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Stablecoin Digital Dollar Substitutes

16 Wednesday Jul 2025

Posted by Nuetzel in Crypto, Monetary Policy

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100% Reserves, Anti-CBDC Surveillance State Act, Anti-Money Laundering, Blockchain, CBDC, CLARITY Act, Crypto Week, Crypto-Currencies, Dave Friedman, Digital Assets, Disintermediation, Dollarization, GENIUS Act, Know Your Customer, Monetary Control, Payment Stablecoins, Scott Sumner, STABLE Act, Stablecoins, Taurus, Terra/Luna, Tether, Zero Knowledge Proofs

Stablecoins are a very hot topic, and not only among crypto enthusiasts. This is “Crypto Week” in Congress, but current activity in the stablecoin (SC) space ranges from an explosion of transactions and issuance by banks and other institutions, plans for issuance by other businesses like large retailers, the introduction of new embedded SC features, laws affirming the right of use in non-crypto transactions, regulatory maneuvers, and central bank scrutiny.

The Digital Money Realm

An SC is a digital asset convertible to currency at a value pegged to some other asset with a stable market value. SCs are almost all pegged to the dollar, but they can be algorythmically pegged to a basket of currencies, Treasury securities, gold, silver, or other commodities, or a combination of various kinds of assets. Still, it’s thought that the growth of SCs will reinforce the dollar’s position as the world’s dominant currency.

SCs had their genesis and are still primarily used for settlement of transaction involving crypto-currencies and cross-border transactions. They function as a store of value and provide investors exposure to the underlying asset(s), but they are increasingly seen as transactions media as well. They offer a direct channel to instant settlement without other intermediaries and with low transaction costs.

Unfortunately, the purported stability of SCs has not always held up. In 2022, the collapse of the SC Terra/Luna demonstrated that a run on an SC is a real risk. Pending legislation in the U.S. will attempt to address this risk (see below). Tether is the dominant SC on the market today, and its issuer, Tether Ltd., claims to back it with 100% fiat currency reserves. However, those claims have come under suspicion with concerns about the true liquidity of their backing. Tether has other problems, including money laundering allegations. The bills now under consideration in the Congress would require a major change in the way Tether and other SC issuers do business in the U.S.

Crypto-Week Pending Legislation

SC issuers hold levels of reserves against their outstanding value, but currently only under various state regulations. That’s likely to change soon. Bipartisan legislation is moving through Congress: the so-called GENIUS Act was approved by the Senate in June; the STABLE Act in the House has many similar provisions.

The GENIUS and STABLE bills would require public disclosure, frequent audits, and establish 100 percent reserve requirements for so-called “payment” SCs. The bills also stipulate that reserves must be held in highly liquid assets like U.S. dollars, money market fund shares, and Treasury securities maturing within 93 days. This is likely a disappointment to “hard money” partisans who’d like to see SCs backed by precious metals. Both bills would also prohibit interest-bearing SCs, obviously an impediment to risk-taking by issuers and also a nod to banks hoping to avoid new competitive pressures. Altogether, the bills would make SCs more currency-like and less vehicles for saving or speculation of any kind.

A third piece of federal legislation, the so-called CLARITY Act, would sort out the regulatory roles of different federal agencies pertaining to digital assets.

CBDC

Central banks like the Federal Reserve have taken a keen interest in SCs, which amount to an alternative monetary system. Advocates of a Central Bank Digital Currency (CBDC) maintain that it would have greater stability and public trust than privately-issued SCs. No doubt a CBDC would facilitate investigation of fraud and money laundering, and supporters say it would help preserve the sovereignty of the U.S. monetary system.

However, a CBDC is off the table in the U.S. for the foreseeable “political” future. President Trump has issued an executive order (EO) prohibiting the development or issuance of a CBDC in the U.S. The EO asserts that a CBDC would not promote stability and in fact would do the opposite.

Opposition to a CBDC revolves around several issues: 1) it would cause an atrophy in the private development of digital assets and SCs in the U.S.; 2) a CBDC would create grave concerns about surveillance and potential use of the CBDC as an input to a social credit tool; 3) the alleged risk of a CBDC to the stability of the banking system. #3 is apparently in reference to possible disintermediation when a CBDC is substituted for traditional bank deposits — but SCs have been noted for that same risk.

Neither the GENIUS Act nor the STABLE Act explicitly prohibits a CBDC, which has riled a few conservatives. However, there are provisions in the GENIUS Act that effectively rule a CBDC out at a “retail” and consumer level.

A fourth piece of legislation, the Anti-CBDC Surveillance State Act, would prohibit the Federal Reserve from “… testing, studying, developing, creating, or implementing a central bank digital currency and bar the banks from using such a currency to implement monetary policy.” The bill was passed by the House of Representatives in May, but it has yet to clear the Senate. Some House members might like to have its major provisions incorporated into the current SC legislation, but that remains to be seen, and if such a revision was passed by the House it would require another Senate vote in any case.

Not Quite Like Cash

As a “programmable” currency, a CBDC could be used to control transactions deemed impermissible by a future “regime”. This would be a manifestation of what Dave Friedman calls “The Convergence of AI and the State”. His concerns extend to privately-issued SC’s as well, inasfar as SCs and other payment systems have us “sleepwalking into a cashless society”.

Privacy has been a downside to SCs and all blockchain transactions from the start, but there are several technological extensions that could protect SC transactions and accounts from nosy governments or nefarious actors. Taurus, a crypto custodian, has launched a Stablecoin contract for businesses with privacy features using so-called zero knowledge proofs that would satisfy “Know Your Customer” requirements and anti-money laundering laws, but without revealing amounts paid or the recipient’s identity. Still, there are legitimate concerns regarding access by regulators, and law enforcement could ultimately gain access to account and transaction data given a reasonable suspicion of wrongdoing. This will almost certainly be addressed in any SC legislation that makes it to Trump’s desk.

Macro Policy Implications

Will broader adoption of SCs compromise the ability of central banks to conduct monetary policy? Scott Sumner says no:

“The Fed will still control the monetary base, and they have almost unlimited ability to adjust both the supply and the demand for base money.  This means they will be able to react to the creation of money substitutes as required to prevent any impact on macroeconomic objectives such as employment and the price level.”

When Sumner’s says the Fed controls the demand for base money, he refers to the interest rate the Fed pays on bank reserves.

As noted above, however, it’s widely feared that public substitution of SCs for bank deposits could drain bank reserves, adding variability to the broader demand for monetary assets, thus weakening the relationship between policy actions, the money stock, and other key variables.

Even if this is correct and Summer is wrong, the Federal Reserve should be treated as a special (but very important) case. That’s because the dollar is the dominant global currency, almost all SCs are backed by dollars, and essentially all SCs used in the U.S. will be backed by dollar-denominated assets should GENIUS-type legislation become law. That severely limits any potential disintermediation that SCs might otherwise cause. Control of bank reserves should be manageable, and therefore SCs will not meaningfully weaken the Fed’s control of base money or the transmission of monetary policy.

Things are not so simple for countries having home currencies that play a minor role internationally. SC’s backed by other currencies or assets are then more likely to weaken the central bank’s control of domestic monetary assets. In fact, SCs might create greater vulnerability to “dollarization” in some countries, which would weaken the efficacy of domestic monetary control. If Sumner is correct, the existence of SCs would still add a layer of variability for these central banks, making policy adjustments more complex and error-prone.

Conclusion

Stablecoins are already huge in the crypto world and they are making inroads to the broader financial sector, factor payments, and everyday consumer decisions. Naturally they have attracted a great deal of interest in policy circles, both for their benefits and the risks they present. The purported liquidity and stability of SCs, together with a few prior missteps, make the legislation now before Congress a key to broader adoption, particularly the provisions on reserves and transparency. While not strictly a part of the legislation, the incorporation of privacy features will enhance the value of SCs to all users.

Conservatives and libertarians undoubtedly will welcome the proscription on development of a digital currency by the Fed. Private SCs backed by dollar reserves should allow the Fed to maintain ample control over the monetary base and the supply of monetary assets. Moreover, the growth of dollar-backed SCs will strengthen the dollar’s dominance in international trade and finance. However, while stablecoins can and do reduce transaction costs in a variety of circumstances, dollar-backed SCs cannot be better stores of value than the dollar itself, which we know has had its shortcomings over the years.

Only a Statist Could Love a Sovereign Wealth Fund

12 Wednesday Feb 2025

Posted by Nuetzel in Central Planning, Public debt

≈ 7 Comments

Tags

Bitcoin, Blockchain, Capital Reserve, Carnegie Endowment for International Peace, Crypto Reserve, Donald Trump, Federal Asset Sales, Fiscal Sustainability, Government Corruption, Interest Expense, Joe Biden, Knowledge Problem, Pension Reserves, Peter Earle, Public debt, Sovereign Wealth Fund, Strategic Petroleum Reserve, Tariffs, Taxes, TikTok

I want a federal government with a less pervasive presence in the private sphere. That’s why I oppose a U.S. sovereign wealth fund (SWF), but President Trump issued an executive order (EO) on February 3 setting in motion the creation of an SWF. It would hold various assets with the ostensible intent to earn a return benefiting American taxpayers.

Here are a few comments on the form an SWF might take:

1) How would the SWF be funded?

—Sales of federal assets like federal land, buildings, and the sale of extraction rights? These are probably the least offensive possibilities for funding an SWF, but the proceeds, if and when they materialize, should be used to pay off our massive federal debt, not to fund a governmental piggy bank.

—Taxes/Tariffs? Funding an SWF via taxes or tariffs would be contrary to the EO’s stated objective to “lessen the burden of taxes on American families and small businesses”. Moreover, it would be contrary to a pro-growth agenda, undermining any gains an SWF might produce.

—Borrowing? Another contradiction of a basic rationale for the SWF, which is “to promote fiscal sustainability”. It would mean more debt on top of a mountain of debt that is already growing at an unsustainable rate.

—“Deals” that might place assets under government ownership? Already, potential buyers of TikTok are singing the praises of a partnership with the SWF. Trump seems to think the government can acquire interests in certain enterprises in exchange for allowing them to operate in the U.S. He also believes that federal dollars can be used for development in order to acquire ownership capital. The federal government should not engage in the development of private resources. Business enterprises should remain private or be privatized, to the extent that their ownership has nothing to do with the provision of public goods.

2) What kinds of investments would be held in the SWF? Stocks and bonds? TikTok shares? Private equity? Crypto? The Gaza Riviera REIT?

These are all terrible ideas. Government ownership of the means of production, or socialism, virtually guarantees underperformance and subservience to political objectives. Federal acquisition of private businesses is not a legitimate function of the state.

There is no point in having the government hold a Bitcoin or crypto reserve. First, giving the U.S. government an interest in the private blockchain undermines the very purpose that most users feel gives the blockchain value. Second, the return on crypto depends only on price changes, and most forms of crypto are volatile. It is a stretch to believe that crypto assets have value in promoting “fiscal sustainability” or national security.

3) How would the SWF’s assets and earnings ultimately be used?

The EO plainly states that earnings in the SWF are to be used to promote fiscal sustainability and benefit taxpayers. In the presence of a large and growing national debt, the best path toward those objectives would be to use any and all spare funds to pay off debt and limit the explosive interest burden it imposes. This puts the funds back into hands of private investors, who will respond to market incentives by deploying the capital as they see fit. Does anyone truly think government planners know better how to put those funds to use?

SWF and Future Debt Service

Just to clarify matters, let’s quantify two alternatives: 1) pay off debt immediately; 2) create an SWF to invest funds and pay off debt later. Suppose the government stumbles upon a spare $100. It can immediately pay off $100 of debt and avoid a certain $3.50 in interest expense in year one. If instead an SWF invests the funds at an expected (but uncertain) return of 7%, then perhaps a greater reduction in the debt can be made a year later. How much? Not $107, but only $103.50 (assuming the 7% return is realized) because the $3.50 interest expense on the debt was not avoided in year one. The SWF must earn twice the interest cost on debt to break even on the proposition. That might be possible for an average return over many years, but the returns will vary and the government is likely to botch the job in any case.

An Itch For Intervention

The SWF is subject to dangers inherent in many government activities. One is that the funds held in reserve might be used as a tool of market intervention and/or political mischief, much as Joe Biden attempted to tamp down oil prices by releasing millions of barrels from the Strategic Petroleum Reserve. An administration having available a large pool of financial assets might be tempted to use it to intervene in various markets to manipulate asset prices. And even if you happen to like the interventions of one administration, you might hate the interventions of another.

The Scratch That Corrupts

In testament to the inefficacy and corruption inherent in government intervention in private markets, Peter Earle offers a number of examples of government planning gone awry. It’s not difficult to understand the dysfunction:

“A sovereign wealth fund would not, whatever the intentions of its government administrators, be guided purely by market signals but rather by political interests. That virtually ensures poor investment choices, investments in politically favored industries, and/or wasteful subsidies tending to yield subpar returns. 

“Government officials will not have the same rigorous concern for opportunity costs that drives private investors and for-profit managers, as bureaucratic decision-making is often guided by political priorities and budget cycles rather than the disciplined allocation of capital to its most productive use. The Knowledge Problem is real — and ignoring it is expensive.“

Big money in government is an invitation to corruption, and an SWF is no exception. According to the Carnegie Endowment for International Peace:

“…there are systemic governance issues and regulatory gaps that can enable SWFs to act as conduits of corruption, money laundering, and other illicit activities.“

Therefore, the management and operations of an SWF require great transparency as well as strong governance and oversight. This obviously adds a layer of cost as well.

Sound Planning

There is an economic rationale for holding funds in reserve for certain, earmarked purposes. For example, private businesses usually maintain reserves for the upkeep or replacement of physical capital. Shouldn’t the government do the same for public infrastructure such as highways or harbors? Public investments in physical capital should be planned such that the flow of tax revenue is adequate to replenish infrastructure from wear and tear. To the extent that the necessary expenditures are “lumpy”, however, a maintenance reserve fund is sound practice, as long as its management is transparent and accountable, and its holdings represent prudent risks.

Another example is the maintenance of a reserve fund for pension payments. This is a reasonable and even necessary practice under traditional defined benefit plans, but those plans have often fallen short of their obligations in practice. The private sector stayed ahead of this risk by shifting overwhelmingly to defined contribution plans. As part of this shift, the existing pension obligations of many private entities were converted to vested “cash value” balances. The public sector should do the same, putting employees in charge of their own retirement savings.

Countries with SWFs tend to be small and also tend to run budget surpluses. Very often, they are funded with revenue earned from abundant natural resources. But even those governments short-change their citizens by failing to reduce tax rates, which would promote growth.

Nonsensical Appeal to Nationalism

Why does the creation of an SWF sound so good to people who should know better? I think it has something to do with the nationalist urge to embrace symbols of patriotic strength. An SWF might evoke the emotive impact of phrases like “sound money” or “a strong dollar”. But in the presence of a large public debt and large, continuing budget deficits, the kind of SWF envisioned by Trump would be counterproductive. Future obligations to pay down the public debt are better addressed in the present, to the extent possible. The government has no business hoarding private financial assets as a means of outrunning debt. Sure, the return on equity usually exceeds the interest rate on public debt, but private investors are better at allocating capital than government, so government should not attempt to take on that role.

The Digital Erosion of Collecting and Ownership

07 Thursday Oct 2021

Posted by Nuetzel in Digital Revolution, Technology

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8-Tracks, Blockbuster, Blockchain, Cassettes, Cloud Storage, Collecting, Crypto-Assets, Digital Assets, DVDs, Electronic Books, Film Collections, Grateful Dead, Hardware Requirements, Kyle Chayka, Microsoft Office, Music Collections, Netflix, NFTs, Non-Fungible Tokens, Ownership Rights, Personal Library, Phonographs, Photo Albums, Physical Media, Rent vs Own, Streaming Content, Use Rights, VCRs

Our material possessions aren’t the most important things in the world, but they are often part of our identities as people. Almost anything qualifies, from the big, expensive stuff like a home or a car, to whatever we find worth keeping. Declutter if you must, but the things that remain have a lot to do with our well being, even if they exist simply as part of our surroundings. They reflect our past, present, and hopes for the future, and they embody important aspects of our interests and passions.

I don’t doubt that individuals of high spiritual or metaphysical consciousness are able to transcend the desire for material goods. Very well, though for most of us, certain physical possessions matter. People collect things like matchbook covers or fine art because they are important in one way or another. Great works and quirky novelties all have their place… with someone.

We’ve witnessed an accelerating erosion in the personal art of “collecting” certain kinds of things, however, and that is the main subject of this post. It draws heavily on Kyle Chayka’s excellent piece, “The Digital Death of Collecting”. There are at least two aspects of this decline. One has to do with digital storage, which eliminates physical media and presents a new set of administrative issues. The other strand has to do with a loss of ownership. That’s a distinct phenomenon, but it has probably been driven by digital technology, at least to this point.

Losing Physical Control

Much of the entertainment we experience today is delivered electronically. Historically, we used physical storage media of various kinds: books, vinyl records, CDs, DVDs, books on tape, etc… so it was (and still is) possible to accumulate and possess a physical collection of music, for example. It can be fun to document those collections, like my old bootleg Grateful Dead concert tapes. Now, actually owning a collection of physical music media is an anachronism to many (mostly younger) people. Instead, their favorite music is stored on a device, a server, or “in the Cloud”. Often, without a shred of awareness, this has led to a kind of interference with the individual’s ability to possess and control a whole class of property closely associated with the cultural and intellectual self.

For example, with respect to physical media and storage, we used to shoot photos and, once developed, we’d curate them and put our favorites into photo albums. However, for the better part of the past two decades, phones have allowed us to snap photos and take videos more or less indiscriminately. I periodically transfer my photos to an electronic hard drive, with minimal curation, where they are automatically assigned names with inscrutable combinations of letters and numbers. I’ve been doing it for years now, and it’s a mess. How long will it take me to find a particular photo? Even one photo from a particular event? What if the drive fails?

I need to back them up, of course, but that was the original purpose of the external hard drive! As I updated and transitioned to new computers over the years, I failed to maintain a complete set on the new laptop hard drives. Now, they reside only on the external hard drive. Sadly, in the end, many of us are simply unable or unwilling to implement better record management practices. My “collection” of photos has been neglected. I could try to rename these images descriptively and sort them into folders, but digging into it now seems almost an insurmountable task.

To some extent, the advent of digital players had the same impact on music collections. Some listeners never made the transition and consigned themselves to the use of older media and technologies, despite the increasing difficulty and expense of finding recordings. But they kept their physical collections active, which is a gratifying thing. Those who made the transition grappled with new issues in managing their “collections”, often without the satisfaction of arranging and beholding the physical media. Granted, this isn’t always an either/or proposition, but doing both requires extra effort.

Similar transitions took place with digitized movies and reading material. I have a small movie collection, mostly movie musicals, animated children’s films, and a few cult films and classics. Not all are on DVD, and I haven’t added anything to this little trove in years. I still rent discs from Netflix, but like most people, streaming accounts for a growing share of my viewing. As for books, it’s less common today to see handsome collections of books arranged on shelves, but some doggedly attempt to maintain personal libraries, even if they aren’t all bound hardcovers.

Loss of Ownership

The other strand of our evolving relationship with digitized entertainment has to do with ownership itself. Today, we often purchase what amount to listening, viewing, or other “use rights”. This has sealed Chayka’s “Digital Death of Collecting”. Here’s how he sums it up:

“My lostness comes from the sense that our cultural collections are not wholly our own anymore. In the era of algorithmic feeds, it’s as if the bookshelves have started changing shape on their own in real time, shuffling some material to the front and downplaying the rest like a sleight-of-hand magician trying to make you pick a specific card — even as they let you believe it’s your own choice. And this lack of agency is undermining our connections to the culture that we love.”

Again, books are a case in point. Chayka notes that building a personal library is an expression of one’s intellectual history and interests. Yet today, with electronically delivered reading material sans physical media, you don’t really “own” the books you purchase. This blogger states the case well:

“As I’ve tried to point out before, both publishers and distributors like Amazon have spent the past decade or so removing rights that we used to have when books were physical property, and were something that you actually bought — along with the right to resell and/or lend them to whomever you wished, whenever you wished. Those rights no longer exist, which is why it’s better to think of an ebook purchase as an agreement to rent access under specific terms rather than an actual acquisition of something tangible.”

Free To Rent … and Pay As You Go

Subscriptions are replacing ownership in all sorts of contexts, and the use rights they confer are obviously of limited duration. For example, I was surprised when I realized that I could no longer “purchase” Microsoft Office and then download and install it to my computer. Instead, I have to buy annual subscriptions to continue to use it. Now, I don’t really “collect” software, unless the plethora of apps I’ve downloaded to my phone qualifies. Also, I understand that software becomes obsolete, so my “ownership” of Office was really equivalent to an indefinite but limited rental period. Maybe one-year subscriptions will be a better deal, though I have my doubts.

Renting certainly isn’t new in the “film space”. Blockbuster was a huge success for a time. And again, I get two discs at a time from Netflix to this day. People can still “collect” videos, but I suspect it’s not quite as common today in terms of collecting physical media.

I’ll always argue that renting is an economically rational alternative to homeownership. Same with leasing vs. owning a car, or anything else. And people often take a measure of pride even in things they rent. These own vs. rent choices and their relative values depend on one’s circumstances in life as well as one’s preference for control over the items in question.

Our Carts Runneth Over

A huge upside of all these changes is that we’re enjoying an astonishing array of choices as well as unprecedented convenience. (We can argue about the quality of the art, but that’s for another day.) In fact, the scarcity of new “collectibles” in the categories I’ve mentioned here might not be such bad news to collectors who’ve been at it for a while. After all, their existing collections might gain value. However, some forms of storage media might require technical or mechanical skill on the part of the collector. That’s because they have rigid hardware requirements. Eight-track players? Cassette tapes? VCRs? Who supports them? Yes, you can still buy a phonograph, but finding compatible “content” can be challenging. For the rest of us, streaming digital content frees us from those requirements and their inevitable obsolescence.

Unfortunately, our relationship to so much of our personal entertainment bounty seems more ephemeral than in the past. Streaming music and films is fine, but I’m much less likely to “burn them”, and ownership is an all but forgotten possibility. Like Chayka, I find the loss of owned, physical collections that has accompanied the digital revolution lamentable, not to mention the loss of control. I truly believe that if publishers ever quit printing physical books we’ll be poorer for it. But I’m not a complete technophobe, and I think there’s promise in recent developments in blockchain technology that might restore our ability as consumers to own more encompassing rights to digital assets.

Non-fungible tokens (NFTs) are essentially digital assets of almost any kind, with ownership documented in the blockchain. Some of the most publicized NFTs we’ve seen thus far are notoriously lacking in the actual rights they confer to the buyer. However, advances in standards are enabling the creation of more robust NFTs. There is no reason, in principle, why a consumer could not possess an NFT documenting ownership for a digital copy of a particular film, piece of music, e-book, or any other form one might collect. That might solve the ownership issue if and when crypto assets gain more acceptance. Individuals who are especially proud of their collections of NFTs could produce physical tokens to represent each NFT for display, if only for themselves to gaze upon lovingly. These could be plaques, for example, or the physical tokens could look like DVDs or books! Granted, it’s not the same as a real collection of physical media, but it might serve an emotional purpose.

NFT Assets, Artists, and Con Games

08 Saturday May 2021

Posted by Nuetzel in Art, Corruption

≈ 2 Comments

Tags

000 Days, Aeriel, Asset Inflation, Beeple, Beeple Crap, Blockchain, Carbon Offsets, Christie’s, Copyright, Crypto-Currency, Digital Racehorses, Ergreifungen, Everdays: The First 5, Face, Federal Reserve, Jerry Garcia, Jerry Garcia Foundation, Katy Perry, Long Con, Metakoven, Metapurse, Mike Winkelmann, NFTs, Non-Fungible Tokens, Remodern Review, Richard Bledsoe, Roper, Royalties, Shill, The American Reveille, Tokenomics

The art world is buzzing about “non-fungible tokens” (NFTs), or digital files in which ownership is secured by blockchain technology. As the name suggests, such a crypto-asset can exist only as a whole piece. That’s unlike crypto currency, which is infinitely divisible and, well, fungible. NFTs are diverse in their features and functions, and various kinds of art are now being traded as NFTs: digital images, GIFs, and audio clips, for example.

Beeple Crap

A digital artist named Mike Winkelmann, otherwise known as Beeple, makes digital “Beeple-crap”, as he calls it, like the giant “Xi-bot” shown above. He has successfully monetized the digital images he’s posted on his web site over the last 13 years, and in a coup de grace, he recently aggregated all those images into a one-file mashup NFT for which a buyer paid $69.3 million in Ethereum (less a substantial fee to Christie’s auction house). And Beeple isn’t the only one making big bucks on NFTs!

Beeple’s “collage” is available for anyone to see or copy on the web. It’s called “Everdays: The First 5000 Days”. But precisely what are the rights now held by the buyer of “5000 Days”? Apparently, they are limited to the satisfaction of knowing digital proof of ownership is his, and whatever that smug feeling might be worth on potential resale! In fact, Beeple himself retains the copyright to 5000 Days, so it’s not as if the buyer is the only guy who can ever print a high-resolution copy. But here’s what Beeple says the buyer got:

“The biggest thing he actually bought is a relationship with me to promote his purchase. He and I are very aligned. I want to see this artwork go up in value. He wants to see the artwork go up in value, which benefits me. So the idea that he bought nothing is kind of misleading.”

The buyer, known as Metakovan, is the founder of Metapurse.fund, a highly influential player in crypto ventures and NFTs. But Metakovan’s purchase of 5000 Days is not his first collaboration with Beeple. They already had a significant “relationship”, and this transaction obviously won’t be their last.

If this smells a bit like a con game to you, you’re not alone. Don’t get me wrong: Beeple does produce art … very striking images, in fact. They might not be your cup of tea, and many are a bit cartoonish, but Beeple has computer skills and a real creative streak. He also has a knack for self-promotion unequalled, in relative terms, by perhaps any of the old masters or impressionists.

I’m perfectly happy to know there is a vibrant market in anything people call art. Whatever floats your boat, baby! However, I have trouble believing that long-term growth can occur on top of this kind of “valuation” without an escalating monetary inflation. Between the Federal Reserve’s open-spigot policy of near-zero interest rates and the advent of crypto-currencies with supply limits, dollars are getting cheap. Asset markets, still denominated in dollars, usually receive more than their fair share of bidding as excess dollars accumulate on balance sheets. So the outlook might be bright for NFTs as an asset class, such as it is.

Art In the Ersatz

The most regrettable thing about NFTs like 5000 Days might be what they reflect about the state of the art world itself. Richard Bledsoe of the Remodern Review has a lively take on 5000 Days and NFTs as a new stage in the long decline in the quality of what is called art. Bledsoe is no fan of contemporary art, which he argues has been enabled by elites who have successfully corrupted the art market.

I’m no expert, but I generally view contemporary art as less ambitious and requiring less skill than earlier forms. I think that’s easy to prove (see here and here), but it’s outside the scope of this post. I have wondered whether the emergence of contemporary art was impelled by the tremendous increase in prosperity during the late 19th and 20th centuries and the attendant expansion in the market for original art. Artists such as painters and sculptors, whose labor productivity did not greatly benefit from technology growth (we can argue about the last several decades), might have adjusted to this reality by focusing on simpler and more abstract forms. This is a digression, but it’s surely worthy of a much longer treatment. 

There’s no accounting for tastes, of course, and while I like some contemporary art, I’m definitely sympathetic to Bledsoe’s views. As for NFTs, he quotes from his book, “Remodern America: How the Renewal of Art Will Change the Course of Western Civilization”:

“Billions are being spent on unskilled and intangible contemporary art. Just like in the good old days, many of the suckers are the newly rich or globalists looking for social credibility and a fast buck. There’s a lot of money laundering and tax evasion in the equation as well.

How does the art world convince well-heeled fools to part with their money, when they are offering so little real value in return? Simple. The art market follows the tried and true methods honed by generations of confidence tricksters: the elaborate pantomime known as the long con…”

Don’t You Let That Deal Go Down

Bledsoe gives a brief sketch of the mechanics of the “long con” and how it’s practiced in the art market. He describes players such as the “Shill” (a promoter who avoids revealing a personal stake), the “Face” (a celebrity whose presence helps to “guarantee buzz will exceed rationality), and the lastly the “Roper”:

“… whose affluence leads to influence, a savvy and powerful individual whose participation gives credibility to the whole enterprise. What is ignored is how much moguls like this manipulate the market to serve personal interests, using insider trading, shady financing and backroom deals to inflate the value of their own collections.

In any other industry, common practices of the establishment art market could probably lead to criminal charges. But in the unregulated free-for-all of the art world, it’s very hard to bring these cases of potential white-collar crime to justice, and the victims here are less than sympathetic. After all, the buyers are people who have so much money it’s meaningless to them. Who cares if a bunch of billionaires are getting ripped off?”

All of these players seem well ensconced in the world of promoting NFT art: Beeple in particular, and the “art experts” at Christie’s, Beeple’s celebrity pals (OMG! Katy Perry!!), and finally Metakovan’s stature as an authority on NFTs and “tokenomics”. By the way, his considered opinion is that 5000 Days is “worth a billion dollars”. Well, okay then!

Carbon Indulgences

Another insane aspect of NFTs and the crypto-currencies used to buy them is the pushback over the carbon footprint of crypto-currency mining. This is discussed briefly by Bledsoe as well. While the electricity used in mining is significant, the amount attributable to any given transaction is minuscule. Yet now, sales of high-value NFTs are accompanied by the purchase of carbon credits. Read this description of an auction to be held for a piece of art created by Jerry Garcia on a Mac in 1990. It says “… carbon offsetting to be provided by a company called Aerial.” Now, Jerry Garcia was a talented visual artist on canvas and on his early Mac, not to mention his considerable magic as a guitarist and songwriter. God bless his family, and no offense to the Garcia Foundation, but they were perfect suckers for what has quickly become a standardized virtue signal or buy-off. The fact is that carbon offsets generally don’t have an impact for many years, and there are doubts as to their efficacy in permanently reducing carbon when the time comes.

Redeeming Potential

While the artistic value of NFTs like 5000 Days can be debated, my doubts about their value as assets center around the lack of real ownership rights conferred to buyers. Work is underway, however, on new NFT standards that would allow an NFT buyer to collect royalties, which would obviously carry real value. So, for example, a musician or band could immediately monetize a recording’s future royalties by selling it as an NFT. No one should have qualms about that, and good for the musicians.

I believe other kinds of NFTs have real value, in principle, such as the digital racehorses discussed in this article. Apparently, virtual horse races have already achieved a degree of popularity. These crypto-horses actually win prize money and collect stud fees, based on their digital bloodlines. Another example: NFTs can be concert tickets, electronic possession of which entitles the bearer to a particular seat at the venue; or, an NFT might remain in your “digital wallet” as a season ticket to sporting events. Among the claimed advantages over “normal” electronic ticketing is security, and NFT tickets live on as tradeable memorabilia as well.

Conclusion

It’s still early days for crypto-currencies and especially for NFTs. I can’t object to a free individual spending their hard-earned crypto-wealth on crypto-art like 5000 Days. Unfortunately, the market for NFT art does seem to embody aspects of a confidence game. And like Richard Bledsoe, I’m a skeptic when it comes to most contemporary art. However, there are circumstances under which the value of NFTs can be compelling, and the development of more “use-cases” will increase the value of digital currencies. New NFT standards and applications might well revolutionize certain industries. Continuing asset inflation instigated by central banks, and especially the Federal Reserve, will cause the dollar value of crypto-assets to rise. Big institutions like investment banks are starting to jump on the crypto bandwagon as well. So, while some NFTs might be short-term plays and might even be dangerous swindles, crypto and NFTs in general should not be dismissed as an asset class.

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