Fedimints and Prole Opacity

“A crypto needs to have features for a central bank to adopt it. One is fungibility; two is privacy… Bitcoin… it’s been used to buy this; it was transacted to this wallet. That lack of fungibility and privacy is a huge lack for broad, structural adoption.”

No, Bitcoin doesn’t have a transparency problem. Central banks have an opacity problem.

I hadn’t heard of Chamath Palihapitiya.² I guess he means well, but— let me put it like this: Hands up if you think the privacy and fungibility will make it down to the proles.

How about this. We get opacity, and they get transparency.

Fedimints

One way to do this would be fedimints. Fedimints are a new kind of local bank. You don’t need permission to start one. Just download the software. Here’s how they state it on the website:

Imagine a world where your community becomes its own bank, collectively managing and transacting bitcoin while prioritizing privacy and accountability. That’s the power of Fedimint.

Here's what happens:

• A group of at least four people— usually seven— sets up an instance of a fedimint called a federation.³
• They are the guardians.
• They control a stash of bitcoin.
• It takes a quorum of ~70% of the guardians to send the bitcoin anywhere, helping to thwart wrong-doing.
• People in the community scan a QR code invitation to join their federation.
• Federation members pay the guardians in cash, crypto, vodka, whatever.
• Federation members get e-cash in return; little files to download on their phones.
• Federation members use these e-cash files just like money.⁴
• E-cash can be redeemed for bitcoin in one’s own federation.
• The guardians don’t know who has downloaded the e-cash and how it’s being used.
• Imagine your village, clan, or club using its own tokens as money, but backed 1:1 by bitcoin.

The Trust Issue

When fedimints came out in 2022, there was a lot of debate in the Bitcoin community. Some people saw fedimints as heresy. The reason is that, contra Satoshi, it brings back trust in some kind of centralized institution. Instead of holding your own bitcoin (BTC), a small group holds it for you. That’s worth a ‘hmm’ and a stroke of the chin at least. I remember Obi Nwoso, one of the fedimint’s creators, answered the critics by saying something like: While you debate, one billion people in the poorest countries are crying out for banking options.

One shouldn’t judge fedimints by the same standards as Satoshi’s protocol. Satoshi crafted bitcoin (BTC) to be used on the Internet by strangers. By contrast, the fedimint creators are very clear…

Fedimint federation guardians should be individuals you know personally…⁵

Why I like Fedimints

• Trust in neighbors is actually a good thing.
• People in poorer countries will soon do local banking anyway.
• It’s much simpler privacy for non-techie bitcoiners.

Guarding the Guardians

I like the idea of fedimint members taking turns to guard the guardians. A bank needs security after all. Who would rug-pull one’s own security guards? It’s game theory. Satoshi would approve, I think.

Volatility a problem

Fedimints aren’t perfect. There are a few issues. I will deal with them in a future article. The main one is that bitcoin’s volatility is okay for individuals but moot for a group using bitcoin to buy stuff. Banking changes the equation. Just telling people over and over to have faith in bitcoin won’t cut the mustard. Fedimints grew out of the Bitcoin Maxi community, and I think they were blind to the practicality of stablecoin.

Opacity for me, but not for thee

This model flips the technocratic model on its head. We plebs get the privacy, but our leaders don’t. Plebs deal with e-cash, which is traded privately. Meanwhile, the bankers publish their usage on the bitcoin blockchain. The blockchain is at heart a transaction log. This transaction log is for anyone to see.

One has to stop and think: “Am I understanding this right?”

Yes. Your financial institution would publish everything it did out in the open, but you would transact in private.

Central banks

For sure, this is all small scale. It doesn’t suit central banks. Mr. Palihapitiya is not wrong that central banks won’t accept bitcoin-based, transparent solutions. There will need to be some Layer Two solution⁶ on top of bitcoin (BTC) or Tether Gold (XAUT) or ripple (XRP) or whichever crypto the big banks end up with.

I say: Get rid of central banks. There is only one truly helpful function, and that is lender of last resort. I mean, for big banks, when the markets are crashing, and there’s nobody willing to lend, there needs to be an emergency fund. I reckon that there should be government-owned banks with 1:1 maturity-matched loans and deposits, and so for every $1 of bail-out loan, there would need to come in $1 of term deposit. It would have the same vibe as war bonds. This notion is not a ‘central’ bank, but a conservative, nationalized bank.

Takeaways

• Bitcoin (BTC) shouldn’t change for banks; banks should change for bitcoin.
• Fedimints are a new kind of local-community bank.
• Fedimint customers get e-cash, which is private, but fedimint bankers transact with bitcoin, which is public for all to see.
• This flips the technocratic model on its head.