Gold-Backed Stablecoins: Bridging the Gap Between Crypto- Gold (Part 2)

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What are Stablecoins?

The term stablecoin is frequently thrown around by those initiated in the crypto-space, but what is it? It is a digital currency value tied to an asset or supply controlled by an algorithm (known as an algorithmic cryptocurrency). This category of digital assets created a cryptocurrency with a stable value. Cryptocurrencies have become popular alternatives to traditional inflation hedges as such money assets are highly volatile, meaning that Bitcoin may not be the best store of value if compared to other monetary assets. In 2014, the first stablecoin, Tether, was established and was backed by the US Dollar and related assets  (US bonds). But wasn’t the creation of cryptocurrency an attempt to veer away from the authority and meddling of central banks? There must be a better asset to collateralize private digital money than monetized debate.

Fortunately, there is gold, precious metal that has demonstrated its value retention and salability over the course of human history. In an age of digital transactions, even using gold-pressed coins or promissory notes to redeem specie may be cumbersome in an era of debit cards. The idea of a gold-pegged stablecoin seems like a natural fit, combining the benefits of gold’s superior value proposition with the perks of blockchain technology. The market for the digital token has answered with popular stablecoin such as Pax GoldTether Gold, and Perth Mint Gold Token.

Gold stablecoins are valued at a specific amount of gold per token, stored in a secure vault. Per the Pax Gold white paper, each coin is collateralized by one troy ounce of gold. In the example of Pax Gold, any owner of Pax tokens can redeem them for physical gold “… at partner organizations..”. While the reserve ratios for gold to token parity and specifics of redemption requirements may vary by currency, most gold-backed stable coins utilized Ethereum-based smart contracts (ERC-20 protocols).

Gold-Backed Stablecoins: Bridging the Gap Between Crypto- Gold (Part 1)

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In mid-June, the value of Bitcoin sunk below $20,000.00, reaching a two-year low; in late 2020. After a slight rebound on June 20th, Bitcoin had still lost 55% of its value for the year and 35% within the month of June. However, Bitcoin was not the only digital currency to suffer turmoil amid this downturn in the market; several other commonly traded cryptocurrencies also experienced a decline in value. As with any speculative assets, there are multiple factors; commentators cited as causing the recent meltdown in the crypto markets. Some commentators suggest that macroeconomic factors such as high inflation and interest rate hikes are potentially to blame. Others claim slumps in trading volume and the failure of several major crypto projects (collapse of Terra-Luna and Celsius) have agitated the market. The recent trouble in the crypto space most likely cannot be attributed to one sole factor but will not be persuading any crypto-skeptics to get on the bandwagon anytime soon. 

Although there may be a digital currency alternative that is not only less volatile but still possesses the benefits of blockchain technology, that is commodity-backed stablecoins. More specifically, stable coins collateralized by gold reserves and gold-pegged money seemed politically impossible since President Nixon closed the gold window back in 1971. Now it is feasible to have gold-backed private money that blends the advantages of cryptocurrency with the value stability and historical salability of gold. In the debate between gold aficionados and crypto enthusiasts, this is the ultimate compromise and is a far better alternative to fiat currency. In this series, I will detail the benefits of gold-backed stable coins and suggest that despite the volatility in the cryptocurrency market, tying digital assets to a valuable asset might strike a balance to create a better form of money. 

Cryptocurrency and Third-Party Doctrine

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Many people hold the misconception that cryptocurrency offers total anonymity in financial transactions. There are multiple reasons why the belief that this decentralized private digital money does not conceal the identities of transacting parties. For one, the perception of complete anonymity is illusory because all transactions on the blockchain are accessible to the public. Since most blockchain environments “..have transaction structures that show the sender and receiver addresses explicitly. Because of this property of openness, a large proportion of the users can be re-identified..” (p. 18). These concerns pale in comparison to the legal resources at the disposal of government agencies with broad objectives ranging from tax collection, criminal investigation, and to even surveillance. This disproportionately impacts new entrants in the space that use exchanges and lack the technological illiteracy to hold their digital token in self-hosted wallets, as exchanges are subject to KYC and AML laws.

There are many various laws, judicial constructs, and conferred powers government actors utilize to relinquish our financial privacy. These tactics extend beyond semantical word games over what constitutes “…persons, houses, papers, and effects..” in the digital age (Amend. IV). One of the best-known doctrinal assaults against economic privacy invoked by law enforcement is the third-party doctrine. A judicial doctrine that strides a thin line, between the state interests; and regulating illegal activities (p.3). Although, the third-party doctrine has remained in use since the 1970s it has been a subject of controversy. The decision in United States v. Miller (1976) spurred the passage of the Right to Financial Privacy Act (1978), a feeble attempt to stifle the reach of the doctrine. The law was riddled with numerous exceptions to warrant requirements.

What is the Third-Party Doctrine?

Legal scholar Orrin S. Kerr provides a succinct definition of the doctrine:

“…The “third-party doctrine” is the Fourth Amendment rule that governs the collection of evidence from third parties in criminal investigations.’ The rule is simple: By disclosing to a third party, the subject gives up all of his Fourth Amendment rights in the information revealed (p.563)..”

The extent to which the doctrine is a rule and not an exception is a matter of debate among civil libertarians and privacy purists. Any information disclosed to a financial intermediary is not out of the reach of government officials. This also includes information provided to a third party that the customer believes will “remain private” ( Hoffa v. the United States) (p.9).

The nascent roots of the third-party doctrine lay within the test established in Katz v. the United States (1967). What has become known as the “Katz Privacy Test”; weighs privacy interests against the interests of the state. The case established a two-part judicial test for distinguishing when a private citizen has a reasonable expectation of privacy. 1.) An individual must have a subjective expectation of privacy. 2.) Society must accept these circumstances as being reasonable. Both standards are abstract and murky, making it a hindrance to derive clear and consistent guidance from such disputable and open-end criteria. 

It is not until nearly a decade later that the doctrine emerged when the Katz Test applied to a case regarding financial privacy. This seminal case was no other than the infamous United States v. Miller (1976).  The case involved Mitch Miller charged with producing untaxed liquor. In the process of collecting evidence, the ATF (Department of Alcohol, Tobacco, and Firearms) issued several subpoenas to collect Miller’s banking records. (p.12). Miller was never informed that his banks had been summoned to supply his records to the ATF. As luck would have it, the lower courts saw that the ATF “…had unlawfully circumvented the Fourth Amendment by first requiring the banks to maintain the customer records for a certain period and second by using the insufficient legal process to obtain those records from the bank..”(p.13). The high court reversed the previous decision citing that “…bank kept copies of personal records that he gave to the bank for a limited purpose and in which he retained a reasonable expectation of privacy under Katz..” (p. 13). The SCOTUS reasoning :

“…checks are not confidential communications, but negotiable instruments to be used in commercial transactions, and all the documents obtained contain only information voluntarily conveyed to the banks and exposed to their employees in the ordinary course of business. The Fourth Amendment does not prohibit the obtaining of information revealed to a third party and conveyed by him to Government authorities….”

Ultimately, the court ascertained that information provided to banks was not subject to Fourth Amendment protection. After all, the information we are willing to disclose to an intermediary may not be so confidential. Ideally, we would never choose to convey such information. We also trust financial institutions to exclude the gruesome details of our purchasing decisions, regardless of the legality. All because a purchase was legal does not mean it was not embarrassing. For example, frequent outings at fast-food restaurants, pornography, and scoring BTS tickets are all legal transactions, but all ones that should not be scrutinized by the judging eyes of stuck-up government employees. It is not just the bad guys who are seeking the prying eyes of government officials. 

The case to advance the third-party doctrine was Smith v. Maryland (1979), adjudicated a few years after Miller further reinforced this hideous obstruction to individual privacy. In this case, the telephone company installed a pen register “…to record the numbers dialed from the telephone at.. the home the suspect of robberies. This scenario would be considered a Fourth Amendment exception since the phone companies already have access to and record phone records.

Another landmark case in the judicial history of the doctrine was United States v Jones (2012). The defendant was arrested on drug charges after a law enforcement official attached a GPS tracker to her vehicle for 24-hour surveillance and all without a warrant. The Supreme Court viewed the warrantless attachment of a GPS tracking device as a Fourth Amendment violation. That covert tracking constituted a trespass and a violation of the reasonable expectation of privacy.

For any faithful civil libertarian, Jones might have been a glimmer of hope in the arena of the right to privacy. The logic in Riley v. California (2014) we have the illusion of hope regarding privacy matters. Riley was a member of a San Diego gang that opened fire on a rival and subsequently drove away. He was then pulled over for expired tags while operating another vehicle and was searched before being impounded; officers intercepted contraband. The responding found two guns and called in the gun unit to analyze Riley’s phone depicting the suspect making gang signs. The ballistics tests tied Riley to the previous shooting direct toward rival gang members. The court ruled in favor of Riley in this case; digital data presents no immediate harm to investigation officers, but phones operate as “minicomputers”, holding a plethora of personal information. Therefore, a warrantless search may be acceptable in exigent circumstances (which Riley did not present).   

The next step in the stare decisis whittling down the third-party doctrine was Carpenter v. the United States (2018).  Defendant Timothy Carpenter; was implicated in a series of robberies, and his phone number was located by authorities; they used this information per the Stored Communications Act (1986)Based upon “..cell-site evidence..” Carpentry had been located as being nearby to the crimes. The five-four decision stated that :

“… Expectations of privacy in this age of digital data do not fit neatly into existing precedents, but tracking person’s movements and location through extensive cell-site records is far more intrusive than the precedents might have anticipated…”

Essentially, utilizing the tracking capabilities of smartphones veers into a territory that infringes upon our enumerated right to privacy. Paralleling, the situation in Jones warrantless tracking regardless of the method is unconstitutional. In many ways using a smartphone is analogous to strapping a tracking device to a motor vehicle.

Crypto and The Third-Party Doctrine

The byproduct of the Carpenter decision has opened a new chapter in the Jurisprudence of the third-party doctrine. Per Fourth Amendment Orrin Kerr “… Carpenter “recasts a lot of doctrine in ways that could be used to argue for lots of other changes.” (p.226). So far, the courts appear to have analogized transactions occurring on cryptocurrency with those of traditional financial institutions (banks). The first case to apply the doctrine to cryptocurrency transactions was United States v. Gratkowski (2020).

The case involved a federal investigation into a child-pornography website and officials subpoenaed Coinbase’s transaction records; defendant Richard Gratkowski was suspected of patronizing the website under investigation through the exchange. (p.1-2). Gratkowski attempted to suppress the information procured in the investigation”.. the government violated the Fourth Amendment by using a subpoena to obtain his information instead of a warrant…” (p.127). The defendant foolishly argues this point without much consideration of the stare decisis substantiating the doctrine. After all, voluntarily disclosed information, in most instances (p.1), is immune from warrant requirements. The court found paralleling cryptocurrency transactions to phone records (Carpenter) was not an equal comparison. As phone logs are far more intrusive “window into a person’s life”(p 129).

Beyond the concerns regarding the degree to which disclosure of transaction histories could be construed as intrusive, in the eyes of the law, the defendant has already consented to the visibility of his financial activity. The court perceived that Gratkowski did not have a reasonable expectation of privacy as Coinbase not only has public records of all transactions but also is subject to the Bank Secrecy Act (1970) (p. 130). Per the letter of the law, the assumption of anonymity is illusory when conducting business with an intermediary such as Coinbase since it is an institution that fits within the purview of the BSA. (p.131).

In a hail Mary attempt, Gratkowski’s defense team tried to invoke the logic of Kyllo v. the United States (2001). In Kyllo, an agent of the Department of the Interior utilized thermal-imaging technology to detect Danny Kyllo’s marijuana grow operation[1]. The Fifth Circuit felt as if extrapolating Kyllo to Gratkowski’s circumstances was inappropriate as even if thermal imaging was equal to traceable record transactions, the cited case is only applicable to searches within the home (p.132).

Conclusion:

Per the current case law, it is indisputable that the third-party doctrine extends to cryptocurrency transactions that occur on an exchange. This does not ethically justify the application of this egregiously invasive judicial construct to financial surveillance. In balancing state and individual interests, the right to privacy implied in the Fourth Amendment was effectively sullied. An individual using banking or investment services should not have to be concerned about the trespasses of government agents on their transactional histories. Even if an individual has committed no crime, they still have a right to privacy. Do you want the judgmental eyes of an overpaid government employee criticizing your recent purchases of tickets to a BTS concert or a treasure trove of goodies at the local sex shop? Some purchases and investment decisions are downright humiliating and should remain out of the view of external individuals. All because stare decisis sides with the third-party doctrine, does not mean that it is faithful to the contextual interpretation of the Fourth Amendment. Especially, when in the digital age the perception of “…persons, houses, papers, and effects…” (Amend. IV)  has shifted into a sphere of intangible media.

While it is disturbing that the technologically illiterate must restore to using crypto exchanges subject to the legal logic of the doctrine. Unfortunately, self-hosted wallets are not safe from the encroaching hand of the state. While regulators are now seeking to target self-hosted wallets for AML and KYC, we know that the Juris prudence will most likely extend the insidious third-party doctrine to these private methods of cryptocurrency storage. Soon cryptocurrency transactions will fully be under the surveillance and auspices of the government. The best we can hope for is that the high court will realize the error of this perverted doctrine and call it out for the Fourth Amendment violation that it is.

Prisoner’s Dilemma-XVIII- Mises Caucus (LibertarianParty)

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The libertarian party is arguably the most disorganized political party in the United States. 

For years, debates have waged over the gulf between the actual political philosophy and the official party’s platform. Many hardcore libertarians feel the party has long since lost its way. For many disillusioned lovers of liberty; the remedy came in the form of the  Mises Caucus founded in 2017. The emergence of this faction within the LP has been met with controversy. As more members of the caucus assume leadership roles within the national party, concerns arise regarding the tendinous social views of this strain of libertarianism. Accusations of racism and transphobia have surfaced and put the Mises Caucus in the crosshairs of LP party leadership.

To the casual observer, this tension in the LP may seem like a new development; but the political in-fighting has been a fixture of the party’s institutional dynamics since its inception in the 1970s. The antipathy sowed between the libertarian establishment and Austro-libertarianism dates back to the founding of the Cato Institute. The intellectual father of the political movement sweeping the structure of the LP was none other than economist Murray Rothbard. Rothbard co-founded the institute with the vision of it being an academic nexus between libertarian thought and Austrian economics. Rothbard’s unwillingness to compromise on Cato’s messaging, he was ousted from the institute. He then moved on to establish the Mises Institute in the early 1980s. It is reasonable to this one event as a manifestation of a major schism within libertarianism. A rivalry formed between the moderate libertarian political philosophy and the convictions of full-on anarcho-capitalism. A system of beliefs exalting ideological purity, articulating rhetoric steeped in social conservatism and the mechanism of Austrian economics.

The competing philosophies of Cato and the Mises Institute are the lines between academic establishment and the populist tendencies of the liberty movement[1]. Cato has the ear of the academy, while the Mises orbit has the ear of the people. However, this is not to say there isn’t a deep tradition of scholarly work within the Austro-libertarian tradition; the cadre of academics advancing this political philosophy has to produce voluminous amounts of literature. Cato has not had the same effect on the advancement of libertarianism on the ground level. Aside from the popularity of Rothbard’s polemical pamphlets in the 1970s and 1980s; the movement gained new life in the 2000s with the Presidential campaign of Ron Paul. The Cato Institute attempted to distance itself from Ron Paul for his reluctance to condemn political extremism. Former Senator Paul was an instrumental figure in founding the Mises Institute. He has also had longstanding professional relationships with figures such as Lew Rockwell and Rothbard.

The variety of libertarianism with a hint of social conservatism advocated for by Ron Paul and the Mises Institute cannot disavow extremism as it is part of their political strategy. In contrast to the libertarian establishment, Austro-libertarians have formed alliances with paleo-conservatives, injecting planks of Old Right sensibilities into their platform. Libertarians favoring this hard-right strategy perceive the virtues of multiculturalism and cosmopolitanism to be treasonous to individual liberty. Many Rothbardians/Hoppeans believe that policies such as open immigration will erode cultural identity, and private property rights and expand the welfare state.

This is not to insinuate that the Mises Institute nor Ron Paul’s campaign was managed by Klansmen. That would be a bad faith assessment of the political dynamics of Austro-libertarianism, there is not enough evidence to make such a claim. The attempts to annex populous conservatives and the far-right were more pragmatism on Rothbard’s part. The run-of-the-mill country club Reaganite Republican will not have any appetite to “end the fed”; naturally this individual would be a lackluster bedfellow in such an endeavor. On the other hand, a gentleman living in the rural south, raised in an environment of culturally entrenched conservatism and a distaste for centralization, would be a more likely partner in crime.

 Rothbard could foresee the logical instability in the Reaganite brand of “fusionism”. The political progeny of National Review editor Frank Meyer; a doctrine suggesting that libertarians and conservatives should make minor compromises and join forces to gain more ground in American politics. Realistically, this approach is shortsighted in a climate of winner-take-all politics. Disagreements on core wedge issues will eventually create fault lines that cannot be repaired. Rothbard’s vision of liberty was immoderate and immune from the debasing effects of implicit logrolling.

The strife between the two warring factions of libertarianism is nothing short of a textbook example of a prisoner’s dilemma. Frank Meyer was not off base with such a suggestion of political compromise, but neither party agrees to make any concessions. The very stance of the Mises Caucus and other Austro-libertarian organizations is nothing more than an automatic defection. Their hard-nosed commitment to ideological integrity has already taken the possibility of bargaining off the table. Developing a libertarian with the rigidity of Aristotle’s ethical virtue of “right reason”; which is utterly inflexible. The libertarian insiders in the Washington D.C. belt away may garner more appeal to establishments and academics outside of the movement; due to their ideological moderation. These movers and shakers at the think tanks have made no effort to reach out to the populous wing of the libertarian party[2]. If anything, they have either ignored or condemned Ron Paul supporters as hopeless racists or conspiracy-mongering dingbats. None of this is productive when it comes to advancing a political philosophy. It is as much of defection as the resolute principles of the droves of lay libertarians regularly reading the Mises Wire.

The suboptimal results engendered by this mutual defection should be conspicuous; we have yet to have had a true Libertarian in the oval office since the establishment of the official party. The overall lack of consensus has stymied libertarianism’s influence on American politics. There are always several groups arguing over what libertarianism truly is; instead of working together to make an impact. This gives outsiders the impression that libertarians are politically disorganized. It is not that they are a bunch of lazy hippies, bearded mountain men, or a gaggle of goofy naked men kvetching about drivers’ licenses. The party has been sidetracked by years of internal conflict, making this turmoil the ultimate collective action problem.

Footnotes:

  1. The Mises Caucus might be the “Trump moment” for the LP, a populous takeover of the formal structure of the political organization.

2. This is not a defense of the Mises Caucus nor a jab at the libertarian establishment. Rather, it is an expression of how neither subset of the LP is willing to compromise with the other.

Prisoner’s Dilemmas- XVII- Media Coverage of Mass Shootings (Columbine to Uvalde) 

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 In the immediate aftermath of any tragedy, we often struggle to make sense of the situation. The senseless loss of life following a mass shooting is no exception. Various experts and media talking heads list all the potential antecedents that pushed a mentally unstable person to commit such an atrocity. The frequently cited causes of domestic mass murder include bellicose political rhetoricviolent song lyricspsychiatric drugsvideo games, disenfranchisement, mental health issues, and access to firearms (although the effect of gun control on preventing such events is inconclusive).

It would be rash to assume that any one of these purported preconditions for molding a mass murder is the sole reason for these tragedies. It is more likely that various environmental, genetic, and social factors drive a person to perpetrate such heinous acts. One potential cause of violence that often gets overlooked; is media coverage of such incidents [1].

Even when we take a cursory view of the incentives of media outlets, they are not going to take any responsibility for inspiring new school shooters and other varieties of a deranged shooter. After all, they are the mouthpiece for all the experts touting the evils of Marilyn Manson (I apologize for the dated reference), political extremism, and guns. Fixating on these gruesome stories and participating in conspiratorial conjecture about the impetus was for a demented young man to kill innocent people. Sadly, negativity sells, making it lucrative for business. Human beings are plagued by what is known as the negativity bias; we are more apt to engage with articles or news programming that has a negative tone. News outlets lay into this bias by exaggerating the severity of negative news. Validated by the fact that fifty percent (p.5) of news coverage features stories on crime. Media companies have a lot to gain from obsessively presenting all the gory updates on the Uvalde massacre. Business is good when you have audience captivity by the horror and depravity of a madman.

At its core, the dynamics of how media outlets cover mass shootings is a Prisoner’s Dilemma. The media companies act in their self-interest by bombarding us with all the horrific details of these mass killing events. This is done so with little consideration for the ethical consequence of how the story is framed. Typically, there is more coverage of the perpetrator than on the heroes who intervened and stopped the killing spree or even the victims (p.22). The tight focus on the gunman aggrandizes the image of the killer. In the mind of narcissistic (p.16) or otherwise mentally unstable people, they become the protagonist in the story of a folk anti-hero. The previous mass shooter serves as a template for how to quickly gain notoriety. In the canonical literature, there is a model known as the contagion effect, where essentially publicized shootings beget more publicized shootings. We begin to see copycat shooters. A 1999 study found that “.. of 83 would-be mass killers or assassins, who noted that evidence in their belongings or writings indicated that 38% of them emulated previous killers…”(p.24). A 2013 study, found a positive correlation between tweets about mass shootings and the likelihood of another one occurring (p.27). The shooters end up “defecting” by orchestrating and executing a shooting event, believing they are acting in their self-interest by indulging their angst and narcissism.

The suboptimal results in this situation would be the victims of the shooting. They are merely collateral damage in the pursuits of media outlets and mass shooters. Truly this mutual defection is the story of excesses. Whether it be improperly channeled rage, vanity, and narcissism or profit and callous political opportunism [2], innocent people had to die to achieve these ends.  

Footnotes

1.) The suggestion that the media companies bare some responsibility for mass shootings is not an indictment of capitalism or freedom of the press. This presents an ironic fact; news outlets blame many distal factors for shootings; it never occurs to them to look in the mirror. Especially considering that most mass murders have proclivities towards narcissism. 

2.) The incentives structure of media outlets may extend beyond the profit-loss mechanism, as they are generally ideologically driven. Many of the news channels and publications of esteem are politically left-wing, meaning they may also have anti-gun agenda. In effect; driving the obsessive coverage of gun violence.

Bootleggers & Baptists: LIV- Going Cashless

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In an age of digital banking, physical cash has become a cumbersome relic of a bygone era in the eyes of most Americans. It is easy to assume that we would all be better off in a cashless society, taking the lead of nations such as Sweden. The belief is that we would be better off in a digital monetary regime that would facilitate tax collection and tracking of criminal activity (p.2). Only demonstrating the tensions between law enforcement interests and the Fourth Amendment rights regarding financial crimes (p.3). Does the question become who benefits from the United States eliminating the use of money? It should be abundantly clear that it is axiomatically true that every policy selects winners and losers. The decision to abolish physical cash transactions is no different.

In the fashion of Bruce Yandle’s Bootleggers and Baptists (1983) theory of political coalitions, for every policy prescription; there is a moralizing agent and a beneficiary. In his 2018 paper, Norbert J. Michel, Special Interest Politics Could Save Cash or Kill It, details the parties that stand to benefit from the relinquishment of cash transactions. Some of the most conspicuous parties that prosper from a cashless society would be law enforcement, with a digital record of every economic transaction, it is hard to obscure illicit conduct. There are parities in the private sector that would find the move to electronic transactions advantageous. The credit card companies are likely one of the most salient groups of Bootleggers of anti-cash policies. The CEO of Mastercard has been a vocal exponent of getting rid of cash; it was even the first company to openly lobby on “… the behalf of bitcoin..” (p. 8). Any move towards digital payments over tangible currency would fatten the pockets of creditors. All credit card transactions are digital; it is not that farfetched to suspect that individuals who use cash would be more apt to use their Mastercard.

Other than law enforcement officials, who are the holy rollers of killing the dollar? One needs to look no further than the late Arizona senator John McCain, as he was an advocate of the COINS Act. This was a measure that was purposed to suspend production of the penny for approximately a decade. McCain defended this policy because it cost more than the actual monetary value of a penny to produce the coin. Very few American consumers would miss the penny; only twenty-six percent of transactions in 2018 patrons used pennies. Why would anyone miss a burdensome form of currency that cost more than what was worth to produce? It is important to note that McCain’s COINS bill did not dispense with copper coinage.

“ In addition, the bill provides for: (1) modifications to the composition of the five-cent coin; and (2) the replacement, in circulation, of $1 notes with $1 coins.”

The legislation would merely shift production towards the presumably more lucrative seigniorage of dollar coins. It would be naïve to not consider the local business interests in McCain’s home state of Arizona. Arizona has long held the reputation as a top copper producer and is the second-highest producer of natural minerals of any of the states. For a state that constitutes seventy percent of all cooper output, the COINS Act provides these firms with concentrated benefits. The COINS Act and the Arizona cooper industry are even Bootlegger and Baptists dynamic outside of the cashless society debate.

Prisoner’s Dilemmas: XVI – Coinbase’s Bankruptcy Policy

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Trust is one of the guiding principles of any business relationship. It is the proverbial glue that has spurred the interest in decentralized digital currency over the past decade. Most people lack the technical literacy to mine Bitcoin or navigate the complexities of blockchain transactions without a middleman, a cryptocurrency exchange. Hence the surge in the popularity of  FTXCrypto.comKraken, etc. One of the earliest entrances to the crypto exchange market, Coinbase, revealed in its first-quarter earnings report that it could hold on to user assets in the event of bankruptcy. Per Fortune:

Coinbase said in its earnings report Tuesday that it holds $256 billion in both fiat currencies and cryptocurrencies on behalf of its customers. Yet the exchange noted that in the event it ever declared bankruptcy, “the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings.” Coinbase users would become “general unsecured creditors,” meaning they have no right to claim any specific property from the exchange in proceedings. Their funds would become inaccessible.

https://fortune.com/2022/05/11/coinbase-bankruptcy-crypto-assets-safe-private-key-earnings-stock/

Only subverting the property rights of the investors utilizing the exchange, but it also sullies the image of one of the pioneers of this nascent investment market. In the absence of trust and reliability, there is no reason for patrons to continue doing business with Coinbase. With no guarantee that their investments are secure with the exchange, customers will seek alternative service providers. In effect, Coinbase’s own internal bankruptcy policy has created a Prisoner’s Dilemma. By implementing a policy that would not allow the user to claim their assets in the event of the firm’s financial demise, Coinbase is veering away from the interests of its customers. A foolish decision, but a defection. Patrons will reciprocate this defection by transferring their assets to either cold storage or other reputable crypto exchanges. The unfortunate consequence is that trust in the crypto community will be eroded. Cryptocurrency was founded on the principles of permissionless, immutable, and decentralized transactions and this culture will lose traction due to the infidelity of unscrupulous service providers. Especially considering the absence of trustworthy exchanges, the technical literacy required to participate in the crypto sphere is far too high for anyone without a programming or financial background. Effectively puts the whole claim of cryptocurrency being a path to financial inclusion into question. 

Prisoner’s Dilemmas-XV: Sugar Tariffs

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“..Look at the United States. There is no country in the world where the law is kept more within its proper domain—which is, to secure to everyone his liberty and his property. Therefore, there is no country in the world where social order appears to rest upon a more solid basis. Nevertheless, even in the United States, there are two questions, and only two, that from the beginning have endangered political order. And what are these two questions? That of slavery and that of tariffs; that is, precisely the only two questions in which, contrary to the general spirit of this republic, law has taken the character of a plunderer…” Frédéric Bastiat- The Law (1850).

The tendency for people to favor protectionist policies is an understandable fallacy, but a fallacy, nevertheless. Some Americans are under the erroneous assumption that they have a moral duty to keep domestic jobs from being outsourced. Much of this sentiment; was fostered by campaigns waged by organized labor throughout American history. It is difficult to tell if the buy American fallacy is the byproduct of union propaganda or an intrinsic sense of nationalism and economic jingoism. Regardless of whether the American public is receptive to their pithy buy domestic slogans, the union interests frequently get their way. The best example is the enduring specter of import tariffs that have plagued American economic policy for centuries. The earliest example is the Tariff Act of 1789, which was strongly favored by none other than Alexander Hamilton.

Arguably one of the most notable tariffs on the books is related to the importation of sugar. The tariffs placed on foreign sugar have been upheld through various laws over the years, starting from the nascent period of the republic.

“…On brown sugars, per pound, one cent. 

On loaf sugars, per pound, three cents. 

On all other sugars, per pound, one and a half cents

(Tariff Act of 1789, P. 25)..”

From a game-theoretical standpoint, consumers are the first ones to defect. If imported sugar is cheaper American consumers gravitate toward buying the less expensive Caribbean sugar. The lobbyists for the sugar industry work to pressure lawmakers into keeping import taxes on foreign sugar. The collective pressure placed on Congress to place and uphold tariffs can be considered a defection by the domestic sugar producers. Many economists and political scientists assume that the marginal increase in the cost of sugar would be negligible to an individual customer. In turn, fulfilling the enduring axiom of Public Choice theory; concentrated benefits and dispersed costs. Few households consume enough sugar to desire to change their baking and coffee flavoring habits. Although, these costs are salient to commercial confectionary producers who purchase mass quantities of sugar for domestic and international retail goods. It has led to firms relocating production facilities to countries without sugar tariffs (Life Savers plant moving to Canada, p. 4). Technically, this could be a defection, but the irony is that it undermines the moral initiative of keeping domestic jobs within the bounds of the United States. But not every company opts to move their factories abroad, another substitute for cheaper inputs. Hence, the rise of soft drink producers using high fructose corn syrup instead of cane sugar. One noteworthy example would be when Coke and Pepsi switched to using corn syrup in their sodas for the US market in the 1980s (p.5) (Mexican cola still uses real sugar). There has been much debate over whether high fructose corn syrup is more unhealthy than sugar. If it is more injurious to one’s health, then a Prisoner’s Dilemma is afoot, the suboptimal result being the American people doing unnecessary damage to their bodies merely to appease a small subset of the overall constituency.

Prisoner’s Dilemmas: XIV- Synthetic Marijuana

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The decades-long War on Drugs initiated by the Nixon administration could be a Prisoner’s Dilemma itself. Naturally, drug dealers and users will not stop their illicit activities merely because the government is cracking down on controlled substance sales. This fruitless and seemingly perpetual public health intuitive has generated a litany of negative externalities. Beyond fueling profligate government spending, it is also a quagmire that has flooded our prisons and tied up our courts (think of the US court system as commons) with individuals guilty of victimless crimes. However, one detrimental consequence that no one could have foreseen over fifty years ago was the development of gray market drugs, intoxicating compounds that are molecularly altered variants of banned illegal drugs. One particularly infamous example is synthetic cannabinoids. The active chemical of THC; is prohibited under federal law, but a slightly different derivative technically would be legal.

The attempts of eager drug users and innovative chemists to skirt US drug laws have resulted in its own Prisoner’s Dilemma. The government is the original defector by making drugs such as marijuana illegal. Individuals who enjoy the effects of cannabis do not want to stop using it just because it is Schedule I inebriant. Drug users, producers, and vendors defect by finding and creating similar substitutes for their illegal drugs of choice. In most instances, synthetic marijuana may only be a few molecules off from the real thing, but chemists have unwittingly created a more destructive recreational drug. The ingestion of synthetic cannabinoids is associated with serious physical and psychological complications never reported with the consumption of naturally occurring THC. There would have been no appetite for developing fake marijuana if state governments had started legalization and decriminalization efforts years before the “research chemical’ craze of the 2010s; this attempt to exploit legal loopholes only exacerbated the public health issues related to drug use. Fortunately, this was more problematic a decade ago; more states have legalized marijuana.

Bootleggers & Baptists-LIII: Condom Prohibition???

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Arizona senate candidate Blake Masters is signaling that he wants to double down on the rhetoric of the draft of the Dobbs decision. Per Business Insider, stated that Masters does not want to ban contraceptives outright; but believes that Griswold v. Connecticut was flawed. His response to the publication lacks any substantive explanation. He will have plenty of time on the campaign trail to elucidate his position on Griswold. When I first heard about Masters’ position, it was framed as a “condom ban”. The words of a politician tend to be hollow, but only time will tell if his policy scope will veer into prohibiting contraceptives. As we all know, like dishonesty, political figures also have a penchant for engaging in policy mission creep.

If we were to apply the Bootleggers and Baptists (1983) lens to Masters stance on Griswold, the question arises, who benefits? Masters is a Baptist for advancing the normative objective of supporting a Pro-life platform. Arguably, this hard-right political candidate is also Bootlegger for pandering to the highly religious populous right. It is entirely possible that he has gone too socially conservative.

The undisputable Bootleggers are Democratic candidates in Arizona. Why? Independent voters and moderate Republicans might be turned-off by Masters’ social policies. Especially, considering the vagueness of his explanation for wanting Griswold overturned lends itself to misinterpretation. Leading many to assume that his position is equal to a contraceptive ban. Condom bans in the works? Not 100% sure at this point, but it seems like many people are jumping the gun. In the meantime, it will make for some great political theater. For those in Texas, never fear; Ted Cruz has vigorously defended the use of prophylactics; needless to say, 2022 will make for an intriguing midterm cycle.

Bootleggers & Baptists: LII- Pro-Gun and Pro-Roe Actvists Form a Coalition

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The Dobbs draft leak has seemingly added more fuel to the abortion debate over the past week. The real point of contention stilting the embers of the current renaissance in the commentary on Roe v. Wade was the passage of the Texas Heartbeat Bill (Senate Bill 8) last year. The state legislature passed a law that would effectively operate as an informal ban that skirts judicial review; since enforcement was being handled through the deputization of private citizens. Senate Bill 8 is a spectacle of legislative ingenuity; even knowledgeable detractors must admit this point. The design of the Bill is particularly pernicious and could be manipulated for partisan retaliation. For example, last year, California Governor Gavin Newsom talked of engineering his variant of SB 8 tailored to target ghost guns and semi-automatic rifles. The only thing gun owners have going for them in defense against such an action is that the Second Amendment is an enumerated right, meaning they do not need to only rely on stare decisis.

An unlikely coalition formed in 2021 to combat the passage of Senate Bill 8. The kind of coincidental political union that only further justifies the utility of Bruce Yandle’s concept of Bootlegger and Baptist (1983) coalitions. The California-based Firearms Policy Coalition joined the Texas pro-choice faction to oppose the legislation. Even going so far as to author an amicus brief critical of SB 8. Per Statista, of the Republicans, polled 50% owned a gun; 61% lived with a gun owner. Odds are, members of the Firearms Policy Coalitions are right-wingers that would not typically work with the pro-Roe camp. The flawed structure, logic, and versatility of SB 8 could put gun rights in jeopardy. Who would be the Bootleggers and the Baptists in this scenario? Anytime there is a collaboration between different stripes of political activists, these roles are interchangeable depending on the observer’s ideological proclivities. A more even assessment would be that both merging factions are Dual Role Actors (2020). As the pro-gun and the pro-Roe camps, both are defending moral arguments but simultaneously benefit from achieving their own separate policy goals.

The Paradox of Implicit Logrolling: Bodily Integrity- Newports and Roe

The Paradox of Implicit Logrolling (Clark, 2021) demonstrates how intra-platform vote trading can lead voters to hold logically inconsistent policy positions. One example is; a Republican purporting to be Pro-life but concurrently supporting an aggressive foreign policy. In the current political climate of the United States, the topic of bodily integrity appears to be the nexus of the most salient examples of this phenomenon. After all, the genesis of this paradox came from the incongruency of Democrats favoring vaccine mandates (93 % of poll Democrats support mandates applied to private companies) and simultaneously defending Roe v. Wade from the standpoint of bodily integrity. 

However, the current trends in the Democratic party’s policy platform‘s lack of logical continuity regarding bodily integrity are evident from the policies the party has recently supported. Last week, the Biden Administration announced a plan to move forward with a national ban on mentholated cigarettes. A measure favored by 57 % of Democrats polled. The fervor of Pro-choice (predominately left-leaning voters) advocates protesting and repudiating the decision in the leaked draft of the Dobbs case. 

These examples are not intended to shame modern liberals, nor are these normative value judgments regarding their ideological positions; these examples are merely observations derived from an applied static model. The bundle of policies favored by the Republican party is also rife with logical contradictions. The DNC seems to be providing us with most of the conspicuous examples of this paradox. The fact that the Dobbs case and the menthol ban magnifies how the topic of bodily integrity causes political parties to adopt policy preferences that pose philosophical contraventions. If it is rational to assume that electing to obtain an abortion is a matter of self-ownership, then would not the same apply to an adult choosing to smoke Newports? It is perplexing how this lapse in logic eludes many folks on the left. President Biden openly spoke out on the Dobbs decision but opted to proceed with nationwide menthol prohibition. It is possible his vocal criticism of the SCOTUS draft decision is a political maneuver to curve the disappointment of the Progressive-wing of the DNC with his centrist policies. Making the correct statements on the right wedge issue can be gold in the sphere of social currency. 

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Bootleggers & Baptists- LI: The U.S. Ban on TV Cigarette Ads

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The enduring brilliance of Bruce Yandle’s concept of Bootlegger and Baptists (1983) coalition dynamics cannot be overstated. Often the policies supported by the “Baptists” end up benefiting various interest groups. The nature of this self-propelled relationship is steeped in irony. Superficially, many of the proposed initiatives would be detrimental to the interests of the “Bootleggers”, but frequently have consequences contrary to the aims of the morally motived activists. Carelessly crafted remedies to social ills can result in gapping loopholes or anti-competitive advantages to established firms producing goods that are injurious to public wellbeing.

An excellent example of this phenomenon was the FTC’s 1971 ban on televised cigarette commercials. This example seems to be timely considering the finalization of President Biden’s national prohibition on mentholated cigarettes. The impact of the 1971 advertising restrictions is detailed in Baptists, Bootleggers & Electronic Cigarettes (2016):

“….The tobacco industry was not as enamored with these regulatory initiatives as were some health-oriented groups. Congress reacted to such concerns with new legislation that weakened the FTC’s proposed label language while banning TV advertising starting in 1971.53 Far from a loss for the industry, this legislation erected a substantial entry barrier for potential competitors 54 The established brands enjoyed widespread name recognition, and new entrants would be unable to use television to establish their brands. 55 The elimination of television ads for cigarettes also brought an end to the offsetting public interest messages that attacked tobacco products and reduced cigarette company advertising costs. 56 The tobacco Bootleggers gained ground, and innovation took the back seat in what began to look like a comfortable cartel. Meanwhile, the health-care Baptists may have unwittingly cheered the new strictures that seemed to penalize bad Bootlegger behavior but actually protected their profits…” (p.325-326).

Based on the prima facie impressions of most people, it is easy to assume that the limitations on advertising would harm the tobacco industry; to a certain extent, it did. Cigarette consumption did decrease in the period after advertisements; were pulled from the airwaves. However, the magnitude of the impact is difficult to measure as other factors can also account for the lower smoking rates in the United States. This policy truly harmed the up-and-coming cigarette companies more so than the titans of the American tobacco market. Why would Marlboro need to advertise its products? The brand already had significant brand recognition by the early 1970s. Companies like Philip Morris and RJ Reynolds could comfortably rest on their laurels while the newcomers could flounder in their attempts to gain a little piece of the market share. Effectively, this ban significantly increased market concentration among the established firms.