Sauron Remains Undefeated

I'm delighted to co-author this note with my friend Brent Donnelly, president of Spectra Markets and FX trader extraordinaire.

Brent is a senior risk-taker and FX market maker. His latest book, Alpha Trader, was published last summer to great acclaim (by me, among others!) and can be found at your favorite bookseller. I think it’s an outstanding read, and not just for professional traders. He publishes a daily (!) note on FX, which you can subscribe to here, and a weekly note on crypto, which you can subscribe to here.

You can contact Brent at and on Twitter at @donnelly_brent. As with all of our guest contributors, Brent’s post may not represent the views of Epsilon Theory or Second Foundation Partners, and should not be construed as advice to purchase or sell any security.

Last April I wrote a note titled In Praise of Bitcoin, which got a fair amount of attention for the first of its two assertions, that Wall Street was transforming Bitcoin into Bitcoin! TM — just another securitized and sanitized game in the Wall Street casino, with all the revolutionary potential of a bumper sticker.

Bitcoin! TM doesn’t stick it to the Man … Bitcoin! TM IS the Man.

But the second of that note's assertions didn't get nearly as much attention, even though I think it's the more important of the two.

The US Treasury is the Eye of Sauron — a gigantic panopticon tower that sweeps the world with its unblinking gaze, seeking out the owners of power, i.e. money.

The US Treasury can’t see Bitcoin. It can, however, see Bitcoin! TM, and it will not rest until all of crypto has been transformed into Wall Street's securitized and sanitized casino game.

What Treasury did to Tornado Cash and its developers is just the beginning.

Here's Brent to explain ...

The US Treasury sanctioned Tornado Cash on August 8. This has triggered a massive wave of concern, outrage, anger, navel-gazing, disbelief, fear, beard-scratching and scrambling from the crypto community, even as the historic move garners minimal coverage outside the crypto media. The US Treasury press release is here.

Here are some key points:

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  1. Monero (XRM) is next.

    If you want to know how it is that Sauron plans to see everything then look no further than Chainalysis, the blockchain data platform that works hand-in-hand with governments across the world to crack down on ‘illicit’ uses of crypto. In 2020 the IRS posted a bounty for anyone who could build software to trace a Monero transaction. See if you can guess who won part of that contract.

    Yes, Bitcoin became Bitcoin!. But the other things that happened were more quiet and subtle. Crypto and blockchain data firms went from being SaaS for traders, arbitrageurs, and investors to being tools of Sauron. The revolution never really stood a chance.

  2. Summed up in two sentences.

    “Some are making free speech arguments because code is deemed to be speech. And in the US, money is sometimes speech, when that money is being funneled into Washington. I’ll leave these arguments to the constitutional lawyers.”

    “At the very least, it seems undeniable that the US Government is not going to allow a private, libertarian monetary system to be built on top of the USD.”

    Sheldon Whitehouse’s book Captured explained it well, imo.

  3. Towers are interesting. I suppose because Towers are one of the Old Stories. Implicit in their creation is the defiance of man v nature; implicitly, in turn, they can last for a very long time but they always fall in the end.

    round and round the winchesters go — sokkasass: apriki ...

    The question of scale overlays on everything for me, these days. Bitcoin became Bitcoin!TM precisely because they tried to challenge the tower of Sauron by building another tower that could reach the same scale. This was a misguided approach from the beginning; another of the old stories is that once your new tower is tall enough it becomes no different than the old tower and we all know this. I suppose this is why your title is not wrong ‘Sauron Remains Undefeated’. Barad-dur may fall today but the spirit of Sauron will just infect whatever tower is built next.

    Except now there is a caveat that never existed before. It is becoming increasingly plausible to build decentralized but interoperable systems of organizing humans that can have utility but don’t necessarily have to approach the scale necessary to attract Sauron’s gaze. This is why ‘crypto’ still has such great promise. Money may be a part of it but not the greatest part. Of course this is just another old story! The way you’ve always defeated Sauron was by being small enough to be out of sight until it was too late.

    The Tower of the US Treasury will last a very long time still I am sure. But when the people of the tower start to fear a loss of control their constant and only answer is ‘build the tower taller’. This may consolidate control over some time scale but it also hastens the fall in the long run.

  4. There is no one in DC who is more dishonest on this issue than Sheldon ‘Whites-Only’ Whitehouse. Dude is the absolute king of glass house construction. Be careful whose perspective you’re trusting. If their title begins with “Senator” or “Congressman” be even more skeptical than usual.

  5. As someone who once had something to do with AML/KYC/KYCC/ATF this is unsurprising its obviously for laundering money. That it’s a protocol or not doesn’t matter, and is a public good to shut it down.

    As someone whose hung around cryptobros and the scene the freak out is dumb and even they seem to know it.

  6. Avatar for aw21m aw21m says:

    Doesn’t really matter tbh. The cat is now out of the bag with zk-tech, and this will reappear and be even harder to detect, let alone shut down in the next iteration. It’s insane that wanting privacy over your financial transactions is considered “obviously money laundering”. Cash would be illegal if it was dreamt up today, that’s “obviously for money laundering” too, right?

    Today we have the least privacy humans have ever had. The current digital age means that everything you do, everywhere you go is surveilled by big brother. Fuck us for fighting back against that, but we are going to try!

  7. This was a great and very informative note on the specific events related to Tornado Cash and I read it with interest.

    However, these are some thoughts that crossed my mind while reading:

    • Your “the US Treasury is Sauron” analogy is a powerful, and I agree that one should not underestimate the US Treasury’s desire to regulate whereever it can, and even to expand its sphere of influence whenever possible. Non-Bitcoin crypto currency protocols everywhere should beware - a formal warning about the future has most def been issued and let’s hope it is received.

    • Your point about Bitcoin in many places becoming Bitcoin!TM is also a good one. This is absolutely happening and anyone who invests in this Bitcoin!TM should be clear about what they are investing in. Which for the avoidance of doubt, is a product that is labelled as Bitcoin but exists as a mere shadow of the original thing. A one-dimensial version of a multi-dimensional concept.

    • All of that said, I don’t think this note, or those before it, have made a great case for why the creation of Bitcoin!TM means the end of Bitcoin. The end being defined as something very different than negative price action. And this is important to the general gist of this note, which seems to suggest that Sauron is coming for Bitcoin and will eventually defeat it. In my mind, this argument only makes sense if we view Bitcoin as simply a new currency with exciting price prospects and with the simplistic aim of “number go up”.

    While I acknowledge this aspect of Bitcoin and its importance to many so-called Bitcoin proponents, it seriously underestimates the scope and nature of the Bitcoin protocol. By subverting Bitcoin into Bitcoin!TM, “Sauron” has not made away with Bitcoin. It has simply created a distraction among retail investors who only see Bitcoin as money, and whose only interest in Bitcoin stems from a desire to watch its “number go up”. This, most certainly will slow the pace of the price of Bitcoin, but it is categorically NOT the same as defeating Bitcoin the protocol.

    Admittedly, my view of Bitcoin is different from that of many other Bitcoin supporters and many would disagree with me, so take my “two cents” on Bitcoin as exactly that:

    • Bitcoin is not simply a new type of money. Bitcoin is a powerful protocol which many different spheres of potential influence. It is categorically different from other cryptocurrencies because of its Proof-of-work protocol, but while that point is often made the more important point is that the comparison itself is misguided. It is not just apples and oranges, it is apples and…say a fertile field somewhere. The field certainly has the ability to grow apple trees and apples, but it is not in the same category.

    • There are so many aspects of Bitcoin to think about - it is a philosopher’s dream - but to try and make my point here I’ll focus on one additional aspect of Bitcoin that does not get talked about very often, namely Bitcoin as a national defense protocol and a proxy for war.

    • For fellow eager beaver researchers, this idea has been put into the mainstream by a guy called Jason Lowery, who is a US National Defense fellow at MITs US Space Force. He has published a lot of the thinking behind his Masters’ Thesis on Bitcoin here:

    Keep in mind that I am not simply saying that Jason’s view on this is correct (though I have come to believe it is) but that the Bitcoin protocol is a very powerful baselayer of “truth” - not just a new form of money. The fact that hoardes of people jumped on the bandwagon and bought Bitcoin with the singular goal of price ascent does not take away from the underlying value of the protocol. Jason writes about what makes Bitcoin special at the link above and it is well worth a read.

    • Jason Lowery’s main argument is that Bitcoin’s proof of work protocol is essentially a power-based control structure through which owners achieve zero-trust and egalitarian access to property, without power projection. This to me is a point that cannot be overstated, and Jason’s points about implications for national security are well worth exploration.

    • As you/Ben have said before, Sauron cannot “see” Bitcoin - which is why it wants to turn Bitcoin into something that can be more easily seen. But perhaps “seeing” Bitcoin is not the most essential concern here. Perhaps Sauron has already fully grasped that not only can it “see” Bitcoin, it also has no ability to “control” Bitcoin. Creating a side-show casino-chip Bitcoin version is a useful distraction, but perhaps Sauron needs to think “bigger”.

    • Perhaps Sauron needs to consider how the very existence of the Bitcoin protocol may influence other nation state’s willingness to allow the US Dollar its hitherto prime spot in global finance. Jason makes the point that the US (and the Western World) better consider the implications of game theory and the obvious first-mover advantage as the zero-trust and egalitarian control structure of Bitcoin sets about creating a new and powerful industrial defence complex.

    At this point, most people will roll their eyes at perceived hyperbole - but I have found these fundamental aspects of the nature of Bitcoin well worth exploring:

    Quoting Lowery further:

    The sociotechnical implications of proof-of-work digital assets are huge. There are major national strategic security implications of Bitcoin – the world’s most widely-adopted proof-of-work digital asset defense protocol. Today’s kinetic superpowers should be taking Bitcoin extremely seriously and summoning all of their capacity to produce responsible strategic policy that actually understands this technology for what it is, and postures their nation to thrive in this new era of strategic power competition. Like all examples of when new power projection technology emerged in history, the future of digital warfare will be highly path-dependent; the first nations to adopt it will be asymmetrically rewarded, and there will likely be no second chances.

    But this is about more than what nations choose to do; this technology is transnational – it taps into something much deeper. If the theory is valid, then this non-biological evolution is significant on a much broader timescale than the rise and fall of nations. Finding a surrogate to war means Sapiens have discovered their digital antlers – a way to continue the power projection game to establish fair pecking order; but like antlers, do it using special protrusions (ASIC infrastructure) that will not threaten our mutual extinction, like nuclear-tipped kinetic power does. With this change, life will be able to continue to do what it does best: reward its most clever and resourceful power projectors, bring order to chaos, and maximize its ability to resist the inevitable course of entropy. So our responsibility as Sapiens – life’s peak predators & abstractors – demands that we endeavor to understand this technology’s potential. That endeavor begins with having the wisdom to see why this technology is worth every watt.

    • Clearly, if “Sauron” is busily trying to figure out what Bitcoin really means in the context of diminishing levels of societal trust, national defense and monetary policy - I would expect them to prefer to do so without retail investors treating the very same protocol as just the very latests in a string of shiny new investable themes. Ideally, retail investors should be syphoned off into Bitcoin!TM before any further decisions are made about Bitcoin in general.

    So I guess what I am saying is that there is more than one way to view the actions of the US Treasury in relation to Bitcoin - versus all other cryptocurrencies/ non-proof-of-work protocols (for which I completely agree with the entirety of the note’s arguments).

  8. Avatar for bhunt bhunt says:

    Thank you for this tremendous post, Em. More evidence that the ET Forum is the best thing on the interwebs today!

  9. Avatar for Zenzei Zenzei says:


    Your post helped me understand why I don’t connect with this whole idea of non TM bitcoin.

    As long as we are all obsessed with this idiotic idea of “money” as an equalizer of “stuff”, an “asset worth of defense”, then anything that is in service of “money” will by definition end up co-opted by Sauron and becoming a TM. Sauron likes money because it’s quantifiable and thus excisable. Sauron likes money because it is a very nice carrot to motivate the peoples to produce and consume and grow the economy and feed Sauron’s appetite for money.

    And as long as we live in a world where everything is financialized and bubbly to the point where money measures nothing (trillions rise and fall easily with no real link to actual work/humanity/whatever) anything that serves Money serves Sauron.

    Bitcoin is an abstraction distraction that takes people away from the real threats facing them. Like the energy crisis that has the world in its grips right now. Bitcoin w/o energy is nothing. Blockchain w/o energy is nothing.

    The world can keep its bitcoin. Energy is Life.

  10. Rafa it seems like your comments are only addressing the idea of btc or other network-based protocols attempting to compete with centralized systems at scale. Of course this is 99% of what you read and see when it comes to crypto which is exactly the point; the power of the thought ‘this idea can be applied at scale’ is Sauron. But my focus is application of the ideas of btc not at scale. These concepts can be applied to almost anything, it is only Sauron that drives the focus towards money and scale. With that in mind do you still see bitcoin entirely as an ‘abstraction distraction’? I think the ideas that underpin crypto can be applied locally in a way that is compatible with your energy is life thoughts (e.g. Proof of Plant). More importantly, as a logical consequence of the widening gyre and the modern information sphere I don’t think this is just a way, I think it will end up as the only way.

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