Custodial

When Canadian truckers protested COVID mask mandates by blocking key transportation routes along their border with the US, Prime Minister Justin Trudeau invoked the "Emergencies Act". He quickly issued a government order "authorizing Canadian financial institutions to temporarily cease providing financial services where the institution suspects that an account is being used to further the illegal blockades and occupations." Whether or not you agree with the truckers' protests, or with Trudeau's response, this...changes...everything.

For hundreds of thousands of years, humans used commodity money (from cowry shells to gold) to barter and exchange. In the last few hundred years, we have shifted towards various forms of cash-based instruments. All of these systems are non-custodial, because each owner manages their own shells, gold, or cash. But over the last 20 years, the institutional environment has shifted to a posture that non-custodial money is default suspicious, ranging from central banks who want the "death of cash", to the Patriot Act and derivatives thereof, and finally to geopolitical pressure points applied via the banking system (see Trudeau, exhibit 1).

What would a counterfactual, normal constitutional democracy response look like? A) Let it play out if you think it is in good faith, people are not unsafe, trukers are not breaking laws, etc. B) Encourage the local authorities to arrest them and try them in a court of law if you think they are.

But instead, Canada has asked every financial system provider from banks to credit card companies to investment firms to crowdfunding platforms to crypto companies to insurance companies to freeze the accounts of anyone directly or "indirectly" supporting the protests. And "indirectly" is both poorly defined, and is a slippery slope.

You are likely in either one of two camps when you hear this news. "But they can't do that, it's my money" or "good, that'll teach 'em a lesson". If you fall in the first camp, then technically it is your money, and also technically they can do that. Cash, of course, is "non-custodial", "decentralized" and not "KYC'd" (Know Your Customer). But banking systems are custodial, centralized, and KYC'd. If the bank thinks you are doing something illegal, then they, as the custodian of your money, retain the ability to rescine access to those funds, as is playing out in Canada. If you fall into the second camp, then what happens when you, personally, are suspected of indirectly supporting the protests because you bought something from Amazon sold by a trucker's family? Or what happens when you are directly supporting a cause that the central government has deemed inconvenient or illegal, such as BLM?

In either case, you get unbanked. Even in the current system, being unbanked and having to rely on cash is more or less ejecting you from the modern economy. Paying bills, getting a paycheck, paying vendors, investing in 401K, buying crypto even, all require access to traditional payment rails. And it's possible that many of the people unbanked now will not be rebanked because financial institutions won't want the headache of doing so.

So where do we currently stand?

☑️ You have constitutional rights
☑️ You need money to exercise them (see excellent 6529 thread below for more)
☑️ The state has the power to cut off funding

This is a slippery slope that can get so much worse though. If we end up with a fully custodial system: no cash, no non-custodial crypto, and full control digital currency, then these types of punitive actions can happen at the push of a button, instantly, across large groups of people. Indeed, many central banks have stated goals for their Central Bank Digital Currencies (CBDCs) to: eliminate cash, allow global transaction censorship, apply deeply negative interest rates.

The way this process has been working is that we are the proverbial frog and we are being boiled slowly. Every year, the reporting requirements get a little broader, the penalties steeper, the restrictions on cash withdrawals more severe. And most of all the presumption of innocence is turning into a presumption of guilt. "why do you want to withdraw $5K in cash", "if you have nothing to hide, why do you need non-custodial instruments", "non-custodial is dangerous".

Literally for the whole of human history, "non-custodial" was the main form of the mediums of exchange. It is a very recent concept that this is a bad thing. This is why one of the reasons that cryptocurrencies have been generally disliked by central banks in particular. Here they are, closing in on the 'end of cash' and now a new form of digital cash emerges, and, in their view, they need to reel that in too for the rest to work.

Previous articles I've written on Web3 focused on the shift of control away from centralized "Web2" companies, towards decentralized blockchain applications. With a fresh Canadian perspective, the role cryptocurrencies play becomes clear. Being de-platformed from a social media account to most people would be an inconvenience. Being de-platformed from your savings and retirement accounts would be catastrophic.  

The internet, computers, big data, machine learning all allow us to centralize information flows in a way that we could never have before. It is exciting, but it is also dangerous. The case for crypto and the role of the blockchain is to prevent society from building an economic, digital, and metaverse architecture that is completely centralized. Because centralization, whether it is on corporate or state systems, will eventually end up under state control because states control the exercise of power. Just like in Canada.