about as well-understood as credit default swaps were in 2006.

And yet there is a compelling geopolitical case for the G7 nations and our other democratic allies to embrace cryptocurrencies, in spite of their downsides. Since Mt Gox departed the scene in 2014, the crypto ecosystem has been on an absolute tear, both in terms of the value of crypto assets, but more importantly in the rapid pace of innovation and creativity that has followed, bringing cryptocurrencies to an ever-expanding international community. A number of players have emerged since 2014 to rival Bitcoin in terms of scale and significance, such as Ethereum, Cardano, Polygon, and Solana.  On top of these ‘layer one blockchains’ a multitude of applications and ‘layer twos’ are being built that bring decentralised products and services to businesses and consumers which promise to deliver on the ambitions of blockchain’s early advocates.

For our societies, this matters for the following reason: blockchains encode law, and cryptography renders it immutable and verifiable, without a central authority. The smart contracts built on blockchains are, effectively, the rule of law scaled to the internet, and made automatic. Naval Ravikant, a US entrepreneur and investor, expressed this succinctly on Tim Ferris' podcast #542, arguing that "Code is speech, and speech is ideas”, by which he means code is a form of speech, and speech gives ideas form.  Logically, therefore, cryptography plus decentralisation can protect the freedom of speech and ideas, a core objective of many crypto advocates.

The centrality to blockchain of freedoms governed by law should, we hope, make it clear why our alliance of democratic nations should embrace crypto: since the end of history, we have entered a new era of superpower competition and rejoined the battle of ideas and values. But our side has been on the retreat, and we've done ourselves few favours. Pushed back by the relentless march of China's vast and growing economy, some have dared to ask whether the authoritarians have it right after all, as we've watched the weak flames of freedom extinguished in Egypt, Syria, and Belarus; the Uighurs repressed in China; and now a liberalising, westward-looking Ukraine trampled under Putin's jackboot.

Yet the authoritarians fear crypto, as they once feared the growth of the internet. But where China found ways to control web2, limit its freedoms, disembowel its content, and exploit it for commercial advantage, web3 has freedom hard-wired in. Should we be surprised that China has already banned crypto transactions, or that its own Central Bank Digital Currency (CBDC) will further infringe freedoms? We will be returning to this specific issue in a future article, as well as how some of the tensions between sovereignty and crypto can be reconciled.

While the West’s politicians and diplomats have been wearily espousing the merits of democracy and capitalism to anyone who will still listen, the new world has been enthusiastically adopting these ideas in cryptographic form. It could be argued that wherever crypto has a foothold, the rule of law and the freedoms of speech and ideas are more likely to gain ground. Where crypto goes, so do the decentralised applications it enables, notably in the form of decentralised autonomous organisations (DAOs), entities that resist authoritarian control by design, and in which different forms of democratic legitimacy and accountability are being tested. Advocates of crypto have long championed its anti-censorship and anti-corruption properties, and while decentralised and anonymised payments present some real challenges for democratic states, the values of free societies are much closer to crypto than to the authoritarians.

Where is this happening? Well, according to the 2021 Crypto Index, published by Chainalysis, the trend is strongest in the emerging economies of Asia and the Global South, with the USA alone from the G7 among the top-20 nations by crypto adoption.

Source: Chainalysis

In the UK, we've spent years talking about the soft power of our ideas and values, and in 2022 we have had a nasty shock to discover that hard power still counts for rather more than we thought, and definitely more than the Premier League, for all its popularity. But almost unnoticed, our soft power, expressed through ideas and values embedded in hard code, is resisting, maybe even turning back the authoritarian tide.  Look, for example, at the small but fascinating role played by the crypto community and currencies in supporting Ukraine’s fight against Russia. The last thing we should do at this point is stop it.

Jonathan Luff is the co-founder of Epsilon Advisory Partners, and CyLon, advising and investing in outstanding technology companies since 2013. From 1998-2012 he served in the British Diplomatic Service, and as an advisor to the Prime Minister at 10 Downing Street, specialising in national security issues, technology and innovation.