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The Mixed Blessing of Institutional Adoption

One man’s privateer is another man’s pirate.

Sir Francis Drake was knighted by Queen Elizabeth I for his success in pillaging the ports of Spanish colonies in his official capacity of privateer.

Captain Kidd, however, was hanged for the crime of piracy after pillaging a ship sailing under a French flag that turned out to be owned by an Indian ally of the crown.

Kidd even got his start with the same “letter of marque” that made Sir Drake an officially sanctioned privateer, but lost the carte blanche protection it offered after falling out of royal favor and being declared a pirate.

Kidd’s methods, however, were no different than Drake’s: 17th century privateers were simply pirates operating with government approval.

To Drake’s victims, that must have seemed like a distinction without a difference.

It was only the crown’s often arbitrary thinking that made one thing laudable and another indistinguishable thing punishable in the 16th and 17th centuries.

In 21st century crypto, the line of demarcation between lovable rapscallion and despicable rogue is a similarly fine one.

That’s because social consensus has yet to determine some core questions like what separates a hack from an exploit or arbitrage from frontrunning.

There have been plenty of opportunities to debate those issues of late, and yet, we seem no closer to reaching a consensus on where to draw the lines between good and bad.

Do we need the government to draw them for us then?

It’s a question that needs asking, I think, because — as antithetical as government intervention may seem to the cypherpunk ethos of permissionless crypto — it increasingly looks like that’s how some of crypto’s biggest issues may get resolved.

Keeping it real

The US Department of Justice drew one such line of demarcation last week. The DOJ inserted itself into a previously intra-crypto debate over the nature and necessity of front-running by accusing one set of front-runners of front-running another set of front-runners.

The DOJ’s indictment reads like a virtual letter of marque for the MEV bandits that routinely pillage crypto’s retail traders — by attacking those bandits, the DOJ asserts, the accused have threatened the “integrity” of the Ethereum network.

That may or may not be the correct interpretation of US law, I don’t know. 

But either way, it raises a more fundamental question: Are you still cypherpunk if you need the DOJ to defend your integrity?

This is not the only news from the establishment that has me wondering.

Since the launch of his ETF, it’s Larry Fink (the second or third most establishment man in traditional finance) who’s been shaping the narrative around anti-establishment Bitcoin — he says bitcoin will never be a “currency,” only an “asset.”

That matters because bitcoin is only what its holders think it is, and more and more of its holders come via Fink’s ETFs.

Those ETFs were met with near-universal approval and now even Vanguard — one of TradFi’s last anti-crypto holdouts — has a crypto-friendly CEO.

Similarly, former Speaker of the House Paul Ryan is now prominently making the case for stablecoins — because regulated stablecoins would “create new consumer demand for our bonds.“ 

In the process, Ryan also opined on what is and isn’t “crypto”: Stablecoins, he says, are not crypto because they’re backed by US dollars.

I sort of agree with him — but does that mean stablecoins (like Sir Drake) are “good” and that crypto (like Captain Kidd) is therefore “bad”?

Not yet, maybe — Ryan is only a lobbyist these days.

But Kidd’s unhappy fate is perhaps a reminder that there can be consequences when the establishment picks favorites — even if you’re initially one of them.

Et tu, Vanguard?

This is more than just shaping narratives.

In a blog post on the highly technical debate over MEV (aka, maximal extractable value, aka frontrunning), Vitalik warned that “incorrect answers could lead Ethereum down a path of centralization and ‘re-creating the traditional financial system with extra steps.’”

That, coming at a time of increasing institutionalization for crypto, should perhaps be a call to cypherpunk action.

How MEV is dealt with may define Ethereum’s future. I don’t think it’s much of an exaggeration to say that allowing the DOJ to determine the rules around MEV may be tantamount to allowing the US government to determine the future of Ethereum.  

In other words, letting the powers that be defend your integrity may be what compromises your integrity.

If so, it might be a boil-the-frog-slowly kind of process.

Each incremental step of institutional acceptance is widely celebrated and I get that — you’ve come a long way, crypto.

But these may turn out to be pyrrhic victories because the way to win big is bottom up, not top-down — winning the hearts and minds of mainstream users is what would make for a durable victory.

Winning top-down risks co-optation.

Crypto, born of the cypherpunk movement, was meant to be a revolt against traditional finance — so can it still be a rebellion if it’s officially sanctioned?

Fortunately, Vanguard’s new CEO says they won’t be allowing spot bitcoin ETFs on their platform any time soon.

That, I think, is great news, because Vanguard’s approbation may soon be the last vestige of crypto’s cypherpunk credibility — a welcome sign that the financial rebels have not yet been converted from pirate to privateer.

― Byron Gilliam

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