The EU Hunger Games

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A rough week

Some blowback from the ByBit hack. $1.4 billion in Ethereum stolen by North Korea. Overall the response from the impacted exchange has been impressive; fully restoring their 100% reserves within 72 hours. Even so, it left the market rather spooked. 

The audit report (which is in no way an audit report) on what happened doesn’t help that much either. It somewhat exonerates ByBit and puts the onus on another wallet provider; who might be rebranding from their current title “Safe”.  

My main issue with all of it is that it is very complicated. Smart contracts in particular seem in their nature to create risk simply because for them to be operable at all they need to be open to the web. As a consequence vulnerabilities are found in what looks like a wallet that was hosted on Amazon Web Services. $1.4billion in a single wallet on AWS? 

The report concluded: 

CZ chimed in having seen the audit report with some further questions. There is probably a bit more to this and potentially somebody with access to the private keys has been hacked or in some other way compromised. 

The more I think about it, and the more I read about it the more I think it’s probably simpler. Someone has been paid a bribe and the key has been handed over. 

We know cryptography works, all this ”javascript injection malicious code” is just the way they used the key once they had it. 

Case Closed

Zero fines. Zero business changes. It does make you wonder what the SEC spent two years doing. The bottom line was existing legislation did not anticipate the new digital asset class. Accordingly, nobody could really decide who the regulator was or what indeed the regulations were. To this day, nobody knows. It was, and remains, very much a case of just giving it a go and finding out.

Elsewhere, OKex also reached a settlement this week. They were fined $84 million for KYC issues while trading with US customers. They also agreed to forfeit $421m in fees earned from those clients. It’s an enormous sum but goes to show the scale of the industry that they can simply swallow it and move on. 

Brian Armstrong and Coinbase are American. OKex is not. You will further recall that CZ of Binance fame is also a ‘foreigner’. He got four months in prison for doing things not much different to Coinbase. 

Those are the breaks, I suppose. The settlements are happening fast though and finally we can move on. 

The Scarce Thing

First, I would suggest reading this from Ethan Mollick. It's a good background on where we are up to with the very latest LLMs and their capabilities. Having done so it will be easier to be open to the general direction of travel. This next extract is from a book called  “Deep Utopia” by Nick Bostrom (recommended by a reader, thank you). 

“Capital keeps accumulating; so eventually land is the only scarce input. If you want to visualize this condition, you could imagine that every nook and cranny has been filled with intelligent robots. The robots produce a flow of goods and services for human consumption, and they also build robots and maintain and repair the existing robot fleet. As land becomes scarce, the production of new robots slows, as there is nowhere to put them or no raw materials with which to build them—or, more realistically, nothing for them.”

In it he attempts to model hypothetical scenarios in which AI and machines take up a great deal of the work that we currently do ourselves. He first assumes a simple model of the economy, with capital, land and labour. 

Robots then arrive and are ultimately able to replicate and maintain themselves (which in software terms is already true). In doing so labour becomes essentially redundant. In most cases do does capital ( labour is replaced by robots and capital becomes self replicating). Accordingly, the only scarce thing is land in the hypothetical model.

Labour’s share of the economy collapses to zero, which doesn’t mean we all die but it does mean that people arming themselves with the appropriate assets will do better. Which means owning robots, knowing how to use and deploy them etc. 

Consider the video of the latest robots from figure.ai Armed with AI, the robots sort through the shopping and decide what should be refrigerated. It is this new intellectual capability that they have that makes them useful. They look slow and awkward but this is the worst they will ever be. In a year could they do it at our speed? Is it meaningful if they can do this kind of thing?

We have probably all seen the Boston Dynamics videos of robots doing backflips over the years. They were impressive robots but it is now obvious that they didn’t have a brain in the sense that robots using AI do. A robot that unpacks the shopping is far more impressive (at least to me) than a backflipping bit of metal that can’t do anything else or doesn’t know what the fridge is. They will be incredibly helpful to a large cohort of people who might struggle doing lower level physical tasks (the very old or disabled for example). 

The implication throughout is that labour and capital will not be scarce or at the very least not as scarce as they are today. I am increasingly convinced that scarce digital things (which are incredibly hard to generate at scale) will become very important in the new economy. 

AI makes nearly everything digital replicable. Some things it cannot replicate though. 

I like those things, and will continue to buy them. 

This rather reflects our own experience of 2024. It was clear throughout that retail interest in the sector (or at least in bitcoin directly) was quite low. Some of it too was the $100k effect where a lot of long term individual holders handed their coins over to BlackRock as we hit six figures. 

Some other notable stats since the halving in April last year:

• BTC that has been mined: 137,700 BTC

• $MSTR have acquired: 264,340 BTC

• U.S. ETFs have acquired on a net basis: 331,857 BTC

• Miner public company purchases: 45,478 BTC

• Other public companies: 6,055 BTC

• Short-Term Holder Buy-Pressure (minus ETFs, MSTR and other public company purchases within 155 days): 194,571 BTC

• 280,286 BTC off exchanges (Says 25% actually purchased and not swapped into ETF): 70,071 BTC 

• Long-Term Holder Sell-Pressure: 312,120 BTC

• General miner Balance Sell-Pressure (Minimal/could be change of addresses: 13,061 BTC

On a net basis: 449,491 BTC or 3.26x the mined supply since the halving.

Overall, a lot of buying since the halving and the supply has come from longer term individual holders (where else could it come from?) 

It’s indicative of likely buy side pressure over the next few years though. The weaker hands, if we can honestly call them that, are getting fewer in number. We don’t have another Mount Gox to come (which dumped supply on the market). Neither do we have another German government sale (62,000 coins back at $50k). 

Right now it doesn’t feel like it; but all the time supply just squeezes and squeezes. 

Euro-Trash

A chart to set the scene; US-Tech v Euro-Tech. It was easily summarised this week as follows “Home Depot is worth more than every EU tech-startup of the last 50 years”.

Meanwhile, Lagarde has been having meetings. In this case with Petra Hielkema who heads an organisation I had not heard of: “The European Insurance and Occupational Pensions Authority (EIOPA)”. They exist to regulate and improve the pensions and insurance industry across Europe. It’s odd though because each EU member also has its own pensions regulator (like BaFin in Germany). Some of which are very large and very competent. 

Helpfully, our friends at EIOPA have a strategy document explaining their goals until 2026. There is nothing wrong with it, honorable intentions etc. “Green and digital transitions”. Maybe. I would of course be asking, “specifically what do those words mean?”. I would go on to argue that they in fact mean nothing and the document itself is a gigantic waste of resources. 

Does Europe really need this department? Every nation already has one with actual legislative teeth. This kind of pretend stuff is exactly the reason it is so hard to get anything done. It’s also a drain on the private sector. Many highly educated Europeans go off and do nothing. EIOPA, I hate to say it, does nothing. 

Their very detailed Annual Report (although the last one is from 2023) sets out the cost of running EIOPA at €33 million, which in the scheme of things, is nothing. 

This is perhaps the whole problem. There are lots of departments in the EU doing nothing, for the cost of next to nothing. There are pages and pages of them listed here. Departments of bureaucrats dreaming up new administrative pain with which to torture the citizenry. There is even a department dedicated to teaching administration. The European School of Administration (EuSA) where you can learn how to create admin for other people. They have 20 full time staff (cost; you know, next to nothing). They provide “resilience training” for European bureaucrats as well as “certifications”: 

Certification: a procedure whereby officials can move from the assistant function group (AST) to the administrator function group (AD). 

The “AD Group” is no holiday in itself. Comprising 16 mind boggling complex levels, which are explained here. It is the Hunger Games for EU staff where competitions are held for vacant positions.

Anyone who meets the general eligibility criteria and has a bachelor’s degree can apply for the EPSO AD selection competitions. AD Generalist competitions are usually announced annually. AD Specialist competitions are announced when staff recruitment needs arise.

I plan to enter when Christine retires.

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