Thoughts on the 2022 Iranian Protests

As you may have noticed, I have been relatively silent on the Iranian protests, but this does not imply any indifference. I have been reticent because I believe it is not wise to take part in a game the outcome of which seems to be lose-lose for everyone. If you are familiar with the works of Machiavelli, Hobbes, and those of their more recent descendants like “The logic of political survival”, and “The dictator’s handbook”, and if you have read some institutional economics (e.g., Why nations fail?), and have happened to have heard of the public choice theory, then you can easily see that there is not much hope for the situation in Iran at least in the short to medium run. I am not throwing all these names, books, and theories at the readers to impress them, I do so because I believe that those works, put together, paint the most accurate and realistic picture of politics. 

Back to the situation in Iran, let’s assume there will be two binary outcomes for the current situation: one in which the incumbent government remains in power, and the other we witness a successful revolution. I believe both scenarios will likely produce – to put it mildly - unpleasant outcomes. 

If the government retains control, traumatized by the recent events, it is likely that it would become insecure and paranoid. The result would be to tighten the control over citizens and the nearly-dead civil society and to move toward a more closed society.

If the protesters succeed, the crucial question would be whether we have any kind of institution or any other mechanism to ensure that the incumbents will be replaced with a democratic government? My short answer is unfortunately negative. Given that neither in its ancient nor its contemporary history (except for very brief periods during which the country eventually descended into chaos), did Iran have a real experience with democratic institutions, it is likely that the people grabbing the political power after a revolution will reproduce the current system once again. 

I have limited familiarity with the protesters on the street, but my impression of their figureheads leads me to my skepticism about their intentions that they want real democracy. A (constitutional) democracy is a double-edged sword, it cuts both ways. It is easy to be (or claim to be) democratic when you are the underdog, but it is difficult to be one when you are at the top. 

The real test of being democratic is when your interests are at stake. Democracy works by via negativa (facilitating the removal of bad incumbents). When the time comes to yield to the majoritarian demand of removal from office or being respectful of minority rights, I am highly skeptical that they are going to yield to the requisites of a democratic government. 

Having said that, those foreign intellectuals and celebrities, who do not have much knowledge of the situation in Iran, but nonetheless support the protesters, are going to regret it someday as they did about five decades ago. 

There is a third scenario for Iran. The best but most unlikely scenario is to have a referendum that would allow for a peaceful transition, but as far as I can see, it is just a very remote probability not worth wasting our breath on.

It hurts deeply and makes me profoundly sad to write these lines, but it is very important to open our eyes to realities, not to lose sight of where we are standing, not to succumb to idealistic temptations, and adjust our expectations accordingly. Otherwise, once again we are going to fall prey to the schemes of charlatans and political entrepreneurs who are going to lure us into following them with undeliverable promises. 

No country has become democratic overnight, and Iran is no exception. Becoming democratic takes stamina, persistence, perpetual vigilance, and most importantly willingness to accept societal outcomes that are against your private interests. The first step in the long and bumpy journey toward a free and democratic society is to develop a healthy dose of skepticism toward all governments (including democratic ones) and those who seek to acquire political positions. 

I may be wrong, and it is my greatest wish to be so. 

On the importance of taming our untamable revolutionary zeal

There seems to be quite some excitement in the air about the active engagement of the youngsters (Gen Z) in the Iranian protests of 2022. I think nothing good is likely to come out of such a development. Unfortunately, the majority of the protesters are too young to be expected to know about the complexities of the machinery of politics and to form a good judgment about societal or political processes. This I surmise when I hear how they overexaggerate the level of ignorance of their earlier generations and overestimate their own analytical powers; the same mistaken perceptions we had when we were their age. Those of my dear readers who are approximately my age (born in the 80s) and older may have just come to appreciate the complicated intricacies of politics. I can safely assume that those under the age of 30 are likely to make major mistakes and be taken advantage of relatively easily in politics and the process of political transformations.

I would have been much happier to see the younger generations more involved in economic and business matters than politics, and having gained more exposure and experience and acquired more in-depth knowledge and wisdom, tried to slowly effect incremental and piecemeal changes in the political system from within. This is because, in order to reform or replace a system, it is always a good idea to understand that system. Most probably there is a good reason why a system or a process is there in the first place and why it has persisted throughout many centuries. Exposure to business activities has the advantage that makes people get more detailed knowledge of the apparatus of a society and its inner workings. Without such knowledge, no matter how well-intentioned you may be, it is unlikely that you can effect any positive changes in society. Most probably your contribution would be in the form of a revolution that is likely to disrupt the evolving social continuity. I do not need to emphasize that the continuity for a nation is like the memory for a human being, without which we are only going to repeat the mistakes we have been repeating times and again.

Another issue that makes me slightly worried is that most of the people leading or pushing the emerging movement forward are artists or sports celebrities. Despite having a deep respect and much appreciation for artistic works, I can never trust an artist’s political or economic judgement. The arts may be exceptionally effective at casting some light on certain genuine concerns and poignant aspects of human life which cannot be captured by the narrow calculus of an economist or a policy maker. But the caveat is that an artistic work (e.g., a movie) is probably the last thing by which a policymaker or an economist should be inspired. Though these genres of arts and their artists are incredibly powerful at highlighting ‘some’ problematic aspects of the status quo or reality, they often are as hopeless as economists and policymakers in explaining what to do about it.

Artists have a natural tendency to be overcome by sentiments. This may be a virtue in arts, but definitely a weakness in politics. Politics often need specific types of people (no value judgment!) and artists are the worst fit for political positions. The events of the last century have also shown that artists are highly likely to form bad judgments about political events. Remember how many artists often ardently fight for revolutions only to become their victims further down the road.

Whenever you get excited by revolutionary thoughts, think of the day-one after the revolution. Who is going to replace the current governing bodies? In my judgment of Iran today, it is highly unlikely that a better group of people would take over the government. It is the unfortunate fact of human civilization that a revolution cannot escape the confines and limits of evolution. This being said, those who throw a monkey wrench at the process of peaceful evolution make violent revolution not only likely but may be inevitable; a suboptimal societal outcome for everyone.

Let me close this short note with a piece of sober and brotherly advice from legendary Will Durant for the younger generations and all who are overwhelmed by revolutionary zeal. 

“I should advise youth to be skeptical of revolution as a monster that devours its own fathers and its children. Less alluring, but less costly, are those processes of reform, by persistent propaganda and gradual implementation, which have achieved so many beneficent changes in our economic and political life in this century. Persons under thirty should never trust the economic, political, or moral ideas of any person under thirty.” 

I know that in the midst of the volcanic eruption of sentiments these lines are going to fall on deaf ears, but I think, now more than ever, we need to retain our sobriety and shield our minds against the engulfing tidal waves of revolutionary sentiments. 

Needless to say, these lines should by no means be interpreted as supporting the status quo which is utterly indefensible. 

On the tryanny of merit

This video promoting the book “the tyranny of merit” by Michael Sandel was brought to my attention a few days ago. I found the video so objectionable and misleading that I could not resist filing my disagreement (even though through the medium of my personal blog).

Overall, Sandel throws a few straw-man arguments (and arguments premised on wrong assumptions) and tries to make wrong conclusions from them. 

A few very brief points about the video (please watch the video before going through the points below): 

1. Many billionaires with whom I am familiar (not personally of course, but through biographies, etc.,) are very humble, and are very recognizant of their situation, limitations, and the role of luck in their lives. That is why they often contribute to charities and some other causes. There are exceptions as matter of course. 

2. This is the first time I am hearing someone claiming that “the money people make is the measure of their contribution to the common good”!!! He claims that ‘we’ often assume it to be so. I do not know which ‘we’ he refers to. Has anyone ever heard of this strange argument? I assume this is another straw-man argument or wrong assumption he needs to just come to his conclusions. (I guess in the end, things will be hammered down to the definition of the common good.)

3. I absolutely agree that every job should be seen as a dignified job. For me, the garbage picking job is as dignified as any other job that contributes to social welfare. But does that mean that the salaries in every job should be equal or even nearly equal? Of course, a garbage picking job is absolutely essential to society, but should a garbage picker earn (nearly) as much as a physician do? We know that potable water is also absolutely vital to us, but we pay more for a piece of (seemingly useless) diamond than we do for potable water, and there is a good reason for that. 

There is more wrong stuff there, but for the want of time, let’s skip them. I deliberately refrain from entering into some political/ideological stuff in the video. I have not read the book, I sincerely hope that the book is more subtle and nuanced than this video. 

On humility and open-mindedness in social sciences

Having been an observer and sometimes participant in quite a lot of debates over various issues, a single thing that catches any observer’s eye is the extremely polarized nature of each and every single debate. What I have realized throughout my life is that when there is such a polarized debate, the truth is often the main victim, which is why I always avoid engaging in such debates.  

One of the main areas of contention that has caught my attention is the rapid pace of change that is a catalyst for heating up the debate for both sides. In other words, the pace of change often disturbs our perception of phenomena, causing divergent viewpoints, because one side of the debate often clings on the old perceptions and the other tries to analyze the new phenomena wearing a new lens. The strange thing about the former group is that they often stick to the established theories as if they are timeless truths. 

However, it is always important to keep in mind that social sciences (including law, economics, and finance) are not rocket science/natural sciences. In all social sciences, given the sheer abundance of the variables influencing outcomes, it is virtually impossible to derive any conclusions from given facts. Even worse, more often than not, the facts are elusive and in a state of flux, which scapes the eyes of the most perceptive of scholars, making it very difficult to agree upon a specific set of facts, let alone deriving any lesson or conclusion from them.  

In the debates about the value of various assets, it is hard not to notice that they are those who adhere to the existing methods of valuations, and those who try to come up with new methods; the latter arguing that new assets (if they can even be categorized as ‘assets’) require new methods of valuation and the old methods are not up to such a task. While the existing methods, are the fruits of years of toiling of great minds, and have so far provided a valuable contribution to the finance and economics literature, they are not infallible and faultless, and they may indeed fall short of correctly valuing certain objects/assets to which people are willing to assign some value. 

We may know a bit about corporate finance, methods of valuations etc., but we should not take them as given and create a sacred totem out of them. A little bit of the review of the history of such valuation methods is enough to give us some idea of why they are not meant to be bullet-proof and unfailing methods that could always work. 

The whole point is that the social sciences are not exact sciences. After a lifelong deep dive in the study of history, the great historians Will & Ariel Durant conclude that “[h]istory is mostly guessing; the rest is prejudice.” I am afraid their insight is equally applicable to all social sciences. So, it would not be an exaggeration if we say: social sciences are mostly guessing, the rest is prejudice. 

So, what to do with such levels of uncertainty in social sciences? I always prefer the methods that start building on the legacy systems/methods, rather than starting by discarding them. Edmund Burke once said, “[a] disposition to preserve, and an ability to improve, taken together, would be my standard of a statesman.” This quote, which I think has very deep insight, always resonates with me. Although preserving what we already have is in itself a strenuous task, the ability to improve what we have is excruciatingly more arduous, as it always requires a much deeper understanding of what we already have. 

So, I am always more appreciative of the efforts of those who try to improve, rather than those who try to preserve, even when the former turn out to be wrong or fail with disastrous consequences. 

But the ones that I dislike most are the ones who already have some understanding of the existing legacy systems, without a real understanding of their limitations, and have a condescending and belittling approach toward the ones who try to improve things. 

Let’s be humble and respect those who are builders and essayists, who in good faith try to find new ways of analyzing the world and discovering solutions to its most pressing problems.

 

In praise of the entrepreneurial spirit

I recall those desperate days of Tesla, the not-so-distant days when its share price was around $180, and the big investment-bank analysts were forecasting a $10-tesla shares. As far as I can remember, it was in one of those days that Elon Musk appeared in a podcast and burst into tears while describing what he was going through in keeping the company afloat. 

It was so impressed by his dedication and commitment to the success of his company that I decided to do my part by buying a few Tesla shares just to support such an amazing soul and his ambitions. I have never been so careless with my hard-earned money, but once I saw how steadfast on his conviction he was, and how hard he worked to achieve what he aimed for, I just decided to disregard all the analysts’ forecasts and buy a few shares. I was totally convinced that even if the investment turned sour, I would always be proud of losing the money on a noble, ambitious, and worthwhile cause. [Of course, as you might know, Musk, as always, did not disappoint and I got paid back manyfold.]

I am a lawyer, and the supermajority of lawyers are conservative or become so through time. This should come as no surprise as spending so much time within the conservative legal institutions naturally breeds conservatism. Having this in mind, I – similar to many other legal professionals and scholars - should have naturally held a very pessimistic view of the cowboy-like methods of the likes of Elon Musk and their enterprise. 

Perhaps for a lawyer, being conservative is a virtue, but our deeply ingrained conservatism should not blind us to the fact that we live in a multi-dimensional world that needs all sorts of people with various attitudes, aptitudes, and risk calibers to make the world go round.

This is why, despite my usual legal conservatism, the people whom I admire most (in private) are those who – defying all the odds - take a risk with their own skin in the game to better their lives and those of others by trying to stubbornly solve difficult problems of our age, or those who are just after financial gains and in the meantime make the world a better place to live. 

In the case of Mr. Musk, I was happy to see that the US justice system - despite the fines imposed on him on certain occasions - has been flexible and gave him some leeway and room for maneuver. I believe if the likes of Elon Musk were in a different jurisdiction and made the same mistakes, the outcome of the legal proceedings would have been different. 

Anyway, I just wanted to say that I am honored and feel privileged to be living in the same era, breathing the same air, and walking on the same planet as those of the great gentlemen like Mr. Musk. I raise my chapeau to their success and wish them all the best for the coming year and decade, which I hope would be remembered in the history books as the roaring 20s of the 21^st century. 

Many of us, as well as our posterity, will be grateful for all the pioneering and entrepreneurial spirits of such great gentlemen. 

Buoyant markets and the eternal feeling of FOMO

As the markets are in a buoyant mode, I am receiving increasing numbers of messages asking for advice on whether to invest in this or that market.

 

I am a researcher and lecturer with some outdated training in forex trading and with a small investment portfolio as my pastime just to lighten the boredom of life. But if you will, here is my more-than-a-decade-long long-term investment ethos:

• It is very unlikely that you can beat the market. If you think you can, think twice. I was very lucky to get to know people like John Bogle very early. If you want some advice from him, have a look at his book.
• Having the above point in mind, dollar-cost-average when there is blood in the streets (in bear markets), take profit when everyone FOMOes. Otherwise, stay put, relax, and enjoy your life/work!
• While dollar-cost-averaging, have some exposure to assets/investments with asymmetric payoffs. 
• In case you are FOMOed, keep in mind that life is long enough, be patient, and wait for your turn. Believe me, your turn will come.
• It is a waste of the good gift of life to be spent on trading. I am sure there are very many great productive things you can do with your life. Unless you really love trading, don’t make trading your full-time profession, except if you are a fund manager or adviser or you work for an investment services business. In that case, it becomes a heads-I-win, tails-you-lose situation, the best of the two worlds. 
• In case you are lucky and make some good money on your investment, be humble and generous. Believe me (or for that matter, the Bible or the classic Persian literature), cast some of your profits upon the waters and it will return to you manyfold.
• Don't listen to anybody (including me). Do your own research.

I am also receiving some questions on investment in Bitcoin, I have always been optimistic about Bitcoin’s future. But I always refrain from price forecasting, and for good reasons. I have written a few papers on Bitcoin and crypto-assets. In this paper, my coauthor and I have highlighted one very specific feature of Bitcoin and in this one, I have explored certain governance issues in Bitcoin, which answers some questions raised by Bitcoin skeptics. If you have time, you may have a look and decide for yourself whether Bitcoin is worth investing in. 

Again, I am not an investment adviser, and this is not investment advice.

Enjoy your holidays and have a great 2021. 

In praise of free markets or: How I learned to stop worrying and love the free market

The more my age advances, the more I realize that the only fair market is the free market and that the only value that should prevail when it is in conflict with other values is Freedom, one manifestation of which in the business world is the equality of opportunities (market freedom). Any measure we take to correct the perceived failures of free markets tends to distort it in ways that not only make it un-free and unfair but also attract rent-seekers who often do the rent-seeking at the expense of the least advantaged groups in a society. 

I know that many of you who sit in positions of privilege do not share this view with me. But this might be exactly because you are already sitting in a position of privilege and have probably never genuinely experienced how someone starts from zero. Let me start with my own lived experience.  

I was born into a poor family in one of the worst neighborhoods of our city in Iran, with official and nick-names of the neighborhood literally meaning “[neighborhood] without wire/electricity” and “established by force”. My parents – of whom I am immensely proud - are completely illiterate. Not knowing how to read and write - and even worse, belonging to the Azeri minority, how to speak the official language of the country – they have always struggled raising me and my other five brothers and sisters. My father, as a factory worker, had to go to work from 4 a.m. to 8 p.m., and my mother busied herself with raising the kids at home. 

I am not going to go into the details but just wanted to say that being born into such conditions, the first 20-years of my life was replete with all sorts of hardships and difficulties. I had to start working at the age of 6 or 7 in a carpet-weaning workshop – a kind of job that I still consider one of the examples of crimes against humanity - from 7 a.m. to 7 p.m., with the exception of school seasons, during which I was privileged to work part-time and attend the school the rest of the day. But the great thing about working in a manual job, which does not require a lot of thinking, is that it gives you ample time to (day)dream. This, I did for more than 10 years before being admitted to the Law School of my dream in Tehran.

But how did I get into such a prestigious university? The answer is by taking advantage of ever-disappearing outposts of equality of opportunity, which gave me the opportunity to enter free competitive battles in which almost all of the participants were treated equally. The nation-wide entrance exam for state/public universities in Iran is the fiercest competition one can face and it has an unparalleled reputation for incorruptibility (though there are some backdoors to the Universities for certain people). After studying hard for 9 months from 5 in the morning to 12 at night and obtaining the rank of 38 out of more than 500,000 competitors, I enrolled in the University in Tehran, where I had the privilege of coming to know an entirely new class of people and styles of lives that gave me a huge culture shock with scales far greater than the one I experienced when I migrated from Iran to the Western hemisphere. 

It was this environment that made me more ambitious and encouraged me to pursue my studies somewhere else. If it was not for the anonymized and impersonal artificial markets (exams) for University entrance, which kept the human biases, bigotry, and prejudices at bay in the selection process, I and a lot of other people like me were still sitting in carpet-weaving factories weaving stupid Persian carpets.

But I have always struggled once external factors interfered to make free-market processes fair by adding extra – and often arbitrary- measures to markets. In my home country, these ultra-market measures were often the test for religious piety, and devotion to the government and its ideology, and in western countries they are the formal considerations of citizenship, residency, race, gender, and informal considerations of cronyism, cultism, tribalism, favoritism, etc. Whether ideological, religious, progressive, or regressive, they have always worked against me and the people like me with an immensely discouraging impact. In my eyes, they seem to pursue a single objective: protectionism under the guise of fairness with the aim of keeping out the least advantaged people and protecting those who often have a greater influence on the decision-making processes. Let me give you another example of my lived experience. 

During the last couple of years that I have been in the academic job market, I have applied for several positions that I thought I would be a great fit, but eventually, I was not selected. The academic world is a small world and you often come to know who has been selected for a specific position. I am always very happy with the result when I realize that I have lost the game against brilliant minds, but in the majority of the cases, I came to know that I have lost the race to someone not even having one-fifth of my skills, expertise, and experience. These all happened in a job market where the selection committees did not have much skin in the game. I believe the outcome would have been totally different if I were competing in an anonymized or impersonal free market with the committees unaware of my name (which reveals my country/region of origin). I would have attained even better results if the selection committee had 100% skin in the game instead of a committee that only distributes/spends taxpayer money. 

I have to mention that I was once offered a position that I considered accepting. But once I got wind of the fact that some of the extra competitive elements had influenced the decision of the selection committee, I decided to decline the offer without hesitation, as I believed that me accepting the offer would have meant depriving someone else, who was more competent than me, from the opportunity. Please do not see this as virtue signaling. I had to mention it because I did not tell you why I am so immensely proud of my parents: among others, their uncompromising insistence in my upbringing on not infringing other peoples’ rights, irrespective of the consequences.

These two examples of my lived experience, from which I have left tons of details out, are why I would never trade free markets with fair, just, or whatever nice adjective you put before the word ‘market’. It was the free market/competition and equality of opportunity that helped me and thousands/millions like me out of the abject conditions, and it is the human considerations of fairness – extremely prone to rent-seeking behavior that welcomes all sorts of bigotry and prejudice – that have held and are holding the disadvantaged and the underprivileged back. 

This is of course not to say that free markets are always perfect. We are not discussing perfection here; the point is that the alternatives are often worse. In other words, just like most of our social phenomena, perhaps the free market is the worst form of organizing human societies, except for all the others.

Monetary Exclusion and Decentralized Financial Technologies

In November 2018, the Society for Worldwide Interbank Financial Telecommunication (SWIFT) - a financial market infrastructure (FMI) institution that provides secure messaging for international payments - suspended certain Iranian banks’ access (including that of the Central Bank of Iran) to its messaging system. This step was seemingly taken to protect the stability and integrity of the global financial systems. However, the reluctant tone of the announcement could hardly disguise the reality that SWIFT took such an action conceding to the US government push to expand the secondary sanctions on financial messaging services to the Central Bank of Iran. Although the US did not have jurisdiction over SWIFT, which is a cooperative company incorporated under the Belgian law and is owned and controlled by its shareholders (financial institutions), after months of intense negotiations about the US demands and irrespective of the dismay expressed by European officials, SWIFT had to acquiesce. In making SWIFT to yield to US demands, the US government apparently went to such an extent as to threaten the SWIFT’s twenty five board members (which include two US bankers from Citi Bank and JPMorgan) with visa bans and asset freezes, and its member banks with charges and fines.

The intrusion of considerations beyond the scope of financial regulation in the operation and risks management of Financial Market Infrastructures (FMIs), was of such proportions that triggered radical proposals for reforming and restructuring the international FMI institutions. The recent calls for establishing international payment rails independent of the US have shown the frustration with the hegemony of a single dominant player having formal (i.e., through extraterritorial application of its laws or through secondary sanctions) and informal dominance over international payment infrastructures. For example, German foreign minister Heiko Maas proposed that Europe could create its own SWIFT rival based on the euro rather than the US dollar (USD). More recently, speculations about Synthetic Hegemonic Currency (SHC), which would be provided by the public sector through a network of central bank digital currencies (CBDCs), could also be viewed as a mechanism that could - in the long run - lead to decentralization in a multipolar international monetary and financial system. However, it is unlikely that a system, which is based on fiat money, issued and controlled by states, could stand tall against the pressures exerted by one or more groups of hegemonic governments. 

These developments have also highlighted the need for a truly decentralized uncensorable FMI on which one or a group of coordinated actors could not exert arbitrary influence. Such a value proposition requires a settlement asset that is denationalized, decentralized (peer-to-peer), divisible, digital, and globally transferable, and that provides certain levels of anonymity to its users. Bitcoin, which is built upon an open-source protocol, a distributed tamper-resistant timestamped globally synchronized ledger, and embeds a native digital asset is an obvious candidate to play such a role, despite its shortcomings in terms of price volatility. In this regard, it is important to mention that in spite of its currently predominant use as a speculative asset, Bitcoin and its underlying technology can be viewed as a new model for a parallel decentralized FMI (dFMI) for clearing and settling obligations in its unanchored native settlement asset (i.e., bitcoin). In addition to clearing and settling its native asset, Bitcoin can be used to transfer the title to tangible or intangible assets on top of the Bitcoin blockchain. This is made possible because Bitcoin’s scripting language allows embedding metadata in bitcoin transactions. For example, colored coins allow for recording the creation, ownership, transfer, and tracking of extrinsic digital and physical assets other than bitcoin.

Add censorship-resistant property of Bitcoin to the above specificities. Censorship resistance as the unique value proposition of Bitcoin is very much reflected in the Bitcoin whitepaper as well as Satoshi Nakamoto’s communications with early bitcoin adopters. Given the fate of Bitcoin’s predecessors such as Digicash and American Liberty Dollar (ALD), whose centralization was their undoing, the creator or creators of Bitcoin had the understanding that permissionless innovative payment systems have to be decentralized, otherwise those innovations will face the same fate as Bitcoin’s ancestors. This is also clear from the chronology of the technological breakthroughs that led to the birth of Bitcoin. 

More importantly, censorship-resistant property of Bitcoin is reflected in the design of the Bitcoin network. The clearest manifestation of this property is in the trade-off between efficiency and censorship resistance. Rather than opt for fast and efficient payments, Bitcoin goes a long way to create extreme inefficiencies by introducing a distributed ledger that should be maintained, updated and validated by all fully validating nodes, only to make sure that no single or a small group of participants violate the rules of the Bitcoin protocol, modify the ledger arbitrarily or censor other stakeholders from participating in the Bitcoin network. Such a tradeoff has been made because the unique value proposition of Bitcoin and blockchain technology is not to replicate the functions of centralized technologies in a faster or cheaper fashion.

It is indeed hard not to notice that the censorship-resistant property of Bitcoin drives the entire mechanism design in the Bitcoin network. Since Bitcoin is designed to operate outside the legal framework (i.e., alegality), it assumes an adversarial environment and prepares to defend itself against various attack vectors using a variety of ex-ante built-in mechanisms within the Bitcoin network rather than rely on the external legal system for ex-post remedies. To this end, the PoW security and consensus mechanism and various other incentive mechanisms are embedded to align the often varied and divergent interests of network participants and discourage uncooperative behavior that could result in attacks on the network. 

Whether a parallel dFMI relying on a settlement asset other than fiat currencies can alleviate the issues of financial exclusion and censorship remains to be seen. In particular, because the reason that the US possesses disproportionate influence over payment infrastructures is not entirely due to the reserve currency status of the USD, which is predominantly used in international FMIs, but also it is because the US has a large and attractive economy the benefits of which are hard to forgo for market participants in the face of a threat of being cut out of the US markets. But it seems that decentralized financial technologies, in particular, their structural architecture, which is built upon decentralized or distributed, consensus-based and censorship-resistant mechanisms without relying on centralized third parties can help shield such infrastructures from undue political influence. Despite its current shortcomings in terms of price volatility and fungibility issues, Bitcoin remains to be a giant leap for mankind that offers a universal, permissionless, trust-minimized and censorship-resistant store of value and value transfer network.

The new landscapes vs. the new eyes

Recently, I read two books one after the other by coincident: one entitled “The Birth of Plenty: How the Prosperity of the Modern World was Created” by William Bernstein, and the other “Talking to My Daughter about the Economy: A Brief History of Capitalism” by Yanis Varoufakis. 

What I found interesting is that despite both going through the same fact pattern in economic history, they seem to take very different viewpoints and come to diametrically opposing conclusions. Having read the books, combined with my own personal life experiences, I have come to the realization that the facts and realities do not matter as much as the lenses through which we allow ourselves to observe the world. 

Indeed, “[t]he real voyage of discovery consists not in seeking new landscapes but in having new eyes”, selon Monsieur Proust.

Apparently, what counts is not what we see, but how we see it. So, let’s be careful in choosing our lenses.

On the Tenth Anniversary of the Bitcoin Whitepaper

Today (depending on where on earth you are) is the 10th anniversary of the release of the Bitcoin whitepaper.

I invite my tech-oriented friends, lawyers, and economists to carefully read it at least once and to contribute to bettering the Bitcoin network. As far as I am concerned, bitcoin is one of the most promising experiments in money in our lifetime, however, it is a work-in-progress and needs more and more dedicated contributors with diverse backgrounds to overcome its imperfections.

For our part, I and my coauthor have tried to shed some light on some of its idiosyncratic features and raise awareness among regulators to help them view Bitcoin as an evolving, work-in-progress, open-source protocol that warrants a nuanced light-touch regulatory approach which is data dependent, defers to the virtues of experimentation, spontaneous discovery process and evolutionary dynamics in the financial system.

For now, I raise my hat for bitcoin’s spectacular success in its first decade and salute Satoshi for his/her/their ingenious work.

PS: Stay tuned! Within a few days, our new paper on central banks and the regulation of cryptocurrencies may see the light of day. More is forthcoming within the next few months.