FTX and the Code of Capital
When news about FTX and SBF first broke a few weeks ago, I didn’t know what any of those initials meant. I confess I have never really followed the crypto space, at least not since the earliest days of Bitcoin. (I am pretty sure I came close to exchanging some dollars for Bitcoin at one point back in the day, when it would have cost me less than $5 per coin, but it’s also possible I have revisionist memories of that time—woulda coulda shoulda. Even if I had bought into Bitcoin back then, there’s a very good chance I would have just spent it, like the guy who dropped $3.8 billion on a two Papa John’s pizzas. That was the crypto future people imagined in those days – not an investment, but an alternative currency for everyday commerce.)
My general take on crypto is that it seems like a collection of flawed prototypes for something robust and necessary that will eventually exist. Crypto is super interesting in theory, and it’s an understandable response to legitimate concerns about state currencies and traditional (corporate) banking. In practice though, the current iteration has so many gaps and problems that are obvious even to me, a person who has barely followed the space.
What is money?
When I think about crypto, my mind inevitably drifts into deeper questions about money in general. When people try to explain money, they usually talk about its origins and what norms and practices most likely preceded it—how money came into being because exchanging a common currency has obvious convenience and efficiencies over bartering. So we have a story that explains the purpose of money, but what about the nature of money? That’s a much weirder thing to ponder.
You know how a word starts to sound strange and unmoored from any meaning when you repeat it enough times? Money as a concept became like that for me in the wake of the 2008 financial crisis, amid the proliferation of podcasts, books, and explainers that issued forth during that time. I started to think about money on a philosophical level. What is money? What does it mean to have money? Where and how does money actually exist? How can trillions of dollars of global value just vaporize?
It occurred to me that the money I earn and spend exists for me almost entirely as pixels on computer displays. My salary is direct-deposited into my checking account. My mortgage and utility bills and credit card minimum payments are automatically deducted from the same checking account. I make purchases online by putting some details into a web form. In physical stores I do it by tapping a plastic card on a terminal, or increasingly by just waving my phone near it. Then at most I press a button, and voila, I exchange some of my money for goods or services. But that doesn’t feel like the right phrase for it. I don’t really exchange anything. At the grocery store I tap a card and press a button. For my mortgage and bills, I do noting at all, having entered some details into a web form some months (possibly years) ago. Almost all the “exchanging” takes place between systems that I trust, operating in the service of institutions that I also trust.
As an aside, I imagine that if I asked people on the street whether they “trust” their banks or the state to handle all of this movement of their money, a lot of people might say they do not. But in practice they do. We all do. It’s obvious that we do, because this is how we all conduct commerce without ever giving it a second thought. We don’t necessarily trust that the system has our best interests at heart, but we trust that it will transact accurately and securely. We trust that it will keep records. We trust that it will avoid errors or recover from any that occur.
So we trust the systems and institutions, but why? One answer to that question also turns out to be a reasonably good way to understand the nature of money. In her book, The Code of Capital, legal scholar and Columbia University professor Katharina Pistor posits that finance law does not exist merely at the margins of finance, in order to codify procedures and standards and guardrails around money. Rather, finance law is the very essence of money:
…most observers treat law as a sideshow when in fact it is the very cloth from which capital is cut.
Specifically, finance law grafts onto any asset four essential properties [emphasis mine]:
Priority, which ranks competing claims to the same assets, durability, which extends priority claims in time, universality, which extends them in space, and convertibility, which operates as an insurance device that allows holders to convert their private credit claims into state money on demand and thereby protect their nominal value.
These four properties will turn any asset into capital, but only when the the legal codes that capture these properties are enforceable. State currency has value because it is backed by state power, and in every stable country on earth the state holds a monopoly over the means of coercion. So it is with any capitalized asset. An asset has value when it has the four properties described above, plus enforceability. It doesn’t matter whether the asset is a currency note, some pixels on a screen that represent a bank balance, or a lengthy document describing a collateralized debt obligation. This is fundamentally why I can buy things with those pixels on my screen.
There are many problems with a system where law is the essence of capital. Countless times the law has facilitated what amounts to theft, great transfers of resources from the poor to the wealthy. And the law continues to enable corporations to lock in gains while socializing their losses, at the expense of all of us. Nonetheless, with crypto, it’s the lack of deep codification and state-backed enforceability that makes it vulnerable to hacks, theft, fraud, and epic collapse.
Sometime after a different crypto breach a few years back, I watched a bit of a video featuring a conversation between two crypto bros musing about ways they might be protected from such a thing in the future. What struck me was that the more they talked, the more they were basically inventing what already exists for established kinds of capital investment—bank accounts, real estate, stocks, etc. They essentially brainstormed their way to an imagined future where crypto would be better codified and regulated, and legally enforceable.
More recently I found myself in a debate with an anarchist. Not a tear-it-all-down anarchist, but an anti-statism anarchist. I asked him to explain how a computer or a car might come to exist in an anarchist world. I was thinking about how the code of capital makes it possible for all the parties involved to establish the necessary relationships for trade, credit, etc. It’s hard to imagine any of that happening without the law and the states that can enforce it.
I recognize there are many problems with a legal code that operates almost entirely in the service of capital, that’s enforced by states who hold a monopoly over coercion and the threat of violence. But I also recognize that anarchism, and libertarianism are incomplete, immature, unworkable alternatives. Similarly, crypto is an incomplete solution without an enforceable legal code.
That shouldn’t stop us from imagining a better future. A legal code doesn’t have to operate in the service of capital. The concept of private property for example seems like a law of nature, but it wasn’t a thing until the early 1800s when it was codified into laws of states. Understanding the role that law plays in defining capital is fundamental to creating a more equitable world.