Back in the late nineties, free-marketeers reckoned that by opening markets up to the point of total decentralisation, away from the overarching domination of rent-seeking monopolies (especially those supported by governments) and overly powerful middlemen, consumers would be hugely advantaged.
There was no better example of this doctrine in action than the liberalisation of the California power markets, beginning in 1996.
And yet, as is often the case, things didn't turn out as expected. Rather than encouraging prices to fall as larger numbers of smaller-scale middlemen competed for business (encouraging producers to respond to higher prices with more production), deregulation instead encouraged providers to withhold supply until prices got even higher. All this was exacerbated by the fact that many entities were still committed to fulfilling retail contracts at fixed prices, even as daily prices began to fluctuate enormously, allowing them to be ruthlessly gouged by new entrants.
One of the key lobbyists for this sort of deregulation — and a new entrant into the market when it was opened up — was Enron. At the time, the group was becoming extremely well-known for its innovative financial thinking, especially with respect to the creation of new and abstract markets like weather securities and other wholesale risk products. But Enron was also becoming well-known for gaming markets for its own benefit, especially the newly liberalised Californian market, which it began to ruthlessly exploit at the cost of the state as a whole. In the end, Enron became a powerful rent-seeking middleman in its own right, making a mockery of the dream of decentralisation.
The group, of course, went bankrupt in 2002, following the revelation of mass accounting fraud. The inquiries into the rolling blackouts at the peak of the Californian energy crisis that followed concluded that a market approach for certain utility services like electricity would always be inherently gameable and vulnerable to exploitation by new types of rent-seekers and middlemen.
Bear that story in mind when looking at the following perceptual map:
It's from the “introduction deck” of a crypto company called the “Bank of Hodlers”, which depicts itself as getting top marks for ease of use — leaving traditional banks in the dust, as you can see — and also for decentralisation.
But this, we'd argue, is contradictory. How can something calling itself a bank — the primary purpose of which is to be a trusted entity that can look after people's money for them — call itself decentralised? It may exist within a decentralised network of banks, but with respect to its own structure, a bank by definition exists as a centralised go-between, not a headless decentralised organism.
Its whole raison d'être is to be a middleman.
The crypto sphere, however, is convinced that decentralisation can rid the world of such middlemen forever. And yet, in order to function, so-called “decentralised assets” such as bitcoin or other digital tokens rely on countless points of centralisation in order to be usable, like wallet-providers, exchanges and specialist crypto-custodians. The idea of the decentralised “trustless” network is thus proving a fallacy. Blockchain does not eliminate trust; it just shifts it about and grants it to entities that have no history of being trustworthy, often with disastrous consequences.
But far be it from us to pour scorn on the idea of a decentralised bank — which actually isn't actually a bank at all, as we will see — without getting the perspective of the Bank of Hodlers first. So we called up Naveen Mishra, the company's “head of partnerships”, who told us the following:
We believe decentralisation is not an end-game in itself. It’s a spectrum — companies can be all the way from fully centralised like a normal entity, to fully decentralised, like what the DAO attempted to do. We’re somewhere in the middle but we say we’re decentralised because we look at decentralised assets and hopefully our infrastructure will be on a decentralised back-end.
The above implies two assumptions by Mishra. One, that by removing executive function and human oversight from an entity the said entity magically becomes decentralised. Two, that core banking is so centralised that the positioning of any new entity even slightly further up the decentralisation spectrum is a win for customers and consumers.
What the view ignores, however, is that conventional banking, just like the power market, is no stranger to liberalisation and decentralisation efforts. These have been going on for generations. As have, for that matter, efforts to automate the industry and make it increasingly headless — to the point, today, that algorithmic black boxes have replaced human traders and robo-signers have in the past even replaced human credit evaluators.
The problem is, just like with the California example, every time deregulation, decentralisation and automation has taken foot in the financial world, bad things have tended to follow. Most of the time what is revealed is that middlemen or rent-seekers weren't actually eliminated or disempowered, but rather regenerated into new forms. Meanwhile, where algos took on the responsibility for human judgments, they were easily gamed, and introduced all sorts of new risks into the system. Those bad things then justified the return of regulation and the effective reformulation of human-overseen processes that “recentralise” the industry.
Banking, in other words, has always sat on a centralisation spectrum. Currently, with initiatives like “open banking”, the spectrum is veering back towards decentralisation. It's also veering towards the build-up of wholesale systems serviced by competing entities within a structure that still commits incumbent utility-type banks to certain restrictive regulations. Even as these new competitors — free of many of these restrictions — aggressively eat their lunch, potentially putting the core utility infrastructure at risk.
In the BoH case, the pitch is to “create a decentralised bank”, which apparently will one day have some infrastructure that runs on “a decentralised back-end”. But what does that actually mean? And why is it supposed to make banking services better?
Historically, one could argue, decentralisation always failed when entities forgot that the successful provision of core utility services was as much about reliability and accountability as price. People expect their core infrastructure providers to be robust and dependable. If and when they fail, they also expect processes to exist that can hold people within the organisation to account.
A DAO, or Decentralised Autonomous Organisation (made famous by the blow-up of an entity of the same name on the Ethereum blockchain in June 2016) does exactly the opposite. It obscures both responsibility and accountability, due to its lack of executive (centralised) leadership, like a zombie body without a brain.
But that doesn't stop Mishra being a believer about the potential of a DAO system:
I don’t think the legal structures exist for us to become a DAO (decentralised autonomous organisation) but as soon as they exist we will look at going down that route.
So what BoH currently amounts to is an enterprise (can you even call it that?) that oversees decentralised assets, but which eventually wants to become a decentralised autonomous entity when the "legal structures" are put in place. But how can it? A decentralised company is an oxymoron. In order for the BoH to become one it would have to cease to exist.
Back to basics on funding
BoH's original plan, as laid out in the white paper as well as the introduction deck, was to raise money for the project via an initial coin offering (ICO). But they've decided not to do an ICO for the time being because they'd rather take the now apparently innovative step of building a product first. (That nobody can make any money that way any more or because concerns are mounting that the SEC may come down on them like a ton of bricks is, allegedly, not a factor.)
Apart from the ICO and a magically “dividend paying utility token”, many of the other ideas laid out in the white paper and on the company's website have also been dropped, such as insurance against crypto theft. (Too difficult to do, for now, apparently — they would have to “solve further technical problems” first.)
The only thing the BoH is actually going to do, for the time being, is to allow HODLers of Ether (Ethereum's native cryptocurrency) to use their HODLings as collateral for loans, at a leverage rate of 1.5 per cent, to borrow from other BoH users in a kind of crypto peer-to-peer lending system. The HODLers can borrow either in crypto, or in the lovely centralised stuff that is real, spendable, fiat money — if they want to pay a 7.5 per cent fee for the privilege of doing so (on top of the borrowing fee set by the lender). The BoH says it won't take any fees for now (though it website says it will), because like all for good modern companies, market share is more important than profitability.
So how do you raise money for a crypto project these days if not by ICO? Apparently it's back to old school methods like “the equity route”. Mishra says the company has managed to raise $500,000 so far from angel investors in India. But given that the introduction deck and white paper (both of which include a “road map” featuring the ICO and the crypto insurance stuff) was the only documentation available to review the offering, we wondered what information these investors had been given before they gave their money to the company.
Mishra says the content shown to investors was being updated, and that he “would like to reconfirm that we have pivoted and are building a financial services product for digital assets starting with crypto assets”.
So as it stands BoH has raised money for a decentralised bank that is nothing like a bank, and is not doing anything remotely decentralised beyond allowing people to use “decentralised assets” as collateral on P2P loans. (As we all know, P2P lenders mostly mutate into more centralised banking structures eventually due to scaling forces endmic in the industry ). But they do say they're “democratising access to capital”.
As regards to who they are targeting?
Our target users are people who are crypto rich but maybe not yet fiat rich. If you want to take a loan there are very limited options for you. We’re just providing financial services if you’re crypto rich.
On that basis, we can assume the revolution will be decentralised, but only for as long as it's expedient for it be so. Given regulatory attention and growing investor scrutiny, it's arguably ever less so.
So maybe the lessons of Enron and the attempted decentralisation of energy markets weren't completely wasted. The fact that the Bank of Hodlers has been forced to “pivot” away from the original “Hey, we're building a decentralised bank, give us your money for magical tokens” idea suggests that the actions of regulators — namely the SEC — are having some effect.
The mythical allure of decentralisation is not dead yet — Enron executives after all are reportedly looking at blockchain closely — but it's clearly dawning on the Bank of Hodlers at least that it's more of a pipe dream than they realised. (Not that they will tell you that in any marketing material.)
Coinbase wants to be “too big to fail”, lol — FT Alphaville
A failed ICO is trying to flog itself on eBay — FT Alphaville
Enron's Jeff Skilling: out of jail and on the crypto trail — FT Alphaville
More decentralised autonomous organisation (DAO) mysticism — FT Alphaville
- Blockchain: it really is a tough sell
- Sterling has not become an emerging market currency
- Jeff Ubben/ESG: flip flop
- Is this the nuttiest risk factor of all time?
- The tech start-up that wants to “validate” the female orgasm
- It’s a great time for conspiracy theories to thrive
- Let’s call Trump out, but let’s get our facts straight too
- Today, in efficient markets
- We can’t blame all the indirect health damage on the lockdown
- Weirdly, blockchain can’t help combat coronavirus
- Leading ‘UK’ start-ups want a handout too
- China’s PMI print doesn’t mean much
- Let’s flatten the coronavirus confusion curve
- NMC Health: presented without comment
- When “commission-free trading” isn’t (really) free
- Michael Milken: financial innovator
- Oh no, the death-techers are coming
- Bitcoin’s “halvening” won’t boost its price
- CEO of JPM, recipient of $bns in state aid, bashes socialism
- Trump just made a joke about negative rates
- The Witcher is not a freelancer
- The ITV M&A fantasy
- Blockchain, all over your face
- Baillie Gifford: pot kettle black
- Is Facebook’s status as the bête noire of political advertising justified?
- The Eurosystem might have a fatal flaw. But it’s not this
- Venture capital for the ‘forgotten’
- The troublesome Trump inside trading claim
- The US economy is not recession-proof
- Hedge fund bro gonna hedge fund bro
- What do women want? Some crypto flavoured mansplaining, apparently.
- The Fed’s wishful thinking on inflation
- Dalio and Diddy: when genius collides
- State-backed crypto is a contradiction
- Rejoice! Venture capital wants to pay for your holiday
- Are electric vehicles more damaging than diesel?
- The £3bn hole in the Tory manifesto
- ArtGo loses its marbles
- Are banks really magic money trees?
- Will Lagarde’s sneaky tweet change much?
- Can we all calm down about Apple Card’s “gender bias”
- UBS’ billionaire boondoggle
- When fast fashion jumps on the eco-wagon
- GenX will set central banks’ climate response
- The stablecoin anathema
- Masters of the universe, don’t be scared of Elizabeth Warren
- Missing: the GE short report
- The average lifespan of a fiat currency isn’t 27 years
- Lord King: Brexit is no big deal
- No inflation? Tell that to my landlord
- Today, in fintech marketing
- YouGov’s “blockchain-based” sell-your-own data platform makes no sense (*update)
- Presented without comment
- Block.one headed
- Ride-sharing apps can’t save the planet (obv)
- The WeWork bull case
- No deal Brexit is not a hedge fund conspiracy
- Europe’s digital infrastructure issue
- Let’s give a helping hand to Andrew Yang
- Anatomy of a malware scam
- ARK Invest’s Tesla model gathers dust
- A delirious defence of Uber
- WeLiquid: Adam Neumann pockets $700m
- Yesterday, in efficient markets
- The warm fuzzy feeling of indirectly owning Tencent
- The best of Morgan Stanley's Adam Jonas
- Apple/Tesla: M&A and heartbreak
- Did Beyonce make $300m from Uber's IPO?
- Bitcoin is the 10-year Treasury of our time
- High resolution music is a solution looking for a problem
- Amazon is furious about this negative review
- Missing: $500bn of American savings
- Blockchain for Brexit: a wonderfully terrible idea
- Behind the curtain at China Ding Yi Feng
- An answer to Mark Cuban's question
- Crumbs! It's CRYPTO: the movie!
- National Beverage Corp loses its fizz, and its mind
- Amazon won't spin-off Amazon Web Services
- Mensch! Dan McCrum is innocent, ok?
- Europe's $1 trillion tax gap
- Why online propaganda mobs are an investment red flag
- Davos has produced an amazing new guide on precisely how not to think about risk
- When the public relations industry does PR for itself
- Who wants to be crippled by student debt?
- The bitcoin price is wrong
- The warm fuzzy feeling of Goldman debt
- “Cryptoassets” are crashing again. Is it time to start calling them cryptoliabilities instead?
- Puff the tragic cryptowagon smokes out the Mumsnet demographic
- Don't write off the public sector
- Initiative Q: an elementary pyramid scheme with grandiose ideas [Update]
- Moral investments aren't outperforming
- No one is killing it in crypto (not even Woz)
- Too smooth: the red flag at Patisserie Valerie which was missed
- No, the housing crisis will not be solved by building more homes
- Sorry Civil, 'crypto-economics' and 'constitutions' won't save journalism
- 'Short-termism' isn't a thing, say Fed economists
- Coinbase wants to be “too big to fail”, lol
- Regulation and innovation don't have to be enemies
- Retailers get so lonely around the holidays
- Folli Follie: $1bn of fake sales, and what to learn from the debacle
- The new green evangelism
- Tilray, how low can it go?
- The ICO behind the tragic Everest stunt is now “airdropping” tokens from rockets
- Beware the Hindenburg Omen?
- The broken conversation about financial regulation
- The improbably profitable, loss-making Blue Prism
- The EM rout is not made in America
- Wages and growth and honestly we just give up
- Britain's first blockchain-enabled co-working space isn't blockchain-enabled
- There is a FIRE that never goes out
- The WeWork Garden of Eden
- IQE: lumpy 'Apple' sauce at the pricey Cardiff chip shop
- There's only so much a central bank can do alone
- Eight questions every first-time buyer should ask
- MiFID II: not all doom and gloom
- Tesla: getting to Q3 profitability
- Turkey contagion fears are overblown [Update]
- The chance of an inflation shock may be higher than you think
- Sorry Tim, the humanity is not being drained out of music
- Digital crop circles
- What could go wrong here?
- Sirius Minerals: money for a hole in the ground
- The Bank of England has a strange idea of what QE achieved
- One for the ladies...
- 'Of course, many ridiculous papers appeared'
- Is a change goin' to come?
- The capacity's not there yet (and probably never will be)
- Musk and Tesla are not inseparable
- Libraries, from Carnegie to Bezos
- Crypto & government: from anarchy to amity in the USA
- 'I'm sorry Dave, I'm afraid I cannot sanction this Series B round'
- RBC, through the FANG barrier
- Self-help to buy
- CFA: Chartered crypto analysts -- updated
- The Netflix dilemma -- updated
- Fujitsu's new blockchain offering: really cheap or really expensive?
- Nothing But the Shirt on Your Back
- Universities of Britain: cosying up to crypto is a bad look
- How to make a living in the cult of meritocracy
- Spotify: Drake-oil salesmen
- Oh, the digital humanity
- Sports are not markets, predictions ain't investment
- Spot the difference, Steinhoff edition
- Larry Robbins, a cautionary tale
- The node to serfdom
- Carney is down with the crypto kids
- Samsonite: inventory, excess baggage, and unresolved questions
- It might be a long wait for “the equivalent alternative to ICOs”
- Don't blame it on the sunshine
- In corporate America, brands develop you
- One in ten dollars of US housing were anonymous
- Should AT&T worry more about its debt?
- Who cares if Elon is incinerating capital?
- Let’s not try make 'crypto chicks' a thing
- Tokens all the way down
- Eight-dimensional chess with Elon Musk
- A lopsided trade is a good trade, Italian inflation edition
- How to buy Italian fire insurance
- Atlas bugged
- Inflating inflation
- Crypto's most devout believers are suffering a crisis of faith
- Plus500: past performance is no guide to the future
- Noble rot in a shrinking Harbour
- In defence of ticket touts
- Please don't tell individual investors to buy leveraged loans
- RIB Software: the unicorn rainy-day fund
- Retail is not dead
- Did Soros really give Tesla a “vote of confidence”?
- At a crypto conference in New York, it feels like 2017 all over again
- Egregious expectations - Intelsat edition
- Bitcoin cash is expanding into the void
- Stop getting The Flintstones wrong
- Bond investors do not care if Argentina is solvent in 100 years
- Ubiquiti Networks: of cash and borrowed time
- “We're very disappointed in you, Spotify”
- 'Sex redistribution' and the means of reproduction
- Tesla probably needs to raise capital this year
- No entitlement crisis in America
- Free cash flow to whom?
- Hey crypto bros! Journalism ≠ advertising
- Human capital and the jobs guarantee
- This is a tech bubble, when's the crash?
- The magic of adjustments: ebitla-dee-da
- FUD, inglorious FUD
- A complex analysis reaches same conclusion as simple one: hedge funds suck
- The jobs guarantee and human-capital “nationalisation”
- These hedge fund numbers can't be right
- The Vomiting Camel has escaped from Bitcoin zoo
- Lies, damn lies, and charticles
- The world doesn't need more Elon Musks
- No, Facebook should not become a nonprofit
- Sell all crypto and abandon all blockchain
- Immutable ledgers meet European data protection
- Amazon is not a bubble
- Japan's economic miracle
- Have you ever meta crypto joke you didn't like?
- Delaware should change its rules to let the light in
- Who needs the labels anyway?
- Baby Boomers want your family to finance a larger share of their retirement
- No, America would not benefit from authoritarian central planning
- No one needs to buy Tesla
- How to win a debate in the cult of meritocracy
- Steinhoff International and the case of Pepkor Global Sourcing
- Sorry Jack, Bitcoin will not become the global currency
- The “academic’s cryptocurrency” is an elegant waste of time
- Cigarettes are the vice America needs
- Well that’s one reason to buy yen…
- Musicians, don't just blame the labels for your lack of dough
- Giving stock away to staff doesn't absolve share buybacks
- A penny for Macpherson’s thoughts on the nominal anchor
- Monopoly and its discontents
- A State of Mind
- America is not the least protectionist country in the world
- This is nuts, when does Netflix crash?
- No Bloomberg, the world's richest people did not lose $114bn...
- Someone is wrong on the internet, government employee pensions and passive investing edition
- Someone is wrong on the internet, possibly fragile
- Someone is wrong on the internet, consumer financial regulation edition
- Someone is wrong on the internet: tontine tokens [Update]
- Someone is wrong on the internet, road economics edition
- Someone is wrong on the internet, wages and the stock market edition