Is a lack of "rules" dangerous for cryptocurrency

Question

An issue/disadvantage that the gold standard had was a lack of mechanisms that forced economies to abide by the rules of the game. As a result, they could at any time de-monetize gold and therefore hurt the whole purpose behind it.

Can't this same idea be applied to crypto-currency? If one day individuals decide to not put any value behind XYZ-Therum Crypto (using a generic name), won't that cause a collapse?

Also, isn't there a danger in the lack of regulations behind it?

Why can't I invent MikeIsCool-Coins. I make a website, with a wallet and say that the direct quote for MikeIsCool-Coins is 1BTC. I then give myself how ever much I want MICC, trade it to bozos for BTC, then sell the btc for USD, renderring myself a millionaire?

And this scheme, as a result of a lack of regulation puts no consequences on me?

Thank you, I'm just trying to challenge crypto. I think a currency backed by prime numbers (something that itself holds no value, where FIAT money is based by a promise) is complete nonsense.

Answer 1

ELI5: What actually makes makes currency worth anything? : explainlikeimfive

One reason why fiat money has value, is that the government insists that people pay taxes, and the only payment of taxes they will accept is in their own currency. So, everyone has to earn or acquire enough in that currency to pay their taxes.

You asked

If one day individuals decide to not put any value behind XYZ-Therum Crypto (using a generic name), won't that cause a collapse?

Yes is your answer. As at July 29 2020, no governments allow citizens to pay taxes with cryptocurrency, unlike fiat currency. Thus "If nobody is actually using them, that means the platform has no adoption, which means the tokens aren't worth anything and it's all just a dangerous speculative pricing game..."

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For more detail, read ELI5:Crypto currencies how are they actually worth anything? : explainlikeimfive.

TL;DR: BTC's intrinsic value is represented by fractional participation in the 'illegal economy.'

You're getting a ton of 'BTC is fiat!', which feels true, but this isn't really true. Its the same situation for the USD, as much as people like to scream "THE DOLLAR IS JUST FIAT!!" over at places like zerohedge (don't go there - that website is trash).

Let's start with the USD (but the same is true about the yen, euro, ruble, etc). The thing about the US dollar is that there is an unequivocal end demand for US dollars, imbuing it with an intrinsic worth: if you want any level of participation in the US economy, you need dollars to buy it (to get access). Think of it this way - the US dollar is the vehicle by which you gain access to the US economy.

"But but but you can just convert....." No you can't 'just convert'. What would you say if your employer told you tomorrow that they were going to pay you in rubles, euros, yen or even gold? You wouldn't say anything - you'd quit. Why? Because you have to convert to USD to do anything within the bounds of the US economy. Paying your rent, going to Kroger, buying a car, getting a computer, hiring a maid, paying your taxes all require USD. In the case of your employer paying you in an alternative currency, instead of quitting, you might demand a raise to cover transaction costs, taxes and hassle as you convert back to USD.....so you can participate in the US economy. As such, there is a floating but measurable demand for USD. It is not fiat in the way that that it is typically described.

In slightly more technical terms: the 'intrinsic value' of the USD is a 'right of participation' within the US economy and all ROPs have an intrinsic value. We can debate the value of the ROP, but we are both gonna agree its there. I come on here all the time and talk about how the size of your money supply needs to be linked to the size of the economy - this is the manifestation of that link and an explanation of precisely why it has to be linked. SIDENOTE: John Nash (Nash Equilibrium & A Beautiful Mind) was working on 'solving' the precise math on this when he died, but he admittedly did not think it was a solvable problem.

Back to BitCoin: BTC's intrinsic value is tied to the size of the 'BTC economy' in that the value of a single bitcoin represents a 'right to participate' in the BTC economy. So what do people use BTC for? Well, let's be honest: mostly illegal shit. Here's a really interesting thought piece by a guy who tried to value BTC by measuring against an estimate of the illegal economies that BTC helps to facilitate. We can argue the particulars in this piece all day long, but I really like the economic/financial construction behind the theory - the guy is definitely approaching it the right way.

Now there are some obvious problems here, with the most obvious two being: 1) you are 'long' illegal activity which is very risky from an investment standpoint (I don't mean BTC holders 'go to jail', I mean you have no reasonable recourse if shit goes against you, such as criminal prosecution of the criminals that comprise the BTC economy); and 2) governments want to maintain their currency monopolies and will be fighting you forever (and again you have no recourse).

So how does BTC become really valuable? If BTC is allowed to edge in on the 'legit' economy, then BTC becomes very valuable b/c it becomes a viable alternative to traditional currencies (eg, you now get global access to local economies.)

However, let's be super fucking honest: the last thing the US gov't is going to allow is for a competitor to the USD, so when you buy BTC keep in mind that the government will be fighting you. And yes, they can stop the growth of BTC by restricting access by preventing any company that does business in the US from accepting BTC in any, way shape or form. Additionally they could prevent any transaction that might have come from BTC via existing money laundering laws. That alone could (close to) zero BTC overnight. If you think that could never happen, you're living in fantasy land.

In summary: BTC is granting you fractional participation in an illegal economy - that's its intrinsic value. However, I would not call it a currency (or an asset or a value store) because you do not have any of the legal protections that are inherent with currencies, assets or value stores. This is why its speculative as fuck.

Source: current quant hedge fund manager with a career on wall st. People like me get drunk together and talk about this shit all the time.

Answer 2

The problem, in my mind, isn't the absence or rules, it is the plethora of rules in every jurisdiction that are not specifically written with cryptocurrency in mind.

For example, if I create a coin operation and attach something such as artwork, software or other things and have limited terms of service, what happens when you resell your coin. The contract is between you and me. If you sell the coin and the attached items, that third party is not a party to the contract with me. I bear no duties to them.

What if we are in differing types of jurisdictions. I live in a Common Law jurisdiction, but someone in Louisiana, Quebec, France, Germany or China lives in a Civilian Law jurisdiction. The concept of a contract is radically different. Amongst other things, there is no concept of consideration. You also do not have to exchange value to create a contract. There are unilateral contracts. Islamic jurisdictions are highly similar to Civilian jurisdictions but have their own interesting rules. What if the buyer lives in a Civilian jurisdiction and a contract was created there even though no contract would exist in a Common Law jurisdiction?

It isn't the absence of rules that is the problem. It is that the rules are highly varied and potentially mutually inconsistent.

Just a note, cryptocurrencies have existed before, from the time when Isaac Newton was the Master of the Mint until George III abolished "button money." This isn't new and neither are distributed ledgers or smart contracts. They all have their real-world physical analogs, some of which have been in use for six hundred years.

You can find regulations covering every aspect of cryptocurrencies, but they are not written with cryptocurrencies in mind. All you have to do is have a court assert that it has jurisdiction and a new set of rules come into play.

You probably could not do what you are describing because you have ill intent. I would expect most jurisdictions would find your specific description a fraud of some form. Indeed, in Islamic law it would be illegal. Islamic law requires the consideration of third parties who are not part of the current contract to be parties.

If I rent a speaker system for a large outdoor party from you, and we have not considered the impact on my neighbors and included it, then no valid contract exists. Islamic contracts internalize externalities in many cases. The validity of that initial enterprise does not have a mechanism for you to maintain value, you might be required to return all initial funds.

Likewise, there may be damages available in places like Louisiana. There is no concept of consideration, so you must exchange at a reasonable person's understanding of fair value. If you find an old world master in a garage sale, buy it for $10 and sell it for $10,000,020, then you owe the seller at the garage sale $5,000,000.

While U.S. securities laws have applied to some initial coin offerings, to those where it does not apply, no covering, universal set of laws may exist.

If the creators of coins are wise, they have very good attorneys and have written excellent contracts. That does not seem to be the case based on anecdotal comments by attorneys, but hopefully, that is the case and courts will say all is okay.