[Plura-list] Money is power; When crypto-exchanges go broke, you'll lose it all

[Cory Doctorow]

Read today's issue online at: https://pluralistic.net/2022/02/03/liquidation-preference/

Today's links

* Money is power: A political economy parable (with a side of environmental racism).

* When crypto-exchanges go broke, you'll lose it all: The fatal flaw in the "neither fish nor fowl" gambit (there is such a thing as society).

* This day in history: 2017

* Colophon: Recent publications, upcoming/recent appearances, current writing projects, current reading

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✋🏽 Money is power

"Political economy" may sound like an obscure technical matter, but it's a really very simple (and incredibly important) idea: That the economy is inevitably political, and there is no way to depoliticize economic theory.

That is, every aspect of economics - taxation, antitrust, contract and labor law, etc - is fundamentally political. There is no objective perch on which an economist can stand and decide which tradeoffs are empirically best.

What's more, any claim to about such a neutral test of economics is itself political: when economists assert that "Pareto optimal" is the same as "fair," they're saying that the people who lose in a Pareto optimal arrangement *should* lose.

This may strike you as incredibly obvious, but if so, you're probably not an economist. The neoliberal economic project over the past 40 years has been to assert that an economic system that benefits the rich is also the fairest economic system, and that any attempt to intervene to produce a more even wealth distribution pollutes our economy with "politics."

This claim to objectivity is a familiar rhetorical cheat. Think of the machine learning hucksters who claim that "math can't be racist" so we should buy their automated sentencing, predictive policing, hiring and lending algorithms.

Denying political economy is particularly useful if you are in the "hard" sciences that deal with mathematical models. It's a great way to sweep the problem of quantifying fundamentally qualitative matters under the rug. Like, "We asked you how much pain you were experiencing on a scale of 1-10 - why would we ask you to *describe* your pain? We can't do math on a description!"

This pretense of objectivity was a source of real mischief through the pandemic, where quants pretended (for example) that "contact tracing" (which involves person-to-person rapport to understand the context of exposure) was the same as "exposure notification" (measuring how long two Bluetooth radios were in range of one another):

https://locusmag.com/2021/05/cory-doctorow-qualia/

40 years ago, the New Deal antitrust policy - which considered the impacts on workers, communities, national prosperity, suppliers and customers - was supplanted by the Chicago School's "consumer welfare standard." This standard uses mathematical models that are claimed to measure whether monopolies are "efficient" or whether they abuse their power to raise prices or lower quality.

Consumer welfare was sold as an objective, "economic" replacement for antitrust's subjective, "political" standard. In reality, it was anything but. The consumer welfare standard was deliberately designed to allow monopolies to form. One of its architects, Frank Easterbrook, laid down the doctrine that it was better to let a few "bad" monopolies form than to accidentally crush a "good" monopoly. Easterbrook claimed to be operating objectively, but really, he was dressing up his ideological preference for corporate rule - the right wing ideology that we're all better off when "great men" are in charge - as mathematics.

Easterbrook's analysis had a lot of serious deficiencies, but the most important one was the core question of political economy: how will monopolies and the state interact with one another.

What Easterbrook missed is that big businesses can extract higher profits (because they can force lower wages on workers, lower margins on distributors, and higher prices on buyers). These excess profits - "monopoly rents" - can be invested in political spending. Political spending can be converted to policies that allow large firms to do things that harm others and benefit themselves.

Like, here's a perfect microcosm. There are two ways to cultivate sugar-cane. You can burn it to get rid of the outer leaves, or you can spend a little more to cut away the leaves after the harvest. The former is cheaper for growers, but it imposes a heavy cost on surrounding communities, who get asthma and other chronic breathing diseases from the soot.

Last year, Florida's state legislature passed a bill to prevent "nuisance suits" against farmers. These "nuisance suits" were actually brought Black and brown families who live in the smoke-plume of cane-burning, suing giant, wildly profitable cane growers.

The bill passed. The families who are burdened with lifelong, debilitating disease by the growers' decision to goose their fat margins by a few points lost.

One of the fiercest fighters against those families was Joaquin Almazan, who was elected city commissioner of Belle Glade, the capital of cane, just a few weeks before the vote.

In Propublica, the *Palm Beach Post*'s Hannah Morse lays out the political economy of Almazan's campaign: the way that monopoly was converted to money, money to power, power to policy:

https://www.propublica.org/article/how-the-sugar-industry-makes-political-friends-and-influences-elections

Almazan ran against Steve Messam, who wanted to end cane burning. Each raised $16,000, 500% of the typical city commissioner's campaign budget in Belle Glade. Messam raised his historic funding from 200 small-dollar donors. Almazan got his money from 40 rich people connected to the sugar and farming lobbies (these same donors spent lavishly on candidates for two other commission seats).

In his campaign against the families sickened by cane burning, Almazan claimed that they were being used as a pretext by "wealthy, out-of-town, so-called environment special interest groups." It wasn't true, of course. The environmental groups that contributed to Almazan's opponent were local, like the Florida Sierra Club.

Almazan's victory wasn't just down to the 40 people who gave him $16,000 for his campaign. A PAC called "Glades Together" spent lavishly to support his campaign, thanks to its backers: Liberate Florida backed by the Florida Prosperity Fund, backed by...U.S. Sugar. In other words, a monopolist bought the election.

U.S. Sugar's workforce is partly organized under the International Association of Machinists. The local has thrown its lot in with U.S. Sugar, allowing the monopolist to divide workers from locals - many of whom are also workers in the fields. This cozy relationship between unions and corporations is another casualty of monopoly: when a company is the only employer, the union will stan for it, even if that means dooming its own members and their kids to a lifetime of debilitating respiratory illnesses.

Almazan and his colleagues then lobbied the state legislature, claiming to represent the interests of residents of the Glades. It worked.

This is pure political economy. When an industry is monopolized, it has fewer executives who have to solve the problem of agreeing on a course of action. It also has more money to spend on pursuing that policy. The new policy allows the company more freedom to externalize its costs - saving pennies on cane processing while costing the community millions in health problems. These additional profits can be diverted to more lobbying.

This is the biggest problem with the "consumer welfare" standard of antitrust enforcement. It's the inevitable outcome of allowing businesses to present their side as "empirical" and the public's side as "subjective."

"Political economy," in other words.


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✋🏽 When crypto-exchanges go broke, you'll lose it all

If you've spent much time around cryptocurrency people, you've probably heard a rant or two about "sound money" and the need to "depoliticize money." This is a foundation of blockchainism: the belief that money is born separate from states, and states invade on the private realm when they "meddle" in the money system.

There are at least two serious problems with this ideology. First, it's plain wrong on the historical facts. Money did not emerge from barter systems among people. Money was and is a product of states:

https://www.theatlantic.com/business/archive/2016/02/barter-society-myth/471051/

But even if you stipulate that money didn't originate among private markets (and I'm fully aware that there are many Reply Guys who will @ me to tell me that they disagree), there's another serious historical problem with "sound money."

It's this: central banks didn't emerge to usurp the private sector's control over money. Central banks were created because without them, finance was subject to wild, terrifying, ruinous boom/bust cycles. What's more, without a central bank, money *was* subject to naked political meddling, which central banks (sometimes) moderated.

The idea that a society can survive without a state or other actor that can create and destroy money based on prevailing economic conditions is both ahistorical and impractical. If we all adopted cryptocurrency tomorrow, there'd still be an elastic money-supply, as Yanis Varoufakis explains in this interview with The Crypto Syllabus:

https://the-crypto-syllabus.com/yanis-varoufakis-on-techno-feudalism/

"What would banks do? They would lend in Bitcoin, of course. This means that overdraft facilities would emerge allowing lenders to buy goods and services with Bitcoins that do not yet exist. What would governments do? At moments of stress, they would have to issue units of account linked to Bitcoin (as they did under the Gold Exchange Standard during the interwar period). All this private and public liquidity would cause a boom period before, inevitably, the crash comes. And then, with millions of people wrecked, governments and banks would have to abandon Bitcoin."

The blockchainist's insistence on "de-politicizing" money is a dead-end, in more ways than one. Actual money, run by actual states who charter actual banks, has rules - reporting rules, insurance rules, taxation rules.

The stated dream of the blockchain is to replace those rules with "private agreements," but if you but scratch the surface of this dream, you find the age-old dream of the goldbug: money without taxation.

Thus it is that crypto people have long insisted that their coins and tokens are neither fish nor fowl: neither a currency subject to currency controls, nor a regulated security, not an asset subject to capital gains. The ideal crypto asset is in a state of durable quantum indeterminacy, immune to collapse even when it is observed by a tax-collector.

This may (may!) make crypto immune to some kinds of tax and regulation, but it also means that crypto may be exempt from the *protections* that are afforded to people who own conventional assets.

Writing in Credit Slips, Adam Levitin examines the (lack of) bankruptcy protection for people who entrust their assets to crypto exchanges. It's grim reading.

https://www.creditslips.org/creditslips/2022/02/what-happens-if-a-cryptocurrency-exchange-files-for-bankruptcy.html

Almost everyone who uses crypto relies on these exchanges. In theory, it's possible to manage all your own keys and transactions, but in practice, it's a complex, error-prone, high-stakes business. Even if you can manage it, the people you're hoping to transact with likely can't, meaning that nearly everyone involved with cryptos has an account with one or more exchanges.

And the exchanges don't have a great history. Mt Gox, the first successful exchange, collapsed in a fraud-riddled bankruptcy. Quadrigacx, Canada's largest exchange, collapsed when its founder died without any succession plan for the keys needed to access the hundreds of millions he controlled:

https://newsinteractives.cbc.ca/longform/bitcoin-gerald-cotten-quadriga-cx-death

Crypto exchanges, projects and communities keep vanishing overnight as their founders are revealed to be scammers engaged in "rug pulls," or mere incompetents in over their heads. When that happens, the informal nature of these projects leaves the backers with little or no recourse.

https://web3isgoinggreat.com/

All this is in stark contrast to the traditional finance sector - itself hardly a paragon of fairness and probity, but still far more legally responsible to depositors than, say, Coinbase.

Let's start with that word "depositor." Levitin makes a good case that legally, when you "deposit" a crypto-coin with an exchange, it's a sale, not a deposit, with the "possessory interest" going to the exchange, not you.

If the exchange goes bust, a "bankruptcy estate" is created, and those coins become its property, as do any coins that have been staked (placed in escrow) via the exchange.

Thus you are not a *depositor* in the exchange, you are a *creditor*. When trustees oversee a bankruptcy, they line up the creditors based on their liquidation preference. Secured creditors get first dibs on whatever is in the estate. Once they've been satisfied, the remainder is divvied up among the unsecured creditor.

In the case of a crypto exchange, the secured creditors are the funds, investors, and financial institutions that extended credit to the exchange. You and your fellow "depositors" are unsecured creditors. You are last in line to gain access to the bankruptcy estate's assets. If those assets run out before it's your turn, you get *nothing*.

But let's say you *were* entitled to something when the bankruptcy is finalized - your assets are frozen until that finalization takes place. And if the crypto exchange just happens to be doing a lot of deliberately opaque, complex stuff to dodge taxes and regulation, you might have a *very* long wait.

How long? Well, Lehmann Brothers incorporated over 6,000 subsidiaries and sister companies in over 100 countries in order to duck taxes, oversight and regulation. When it collapsed, it took more than *five years* for the bankruptcy trustees to unwind all this complexity. For half a decade, all those funds were frozen.

And even if you do get paid, you'll be paid at the dollar value of your assets on the eve of the collapse. If your coins double in value over the years it might take to unwind a complex bankruptcy, your pro-rated share will be based on their value when the exchange tanked.

It gets worse. If an exchange declares bankruptcy, it can legally claw back many of the withdrawals its depositors made over the 90 days before the bankruptcy. So if you think Coinbase is looking shaky and take your money out, you'd better hope they last for at least three more months, or you might have to give the money back to the bankruptcy trustees.

Not every bankruptcy locks up every asset. There are exemptions for assets related to conventional securities contracts, swaps, repos and forward contracts that let their owners get them back before the bankruptcy is settled. But none of that applies to exchanges.

Likewise, clawbacks might be prevented if cryptos were definitely regulated securities. Making that happen would involve a bunch of former exchange customers going to court to argue that these were regulated securities all along. You can bet that if they do that, everyone who hasn't lost their crypto will go to court to argue the reverse, because otherwise, they lose all their regulatory and tax advantages and might have to pay whacking great sums.

Keep in mind, all of this is a *feature* of cryptos, not a bug. The point of the sound-money delusion is to take money out of the realm of democratic state control and move it into a wild west of caveat emptor and smart contracts.

The current protections for bank depositors were established after ghastly crises that destroyed lives. The goldbug/cryptobug's insistence on ignoring that history means that they are doomed to repeat it - and take all the naive people who buy into their "investment" schemes with them.

  

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✋🏽 This day in history

#5yrsago Dump of Iphone-cracking tools shows how keeping software defects secret makes everyone less secure https://www.vice.com/en/article/5355ga/hacker-dumps-ios-cracking-tools-allegedly-stolen-from-cellebrite

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✋🏽 Colophon

Currently writing:

* Picks and Shovels, a Martin Hench noir thriller about the heroic era of the PC. Yesterday's progress: 563 words (58637 words total).

* Moral Hazard, a short story for MIT Tech Review's 12 Tomorrows. Yesterday's progress: 304 words (4531 words total).

* A Little Brother short story about remote invigilation.  PLANNING

* A Little Brother short story about DIY insulin PLANNING

* Spill, a Little Brother short story about pipeline protests. SECOND DRAFT COMPLETE

* A post-GND utopian novel, "The Lost Cause."  FINISHED

* A cyberpunk noir thriller novel, "Red Team Blues."  FINISHED

Currently reading: Analogia by George Dyson.

Latest podcast: A Bug in Early Creative Commons Licenses Has Enabled a New Breed of Superpredator (https://craphound.com/news/2022/01/30/a-bug-in-early-creative-commons-licenses-has-enabled-a-new-breed-of-superpredator/)

Upcoming appearances:

* Boskone 59 (Feb 18-20)
https://boskone.org/program/schedule-text-view/

* Dangerous Visions and New Worlds: Radical Science Fiction, 1950 to 1985 (City Lights), Feb 27
https://citylights.com/events/dangerous-visions-and-new-worlds-radical-science-fiction-1950-to-1985/

* Emerging Technologies For the Enterprise, Apr 19-20
https://2022.phillyemergingtech.com

Recent appearances:

* The End of Uber (The War on Cars)
https://thewaroncars.org/2022/01/26/the-end-of-uber-with-cory-doctorow/

* Moral Panic (Drug Science Podcast)
https://www.drugscience.org.uk/podcast/53-moral-panic-with-cory-doctorow/

* It Could Happen Here podcast
https://www.iheart.com/podcast/1119-it-could-happen-here-30717896/episode/an-interview-with-author-cory-doctorow-90500468/

Latest book:

* "Attack Surface": The third Little Brother novel, a standalone technothriller for adults. The *Washington Post* called it "a political cyberthriller, vigorous, bold and savvy about the limits of revolution and resistance." Order signed, personalized copies from Dark Delicacies https://www.darkdel.com/store/p1840/Available_Now%3A_Attack_Surface.html

* "How to Destroy Surveillance Capitalism": an anti-monopoly pamphlet analyzing the true harms of surveillance capitalism and proposing a solution. https://onezero.medium.com/how-to-destroy-surveillance-capitalism-8135e6744d59 (print edition: https://bookshop.org/books/how-to-destroy-surveillance-capitalism/9781736205907) (signed copies: https://www.darkdel.com/store/p2024/Available_Now%3A__How_to_Destroy_Surveillance_Capitalism.html)

* "Little Brother/Homeland": A reissue omnibus edition with a new introduction by Edward Snowden: https://us.macmillan.com/books/9781250774583; personalized/signed copies here: https://www.darkdel.com/store/p1750/July%3A__Little_Brother_%26_Homeland.html

* "Poesy the Monster Slayer" a picture book about monsters, bedtime, gender, and kicking ass. Order here: https://us.macmillan.com/books/9781626723627. Get a personalized, signed copy here: https://www.darkdel.com/store/p1562/_Poesy_the_Monster_Slayer.html.

Upcoming books:

* Chokepoint Capitalism: How to Beat Big Tech, Tame Big Content, and Get Artists Paid, with Rebecca Giblin, nonfiction/business/politics, Beacon Press, September 2022

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