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“Pecunia non olet.”
— Vespasian, Roman Emperor, AD 69-79
Fiat Does Not Stink (Yet)
Many Roman citizens found it undignified when the emperor Vespasian imposed a tax on urine (useful for tanning, wool production, making ammonia and putting out very small fires).
Asked by his son if he was not disgusted by the thought of such a malodorous source of revenue, the emperor’s reply was, “Pecunia non olet.” Money does not stink.
Rome’s coffers needed refilling, and it didn’t matter how it was done: The value of money does not depend on its origins.
That is still the case today: A dollar earned writing newsletters is exactly as valuable as a dollar earned performing brain surgery.
(Maybe a bad example as those two activities have about equal value to society, but you get the idea.)
Even money involved in illicit activity requires only light laundering before entering the banking system. Or none at all if it’s left in cash.
That money also does not stink.
Crypto money, however, does.
The Long Arm of Chainalysis
The analytics firm Chainalysis recently said it had identified the perpetrator behind The DAO hack that led to the controversial Ethereum fork way back in 2016.
The news added to mounting evidence that blockchains are not well suited to launder money.
As Razzlekahn also recently learned, blockchains are immutable: The long arm of on-chain analytics can track you down even years after the fact.
This sounds like a good thing: Money laundering is bad!
But it also compromises the permissionless appeal of cryptocurrencies.
In other words, crypto stinks: Unlike fiat, its value can be compromised by where it’s been.
What if, for example, the government bans centralized exchanges from accepting crypto that's been through a mixer? Or been traded on a Russian exchange? Or was once owned by an oligarch? Or held on an account known to belong to North Korean hackers? Or originally mined with coal-generated electricity?
That crypto will then be worth less than crypto it is otherwise perfectly fungible with.
Crypto that stinks is worth less than crypto that doesn’t.
Cracking the Code
Conditions currently seem ripe for the dollar to surrender its privileged position as the world’s reserve currency.
But what could supplant it?
The Euro is a mess. China’s financial infrastructure is not fit for purpose. Gold is too heavy to move around.
Crypto is the only plausible candidate.
But if the next reserve currency is going to be digital, it may need to fulfill the prerequisite of not stinking.
In fact, given the advent of weaponized finance, the quality of not stinking may be the aspect of moneyness that is most likely to determine the next reserve currency.
Not because drug dealers need a better way to move money around: The status quo works just fine for criminals.
But because central banks need a safer way to hold foreign reserves.
Even if mixers were to become more effective, the Central Bank of Russia could not launder the hundreds of billions it holds in foreign currencies — bitcoin would have to be orders of magnitude larger to move those amounts.
So, out-of-favor central banks need a digital currency that makes laundering unnecessary.
Canadian truckers would welcome it, too. As would anyone else who thinks they may fall out of favor with government. Or those who just think that finance and politics should be separated like church and state.
If crypto cracks that code, it may have a chance to become the world's next reserve.
Progress is being made in that direction: The Secret Network blockchain, for example, promises untraceable smart contract transactions and the Shade Protocol is already building DeFi applications on top of it.
I don’t expect central banks will be either stockpiling Secret Network tokens or using Shade dApps any time soon.
And it will be a long, long while before the crypto market is deep and liquid enough to be useful to countries much larger than El Salvador.
But every iterative advance in privacy will make crypto an increasingly viable option as a reserve currency.
That process is being sped up as people rethink what it means to own an asset in light of the financial sanctions imposed on Russia.
Things could speed up further if major governments decide to issue digital versions of their currencies on fully transparent blockchains.
The idea of governments being able to precisely follow the flow of money throughout an economy will get a lot of regular people questioning their savings in the same way central banks are questioning their reserves.
With the issue of CBDCs, fiat money would lose its property of not stinking.
And hasten the development and adoption of not-stinking crypto.