Tether's revolution

The biggest obstacle for progress has been the lack of a culture of error correction, like the one that enabled science. Tether is showing us how the need for that culture could be bypassed.

A fascinating paper written by two cypherpunks in 2003 based on the work of Peruvian economist Hernando de Soto too, explains how the internet and computer networks could enable reputed institutions to extend their reach. An image I use a lot in my presentations is the following one taken from that paper:

Orange dots would be traditional institutions enabling cooperation for local users connected by solid lines while at the same time, they would enable cooperation as well among global users connected to them via the internet, that is, dotted lines.

So while Bitcoin enables the institution of wealth transfer independently from any traditional institution like laws, courts, lawyers, police enforcement, etc… fascinating things like extending the reach of existing traditional ones can be done too.

We can improve cooperation with fully trust minimized institutions like Bitcoin but also by letting the best traditional institutions worldwide compete with each other on internet rails, so that users worldwide can benefit from it.

Tether

Interestingly, fast forward 20 years and Tether is doing exactly that: it is extending the reach of the most reputed financial institution in the world, arguably the Federal Reserve and enabling users across all continents to cooperate with its most successful product, the USD.

So what is Tether’s value proposition?

Currencies are the liability side of a Central Bank’s balance sheet, while all kinds of debt mostly US Treasury securities and other debt instruments used to help the financial system manage liquidity are most of its asset side in the case of the US Federal reserve.

Those debt assets are valuable when debts get paid, which happens when there is rule of law.

So essentially what makes the USD valuable is the US’s rule of law.

Rule of law is what happens when institutions and individuals follow fair, transparent and consistently applied rules and protocols. The US courts, laws, police enforcement, regulators and supervision, etc… are what makes the USD valuable.

Outside of the West rule of law is scarce, and so their local currencies have little value and cooperation is hard to achieve, which then stagnates progress.

With a secure and trust minimized enough blockchain, you can enable people in poor rule of law countries to enjoy the benefits of someone else’s rule of law.

What tether is effectively doing is exporting the US’s rule of law worldwide.

This is revolutionary in my opinion and the value it creates is astronomic, well worth those billions that this +100 people company generates per year.

Up until recently, the only way to enjoy evolved institutions was to have Western culture locally. Internet, computer networks and cryptography are letting many countries bypass the need for it.

Sending western soldiers and tanks doesn’t enable democracy in many developing countries because institutions need to evolve organically in a process of error correction.

For the same reason, you just can’t drop top-down an evolved institution in a country that didn’t do the leg work of getting there organically and expect it to thrive overnight.

This is in my opinion the same reason why international institutions like the UN, IMF, World Bank, EU, are a shitshow. They haven’t evolved organically to fix cooperation problems among different cultures.

Instead, Western governments thought after WWII that they could just drop them on everyone and expect legitimation over night. But that is not so. Institutions need to have consensus driven sources of truth and many countries out there are outright dictatorships. There is frequently no such a thing as consensus out there.

UN or EU have a hard time finding legitimation from citizens. Bureaucrats on the other hand, are happy to keep maintaining their sweatshop running for as long as they are paid well.

But you can instead let folks embrace an institution organically bottom up and see what happens and Tether has already proven this to be the right path.

That makes me think, things are going to get deeply cyberpunk, understood as this mixture of high tech capabilities with dystopian societies where a few will benefit from mastering these advanced cooperation tools.

And that benefit will happen regardless of where you were born: ovarian lottery will be less and less relevant and this should push countries to be less equal within themselves but way more equal among them.

So what about Western Countries?

I ignore a lot about the impact of regulations etc… but I believe that while non Western countries will benefit the most, IMO the US government will clearly benefit from people buying USDt that will make Tether back it up with more and more treasuries, consequently adding demand to its debt.

If there is demand for that debt, that is equivalent to decreasing the cost of it for the USA. By the way, if you add some tariffs to the mix and manage to cool down the economy, chances are rates will drop too, but that’s another story I’m not familiar enough with.

What about Europe?

My current hypothesis is that there will be little room for 2nd best global currencies because when the competing landscape is not protected by your local laws, runs on internet rails and is protected instead by nothing, then nothing will be able to protect your currency’s market cap.

In times of uncertainty trust minimization becomes more valuable and having a (even if small) position in Bitcoin is a good alternative.

European authorities could follow the Orwellian route but since the US benefits from Tether existing, what are the chances of Europe succeeding at trying to stop it?

Note: I had almost already clicked on the send button when I just read this, which completely validates this thesis by making stablecoins not only legal but something very straightforward to create in the USA. In my opinion this piece of news is HUGE, there is no way back after this. It’s day 0 for currency wars and I expect a massacre for second bests.

If local regulations become very restrictive, Tether in Europe would exclusively be used in the black markets and those are not negligible. In Spain the black market economy is estimated to be around 20%-25% of the GDP and I suspect other Southern European friends are not far from that figure, precisely countries where tourism is very large, people that will benefit from bringing USDt and not even bother to exchange or pay with credit cards.

So in my view, and again this is highly speculative, pure unvalidated conjecture in fact, Tether could become a de facto black money in Europe, impacting to a great extent public sector economies and governments ability to raise taxes or censor multiple other things.

If you think about it, more and more people use digital payment rails instead of cash and the reason is not because they don’t find privacy or avoiding taxes interesting, in my opinion it’s just because digital payments are way more convenient, in the same way spotify costs money but it’s way more convenient than free p2p music file exchanges.

So if you add cash properties to digital payments with a better currency with better network effects, then the value proposition is something not to be ignored.

Tether is also taking over developing countries one by one. I once even heard that Tether is already the official currency of an opposing guerrilla in some African country.

If that keeps happening, for all the aforementioned reasons, chances are more people in developed countries other than the US will lean towards holding increasing shares of their assets in USDt and if that’s the case we could see an emerging gigantic parallel institution for money in the West, in the same way black markets emerge when regulated ones don’t work well enough.

In other words, we could have the legal A money institution called the EURO we’d be forced to use in our daily and official transactions, while we’ll hold some Tether as a way to hold value and to avoid certain censorship and perhaps taxes.

Parallel institutions are not bad or something not desirable: parallel institutions are just the result of the fact cooperating is more profitable than not cooperating and the institution that enables that cooperation with the lowest friction and largest network effects is likely to benefit the most.

Secondary order consequences

If I’m right and it’s a big IF, then the power of our Euro bureaucrats could decrease and the power of European citizens could increase.

That could mean a higher cost of debt for Europe, which at the same time could force our governments to be better with their budgets. This could be good for European citizens in terms of more freedom and worse for bureaucrats.

Cheap debt for the USA could be good for its government but bad instead for its citizens because cheaper debt could make US politicians artificially less accountable for bad management of public accounts.

But if you think about it, US citizens have already been paying for decades a fair amount of their taxes to finance their military. We’re just now changing a top down military approach for a bottom up digital dollar approach. It doesn’t mean military spending could go down any time soon because deterrence is the Western military’s main goal. And as I’ve explained a few times in the past, since violence is the institution of last resort, it’s important that if international institutions keep failing badly, that a Western country holds the most important military power.

Only Chinese and Russian autocrats will not benefit from this, because everywhere, people prefer to follow rules rather than rulers.

I have no doubt about is that this is a huge win for the whole world and I hope the digital institution of financial markets will follow.