Sauron Remains Undefeated

Concealed within his fortress, the lord of Mordor sees all. His gaze pierces cloud, shadow, earth, and flesh.

What happened this weekend in Washington DC, where the Senate debated and ultimately rejected various crypto-related amendments to the infrastructure bill, was not a bad thing at all for Bitcoin! TM, the Wall Street-abstracted representation of the price of Bitcoin. If all you care about is Number Go Up, then you can stop reading this note. All is well!

But if it bothers you even a smidge that the core censorship-resistant and anonymity-preserving DNA of OG Bitcoin is being genetically modified by Washington so that it’s just another gaming table in the Wall Street casino …

If you care in the least that what made Bitcoin special in the first place has been reduced to a false and constructed narrative that exists in service to Wall Street and Washington rather than in resistance

Then, yeah, read on.

I wrote this back in April.

If there’s a Western governmental institution that is more unclouded by conscience, remorse, or delusions of morality than the US Treasury, I am unaware of what that institution might be. But unlike Wall Street, which is motivated by Flow, the US Treasury has an entirely different (but highly compatible!) goal.

The goal of the US Treasury is to see all of the money in the world.

That’s really all it is. That’s what Anti-Money Laundering (AML) regulations are all about. That’s what Know Your Client (KYC) regulations are all about. That’s what Report of Foreign Bank and Financial Accounts (FBAR) regulations are all about. That’s what the Treasury-led Society for Worldwide Interbank Financial Telecommunications (SWIFT) is all about. That’s what the Bank Secrecy Act (BSA) is all about. None of these programs are really about taxes. None of these programs are really about catching crooks or fighting terrorists. All of these programs are really about information for information’s sake regarding the greatest source of power in the world and the raison d’etre of every government on Earth: money.

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.

In Praise of Bitcoin

Here’s what I think happened this weekend with the Senate debate and vote.

First, I think that Treasury has been planning to announce these broad extensions to crypto-entity reporting and taxation requirements all along, in order to eliminate a blind spot that Sauron accidentally created via their own 2019 guidance stating that “a person conducting a transaction through an unhosted wallet to purchase goods or services on their own behalf is not a money transmitter” and is thus not subject to the Bank Secrecy Act.

Treasury’s December, 2020 proposed rule-making doc said as much directly:

The Treasury Department has previously noted that “anonymity in transactions and funds transfers is the main risk that facilitates money laundering.”

The Financial Action Task Force (“FATF”) has similarly observed that the extent to which anonymous peer-to-peer permit transactions via unhosted wallets, without involvement of a virtual asset service provider or a financial institution, is a key potential AML/CFT risk in some CVC systems.

FATF members have specifically observed that unregulated peer-to-peer transactions “could present a leak in tracing illicit flows of virtual assets,” particularly if one or more blockchain-based CVC networks were to reach global scale.

I think that implementing these three paragraphs is the entire goal of the regulatory language that Treasury put in the infrastructure bill. The Eye of Sauron wants to see EVERYONE involved in ANY crypto transaction, even if they’re not “a virtual asset service or a financial institution”, and yes that includes miners and developers. Will Treasury actually monitor some random dude with a few rigs in the basement? Nah. But they could if they wanted to. They will if this random dude becomes bigger than just a random dude. They will if this random dude connects with a “person of interest”. An effective panopticon doesn’t require active surveillance of everyone all the time. It requires the power to surveil everyone all the time and the elimination of any legal right not to be surveilled. Treasury doesn’t want to shut down miners and developers. They just want to see everything that miners and developers are doing. Why would you have a problem with that? You’re not a terrorist, are you? You’re not a money launderer, are you?

Second, I think that Treasury could have just announced these new regulatory requirements using whatever language they pleased and that would have been that. But in order to score the infrastructure bill more favorably (it was originally promised to be revenue neutral but ended up being scored as a $250+ billion deficit addition over 10 years), Yellen agreed to have the new regulatory requirements and its $25+ billion in new tax revenues included within the draft legislation.

To be really really clear … the US Treasury could not care less about the new tax revenues. But the White House cares and Congress cares (I mean, they don’t really care, either, but deficit impact is the political battlefield where this bill is being fought), so team-player Yellen tossed this into the pot. Oops.

I say oops because – third – once the new regulatory requirements were tossed into the legislative pot, the Treasury-approved language associated with those requirements became fair game for amendments and revisions and language that was decidedly NOT Treasury-approved. And that’s when all hell broke loose. The amendment process gave friends and enemies of the bill alike an entirely new avenue for mischief-making, either in efforts to take a poke at Treasury (Ron Wyden) or in efforts to derail the vote entirely (Ted Cruz and Bill Hagerty and Pat Toomey and Cynthia Lummis).

Fourth, efforts to “rescue” the original vague, Treasury-approved language with competing amendments were both pathetic and comical. Ultimately, the White House and Senate leadership called a halt to the farce, made it painfully clear to Dems like Ron Wyden that their little insurrection against Treasury was at an end, and moved to a Senate vote on the bill without any amendments at all. Wyden was a Yea on the roll-call vote for short-circuiting his own amendment, by the way, and he’ll be a Yea on the no-amendment infrastructure bill vote on Tuesday.

And please don’t @me about the Toomey-Lummis “compromise amendment” announced today, two senators who are voting against the bill anyway. Their amendment has been blessed by Warner and Sinema. meaning that Treasury is on board with the language here. It strips out the privacy protections that were in the original Wyden amendment, which is why he’s not attaching his name to it. Either we get a Senate vote tomorrow on an infrastructure bill with no amendments, or we get a Senate vote on an infrastructure bill with a Treasury-approved “compromise amendment”. Wheee!

[Ed note: I see that this “compromise amendment” just got shot down. Quelle surprise!]

From there the bill will go to the House, where I don’t think there’s a snowball’s chance in hell that a Wyden-esque, meaningful amendment sees the light of day. Even if it does, it’ll get stripped out in conference, where House and Senate bills are reconciled prior to a final vote. As for some separate piece of Wyden-esque, meaningful legislation that creates privacy protections against the Eye of Sauron … please.

In the immortal words of Omar Little, “You come at the king, you best not miss.”

Ron Wyden missed. Yellen gave him an unexpected shot, and it was a decent shot, but he missed. Treasury isn’t going to give him – much less his Republican fellow travelers – another chance.

“You come at the king, you best not miss.” (The Wire)

I hope I’m wrong. I hope that a miracle happens and the US House bucks the White House and Treasury to include a meaningful privacy-preserving amendment to the bill. I hope that a miracle happens and there’s 67 Senate votes and 218 House votes later this year for a brand spanking new crypto law that goes directly against the express wishes of the White House and Treasury … not just the Biden White House and Treasury, mind you, but also the former guy’s White House and Treasury and the former former guy’s White House and Treasury.

I hope I’m wrong because I think what happened this weekend is really sad. I think that what Treasury is doing to crypto is bad for the country and for humanity in general. I really do believe that the US Treasury is Sauron, with every connotation that this metaphor implies.

I hope I’m wrong, but I don’t think I am.

I also wrote this in April.

Frankly, I doubt that the policy battle can be won. This has been my view since I first started writing about Bitcoin, and nothing has happened to change my mind. On the contrary, Treasury’s moves to make crypto visible and controllable have happened faster than I thought they would. I mean, I’m hopeful that we are at least at some point of policy equilibrium with the proposed rule changes to BSA and FBAR, an equilibrium that will at least allow self-hosted crypto wallets to exist in peace. But hope, unfortunately, is not a strategy.

In Praise of Bitcoin

I think there is another way.

I think there is a way to reclaim the OG spirit and intention and resistance of Bitcoin, not by trying to find a blind spot of the Eye of Sauron and fighting the US Treasury directly through half-baked legislative amendments, but by subverting the entire system from the bottom-up.

I think we need a new archetypal story arc – Asimov’s Foundation, not Tolkien’s Lord of the Rings – and a new set of narratives that flow from that.

I think we have to flip the script.

The Second Foundation hides in plain sight.

Start here for a new story about Bitcoin and crypto, a new story that’s really an Old Story about autonomy of mind and generosity of spirit.

Understand what I mean when I say that Bitcoin! TM doesn’t stick it to the Man … Bitcoin! TM IS the Man.

if you prefer to listen to this note in podcast + commentary form, click here.

And then go here for an example of what that new story could be: a proof-of-plant method for literally growing cryptocurrency tokens as a representation of the value stored in the human cultivation of plants.

When I say that I want to change the language of crypto from mining to growing, I do not mean this in a metaphorical sense!

This note is also available in podcast + commentary form.

And coming soon, the next installment of this new vision – The Green Protocol – available now on the ET Forum for subscribers to review and comment. It’s not just about plants. It’s about a set of fundamental rules for the tokenization of symbolic betting markets in positive social goods.

To learn more about Epsilon Theory and be notified when we release new content sign up here. You’ll receive an email every week and your information will never be shared with anyone else.


  1. With the kindly little old grandma as figure head, ahhh isn’t she so cute, what an adorable little thing, I bet she even bakes apple pies in her spare time.

    But as with any great cartoon character, you know the demon inside that is going to break out from her granny costume, is going to be of mythically bad and evil proportions.

    I think she was intentionally put in place at Treasury so she can lead the upcoming Great Reset project that has been under planning for several years. It will be relatively easy for an innocuous soft-spoken little old granny to enact the Great Reset and bring the sheep along for their fleecing.

  2. We need hobbits, but we’re unfortunately all human warriors, rangers, and mages.

  3. So I am a little skeptical. There has to be a reason (since you state it isn’t to collect taxes or to fight terrorists, etc.) besides just being able to “see” all the money in the world. “Seeing” the money has to lead to something useful (I don’t believe that the Treasury just loves knowledge for its own sake) for the Treasury and the government. Perhaps to keep an eye on potential political rivals to the government, perhaps a means to direct money flows in the general direction that the Treasury would like, or something else. So tell me for what use do they want to put the knowledge of “seeing all money”.

  4. If you think of the Treasury as part of the Intelligence Community… And what isn’t these days?

  5. Crypto does not have an actual use case that can be made to the broader public. When the public generally understands and likes a thing we care about it being regulated and want the rules to enhance the value of the thing. We like airbags and prescription drugs, so we want to those things to be overseen by people who aim to improve them. Most people don’t have a clue what crypto is good for, other than illicit activities, so the public kind of doesn’t care if it gets regulated into oblivion. The crypto community is this small, strange pocket of people that exist on The Twitters as far as the average person knows, so why are they going to get exercised by new regulations?

    The people who needed to make the case for crypto all got sucked in by the NGU wing of the community and after all was said and done they ended up much richer but with no public support for the basic reason the technology exists. Once BTC became a casino chip the only people who cared about it were the ones who needed the chip to still be some simulacrum of legal tender, at least long enough for them to turn it in to the gal behind the cage. After that what happens to it is of little concern.

  6. This is a really great summary at a macro level.

  7. Hmm. I think the world at large is at risk of missing the fundamental “use case” for crypto. By searching for some very specific and novel/interesting use case it is easily missed that crypto is more like…alternative “water to swim in”. Perhaps that explains why the use case still seems elusive to most.

    I am personally wedged right in the middle, demographically speaking. I am too old to have properly participated in the dawn of the “metaverse” with its various gaming environments and digital tokens. But I am young enough to understand the principles and I am raising small humans that are already immersed in it. For a valuable perspective, I very much recommend reading this article by a young man called Piers Kicks.

    You don’t have to agree with or even understand it all, but it will make you go…hmmm…which is valuable in its own right. Suffice to say that the younger generation is already well versed with the concept of the metaverse. And as Piers Kicks writes in this article, “in hindsight, it will be obvious that crypto’s role in the metaverse was the most imperative yet least explored by those speculating on its emergence.”

    So, cryptocurrencies are basically “metaverse water” . And that sounds like a fairly exciting use case to me.

  8. Thank you for the suggested reading, I’ll definitely take a look at that.

    As for the use case within the metaverse–and I have commented on that particular phenomenon before–I think you’re right. But it also very much proves my original point that crypto has no use case to the broader public. The metaverse is essentially Boomer repellent, which culturally is very interesting, but that puts it outside the place where the vast majority of today’s wealth resides. It’s an interesting generational dynamic and I’ll be very curious to see how it all plays out. I’m in a similar demographic as you and feel like I get it, but also I absolutely do not get it.

  9. I agree that the metaverse is not boomer-friendly at the moment. But if there is one trend I am paying attention to, it is the accelerating speed of change, and the metaverse will be announcing its arrival to everyone sooner rather than later. As an IM in a private wealth management company I know very well where wealth is concentrated at the moment…by comparison, my clients make me feel young and youthful every day…

    But I also know that we (my company) spend most of our time tailoring our offering to the next generation and I have no choice but to agree with this tactic. (I mean…I think it is futile and I fully expect to become irrelevant once the generation of clients that value human interaction dies off, but if I had to choose an area to focus on I would focus on the next generation as well.)

    I belong to a small group of investment managers who entered into the field due to a sincere interest in stock markets, but relatively quickly realised that my role is primarily to hold my clients hands while they expose parts of their wealth to market forces. It is a small group, because most of my colleagues were either never actually interested in markets (the professional relationship managers…) or they are still deluding themselves into thinking that our compliance departments would actually allow us to do anything with our clients’ portfolios that would result in alpha. But I digress…

    I absolutely do not get all aspects of the metaverse either. But I get that the use case for the internet was pretty narrow in the 80s as well. Until it wasn’t. Crypto as a whole (not individual coins etc) seems similar. It is about imagining its potential as…infrastructure. As “water”. Which is why I don’t have any problems understanding why governments would like to get a head start on regulating it…

    Thanks for your thoughtful response.

  10. The use case for Bitcoin is really simple. It is an asset. It is a piece of property. It is a new asset class that many people think will stand up well as store of value when USD fiat collapses and is displaced as global reserve currency.

    The collapse of USD fiat as a global reserve currency is not controversial. If you look at history is is inevitable. The exact date of collapse is not knowable. If may be next week, next quarter, next year, or maybe it won’t happen for a decade? No one knows when. We just know it will happen. And it may not occur on a single day. It could just be a continuing multi-year trend. Triffin Dilemma guarantees USA will be running trade deficits into infinity while USD remains as global reserve currency. This situation is unsustainable politically and economically.

    So what are you doing to protect your wealth in face of USD fiat no longer being world reserve currency at some time in future ?

    If you are sitting and doing nothing with a large pile of USD in cash, you are an ostrich.

    If you are taking actions to get your wealth into assets other than BTC that you think will be good stores of value (e.g. gold, farmland, etc.), good for you. No one is forcing you to like BTC now or buy BTC now.

  11. Internet 3.0 is a commonly referred to analogy on crypto-twitter. The Metaverse concept is interesting to me as I was an early internet adopter/gamer of internet 1.0 in the 90’s. Crypto as assets are only the beginning. The sooner we move away from NGU, the less we have to render unto Caesar.

  12. Crypto cast as just a basket of currencies makes a lot more sense to me than the Utopian narratives that are so common. Maybe branding should start with that angle.

  13. Avatar for Zenzei Zenzei says:

    I’ve always found participating in these debates challenging because to me Crypto is just one use case, amongst many, for Blockchain.

    Its sort of like discovering electricity and using it first for lightbulbs and then discussing the use case for electricity through discussing the use case for lightbulbs.

    It misses the whole point of what electricity could be. Crypto is just one of the first “things” to come out of Blockchain. We are not even in the first inning of that game. Hard to reach definitive conclusions about what the 4th or 5th inning are going to look like, never mind the end game.

  14. The difference between Bitcoin and fiat is becoming more stark as Money Printing for USD fiat has gotten out of control in last 24 months (look at M2 growth), whereas Bitcoin has mathematical hard limit of 21M coins. The difference is very simple. USD fiat is printing without limit (which is devaluing the fiat currency), and Bitcoin has a hard limit.

    Crypto in general (or Blockchain if you prefer), has a lot of other types of projects that have different goals and objectives than Bitcoin. 1000’s of other coins, some projects may make sense, some won’t, Darwin will decide which survive. Just like all the internet start-ups in 2000, most won’t survive. The small number of coins that survive will grow large from network effects.

    Bitcoin is a special case as a store of value asset.

  15. Blockchain and crypto open the door to some fascinating use cases that literally can change the world. Right now it’s the wild west and it’s probably 90% noise. But some of it is going to stick.


    • A world without the need for passwords
    • Instant secure transfers of funds to anyone around the world with fees next to nothing.
    • Microlending to anyone in the world with no counterparty risk - you become the bank and earn a decent return.
    • 1.7 billion unbanked people around the world. Nearly all of them have smartphones. Access to capital will literally change their world.
    • A decentralized financial system that eliminates all the middlemen

    It is possible with blockchain.

    I was early on the Bitcoin bus. I purchased 3 bitcoin when it was about $300. Had my secure tokens and wallet with MtGox. MtGox went belly-up and my Bitcoins are forever lost. That made me get off the Bitcoin bus pretty quickly. Since then, I’ve be an ardent critic. But some recent conversations have got me to see it from another angle.

    Bitcoin is blockchain
    Bitcoin may be trash
    Not all blockchain is trash

    There’s some valuable stuff there - could be epic.

  16. The ‘store of value’ argument is betrayed by the volatility that it has displayed over the last three years. Nobody wants to store value and then lose 20% overnight. Without the vol it could absolutely serve the purpose you describe. But with the current environment it’s just a casino chip that is essentially a put on humanity. Not a bad bet!

    Do you want the honest answer?

  17. Volatility is not a surprise in early days of a new asset class. Volatility might be a valid argument of why BTC may not be ideal as means of transaction at this time. Store of value and means of transaction are different objectives. In terms of store of value, no one who has bought BTC and held for any four year period has ever lost value. Sounds like a perfect store of value per my assessment. Please name any other asset class that has a 100% perfect track record where no one has ever lost any money if they held the asset for any four year period. If you can name such an asset, I will agree that the asset you suggest is similar to or better than BTC as store of value.

  18. Over the last 20 years? Ammo, specifically 7.62x39 or 5.56. Paintings stolen from the Gardner museum, though you might run into a liquidity issue on those ones.

    Your assessment assumes that a person will hold something for a random and arbitrary amount of time though. What if someone chose to store their wealth for one quarter in BTC, starting on 4/13/2021? They’ve lost 50% of that wealth. We can play this game all day, I imagine. The reality is that BTC is the face, for better or worse, for a technology that really does seem to be revolutionary. Hard to sell that to the public when it’s early innings.

  19. Avatar for Zenzei Zenzei says:

    You are ignoring sample size in the conversation which really renders the statistics a little bit meaningless.

    If you’re going to be comparing an asset class over a life of 20 years (being kind to BTC) to an asset class with a life that spans several thousands of years, maybe it is useful to do some sort of adjustment for the statistical significance of one series versus another.

    I don’t love or hate Bitcoin, for the record. I am a total blockchain fanboi.

  20. Store of value vs the USD is a very western Anglo-centric perspective. Store of value vs many other currencies is a different ballgame. Again, that is only using the crypto as an asset aspect of the technology. As has been pointed out many times, the underlying technology of blockchain and cryptocurrency is opening doors into LOTS of other areas. Chain of title for instance is an amazing area ripe for disruption. And I don’t just mean cars, and real estate.

    Chain of title is currently undergoing a very large crowd sourced experiment called NFTs. While the jaded veterans among us may sneer at hipsters throwing their stimmy checks at spending real world wealth for the title to a digital piece of art, what many miss is the overall experiment into how we can assign an immutable title to intangible things. If that can be applied to intangible things, there is a whole host of real world problems it can also solve. Take for instance the real estate title issue.

    Most westerners have ZERO concept of how difficult it is to operate in a trustless environment when transacting large sums of money. Think about how you verify land ownership in the US, and then throw everything you know out the window. How do you KNOW the “seller” of the land/house/car is the Seller? Do you have a slip of paper that “proves” they are the Seller and it is stamped by a local government title office? LOL! Guess what? There are FAR more “paper” acres in the land title offices of emerging market governments (if they even have a land title office that is) than there are ACTUAL physical acres of land in the country! Blockchain can actually prove through an immutable ledger the entire chain of title for that property. Imagine the value created by disintermediation of just one country adopting a blockchain for their version of the Register of Deeds.

  21. If you plan to spend within 90 days, BTC is a really bad idea. The only idea obviously worse would be putting your money into a lottery ticket. But four years is not arbitrary. It is the halving period, which has demonstrated impact on price via Stock to Flow model. Institutions are rapidly onboarding for the store of value they can get from Bitcoin, for money they need to hold/manage across multiple years and decades. Eventually the store of value capabilities of BTC will be obvious to all, but right now we are still in early adopter phase so it isn’t obvious to all. It is a touch ironic that many of the folks who have the easiest time immediately grasping the store of value attributes of BTC currently live in Argentina, or Venezuela, or Turkey, or Nigeria, or Lebanon, or El Salvador, or Mexico, or Ecuador, etc. Many in the US are blind to the real world issues of fiat currencies in other countries, due to privilege US has had of UDS fiat being world reserve currency for 80 years. That run is almost over. As an outcome of USD fiat losing its position of world reserve currency folks in US are going to become acutely aware of the dangers and downsides of fiat currencies. Wake up call is coming. History will repeat, due to human nature.

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