Is it better to bribe Trump by purchasing his memecoin or his stock?

Noah Smith writes a provocative article about memecoins as a novel mechanism for bribery payments. A foreign dignitary looking to gain influence over Donald Trump would like to pay him a giant bribe, but doing so directly is prohibited by all sort of laws. Luckily, Trump has just issued his own memecoin, TRUMP, of which Trump owns 80% of all coins. So why not just buy the TRUMP token, thereby pushing its price up and gifting Trump with even more wealth, in return gaining a degree of influence over policy?

The best part is that no money actually changes hands, so it's probably less risky from a legal perspective. The dignitary can just plead "I thought it would go up!", says Noah.

Now, I'm not so sure that crypto is ushering in anything unique here. Consider that Donald Trump also owns shares of Trump Media & Technology Group Corp (DJT), which are NASDAQ-listed "tradfi" shares that predate crypto. Why not just buy DJT shares, pump their price higher, and collect favors from Trump? No crypto involved. 

In fact, a year before Noah wrote his article about memecoin bribery, Robert Maguire of Citizens for Responsibility and Ethics in Washington (CREW), worried about precisely such a scenario. Any entity wanting to "cozy up" to Trump need only buy a bunch of DJT shares on the NASDAQ, enough that they "get Trump’s attention, but low enough that it doesn’t break the five-percent threshold that triggers SEC disclosure."

Consider that Donald Trump and family members hold a 59% ownership stake in DJT equity, which isn't too different from the 80% of TRUMP that they own. Both assets have market caps of around $7 billion. So pushing up the price of DJT will certainly enrich Trump just as much as trying to nudge TRUMP higher. So here's my question: What's the best way to bribe the current President of the United States of America, by pumping the TRUMP memecoin or pumping old-school DJT shares?

Before answering it, I want to pause for a moment to reflect. The fact that I am even writing a blog post on the topic of bribing an American president shows how far along a certain dystopian financial timeline we have gone. Back to the timeline.

I see two reasons why the memecoin probably presents a better pseudo-bribery option than the tradfi stock. 

The first reason is that it's safer to pull off. DJT is listed on just one exchange; the NASDAQ. And the NASDAQ exists in the U.S., which has the most robustly-regulated and well-trusted securities markets in the world. One duty the government requires of NASDAQ is that it surveil transactions in real-time for abusive trading behaviour, so any sketchy DJT purchases could end up being reported by NASDAQ to the authorities. Furthermore, to get access to NASDAQ-listed shares, a brokerage account is required, and that'll require the would-be briber to pass through the brokerage's identity checks.  

On top of that, systems like the Consolidated Audit Trail, a government-mandated system tracking U.S. equity and options trades, gives regulators themselves a means to monitor market activity and investigate potential misconduct.

So a foreign dignitary is taking a bit of a risk if he or she goes the DJT route.

By contrast, the TRUMP memecoin is hosted on a blockchain, basically a borderless and open decentralized database, not a carefully-guarded database confined to the U.S. The result is that TRUMP can be listed anywhere, including on shady offshore crypto exchanges like ByBit or KuCoin, which surely aren't checking customers for pumps. To boot, these offshore exchanges perform only cursory identity checks, if any.

To further protect him or herself, a would-be briber can initiate the pump by sending funds from an offshore exchange, say KuCoin, to a decentralized exchange, or DEX, and only then push the price of TRUMP higher. DEXes are even more hands-off than offshore exchanges; they don't perform any surveillance or identity checks.

The riposte to this is that all blockchain transactions are public and observable, so a bribe conducted on a DEX could be traced. Ok, sure. But while blockchain transactions are visible, they aren’t directly tied to real-world identities. Blockchains are pseudonymous. It's a bit like going to a masked ball. Everyone can see who the dancers are, but as long as everyone has their mask on a degree of anonymity is preserved.     

So to safely get away with bribing Trump, it sure seems that his memecoin is the better option than NASDAQ-listed DJT.

Now for the second reason why the memecoin is better for bribery: it packs more punch per dollar.

A memecoin lacks what equity researchers refer to as fundamental value. Its price is solely a function of Sam's expectations of what future buyers like Jill will pay for it, with Jill's expectations conditioned on what she thinks Sam will pay. They are pure bundles of speculative energy. As I've referred to them in other posts, memecoins are decentralized ponzi games, zero-sum lotteries, or Keynesian beauty contests.

By contrast, DJT is a stock, and stocks provide their owners with a claim on the underlying firm's 1) profits and 2) its assets in case it is eventually wound-up. There is a "something" that buyers and sellers can coordinate on, so that unlike a memecoin, a stock is more than a pure nested expectation games. That's not to say that stocks don't have a big "meme" component (think Gamestop), but the degree to which this guessing game is played with stocks is unlikely to ever reach that of memecoins.

The existence of fundamentals makes pumps less effective. As a pump begins to drive the price of DJT higher, the underlying fundamentals will start to give certain existing investors a reason to sell (i.e. "it's now too expensive relative to earnings"), and that selling will dull the pump. Since there are no fundamentals for TRUMP memecoin buyers to latch on to – any price is as good as another – a memecoin pump never gets throttled by fundamental sellers.

To sum up, someone who has $10 million to bribe Donald Trump will want to demonstrate to the President that their purchases drove the price of the target asset higher: it'll be far easier to demonstrate this by pumping the frictionless memecoin than the burdened-by-fundamentals stock.

Now, if you've gotten this far and think this post is actually about how to bribe Trump, it's not. It's about the often fascinating differences (or not) between crypto and traditional finance. In my view, they aren't really so different. Crypto fans may think there's a financial revolution going on, but there's nothing new under the sun.

You might wonder: is the frictionlessness of a memecoin, its lack of fundamentals, and the ensuing incredible ease by which it can be bribe-pumped a new feature that crypto has brought to the table? Not really. There's no technical hurdle preventing the NASDAQ from listing a non-blockchain version of the TRUMP memecoin on its own old-fashioned Oracle database. People could buy and sell this NASDAQ-listed meme-thingy instead of that blockchain version of TRUMP. But securities law gets in the way. Listing an unadulterated ponzi game on a national stock market has never been legal, at least not in my lifetime. Why putting one up on a blockchain is legal is beyond me, but look over there, the President just did it.

At the speed the train is leaving sanity station and heading to financial silly land, I suspect listing pure ponzis on the NASDAQ will soon be an accepted thing. Memeassets everywhere! Bribes for everyone!

Thoughts on the relationship between corruption and crypto adoption

[This is a re-post of an article I wrote for CoinDesk last week. The IMF recently found that corrupt countries tend to have high crypto adoption. In my article I suggest that this is because citizens of undeveloped countries are using crypto to dodge broken institutions controlled by corrupt elites. I cite Cuban crypto remittances as an example of this. But we shouldn't idealize crypto as a tool for emancipation. A big chunk of crypto usage is unproductive. Their corrupt institutions crushing them, people in undeveloped nations see in frenetic crypto prices a potential escape, a last-chance financial gamble. But this escape is illusory. Undeveloped nations require genuine institutional change, not more gambling opportunities.]

Don't Blame Crypto for Corruption
An IMF study suggesting crypto is facilitating corruption is off target via CoinDesk

Is crypto fueling corruption? The International Monetary Fund (IMF) seems to think so. Using crypto usage data from Statista’s Global Consumer Survey, a group of IMF researchers recently found that countries with high crypto adoption tend to be perceived as corrupt.

As to why this relationship exists, the IMF team suggests that crypto is being “used to transfer corruption proceeds." With crypto facilitating corruption, their advice is the product needs to be regulated, the idea being that regulation – especially know-your-customer requirements – will end graft.

The IMF has this one backwards. Crypto doesn't fuel corruption. Rather, whatever underlying malaise is fueling corruption is probably also fueling crypto adoption.

Why Nations Fail

In "Why Nations Fail: The Origins of Power, Prosperity, and Poverty," economists Daron Acemoglu and James Robinson offer an explanation for why some nations seem to function well and are relatively free of corruption, like Canada and Sweden, and others do not, like Nigeria and Syria.

It isn't geography or culture that determines success, say the authors, but institutions. By institutions they mean the rules that govern and shape economic and political life: property rights, contract enforcement, licensing standards, financial regulation and more.

Inclusive institutions create the incentives necessary to harness the energy and entrepreneurship of all members of society. Extractive institutions do the opposite. They create a non-level playing field and narrowly concentrate access and benefits for those with political power.

Acemoglu and Robinson offer the city of Nogales, which straddles the U.S.-Mexico border, as an example. “The inhabitants of Nogales Arizona, and Nogales Sonora share ancestors, enjoy the same food and the same music, and … have the same culture,” write the authors. But those on the northern side are prosperous while those on the south suffer from poverty. They suggest this is because U.S. institutions are more inclusive than Mexican ones.

Under Acemoglu and Robinson’s framework, corruption is a by-product, or symptom, of extractive institutions. A profusion of bribes is the return flowing to the small set of politicians, bureaucrats and soldiers who have managed to seize control of a country’s gears.

Regulating crypto is important but it won't fix corruption

Which returns us to crypto. Solving a problem like corruption requires the tearing down of underlying institutions that abet the graft-addicted elites, and their replacement with institutions that actually work for the people. The IMF's prescription for fixing corruption – crypto regulation – is just a cosmetic change. It does nothing to alter the sick institutions driving corruption, poverty and inequality.

If the IMF's prescription is inadequate, I’d suggest that its explanation for the correlation between crypto and corruption is wrong, too.

Instead of crypto fueling corruption, as the IMF seems to think, it's the other way around; the very same extractive institutions that drive corruption are fueling crypto usage. Put differently, the reason we see high rates of crypto adoption in undeveloped nations where elites rig the rules of the game is not because those elites are dealing in crypto bribes, but because the suffering masses see crypto as a form of escape.

Why do people adopt crypto as a reaction to bad institutions? There are two opposing camps. I'll call them crypto-as-redemption and crypto-as-tragedy.

Crypto-as-redemption

For advocates of the crypto-as-redemption viewpoint, the correlation between corruption and crypto adoption is a sign that crypto is acting as a redeeming force. Citizens in corrupt countries are using it as a hack around the extractive institutions that subjugate them.

Take Cuba for instance, a country long bedeviled by extractive institutions. Most Cubans lack connections to the ruling regime. This makes it very difficult to make ends meet, and so they are reliant on remittances from Cuban family members living in the U.S.

But the regime extracts its pound of flesh. Remittances made through Western Union have historically been routed through a set of Cuban-military linked financial companies, which take a cut of around 5%-10% of each remittance for themselves. By avoiding the regime’s intermediaries, crypto provides Cubans with the chance to get better exchange rates.

Crypto also offers a route when those intermediaries cease working altogether. In 2020, the Trump U.S. presidential administration placed sanctions on the military-linked companies involved in remittances, making it difficult for Cubans to send in dollars at all. Some Cuban-Americans turned to couriers, or "mulas," to physically transport cash to relatives. Others used banks in Europe, which were still willing to interact with non-sanctioned Cuban banks.

Crypto emerged as one of these alternative remittance channels. With Western Union down, Cuban Americans could send crypto directly to their relatives who converted it into Cuban currency to buy food and pay bills. For Cuban recipients who don’t want to handle crypto directly, tools like BitRemesas allow local traders to bid for the right to deliver these remittances in person as cash or to their bank account.

And thus crypto became a redemptive force in Cuba, helping fill in the cracks when institutions stop working for people.

Crytpo-as-tragedy

The crypto-as-tragedy view takes the opposite view. Most developing nations' crypto usage isn't very redemptive at all. Instead, crypto is a last-gasp gambling venue for the desperate.

Take the case of Nigeria, a country beset by extractive institutions and corruption. Citizens who want to advance in life have fewer options than in the West. They are excluded from many of the official channels that lead to financial advancement: gainful employment, genuine business opportunities and investment. Desperate, they've turned to the only available channel for advancement: get-rich schemes, Ponzis and hyper-volatile crypto.

According to Statista crypto adoption data, Nigerians are the most likely of all nationalities to say they used or owned cryptocurrency. Nigeria also happens to be the world capital of the Ponzi scheme. Starting with MMM in 2016, waves of Ponzis have torn through the country including Ultimate Cycler, Icharity Club Nigeria, Get Help World Wide, Givers Forum, Twinkas, Crowd Rising and Loom.

Surveys show that more than half of Nigerians have either participated in a Ponzi or know someone who has. Many are unemployed students, which isn't surprising given Nigeria's 33% unemployment rate. In one survey of Nigerian Ponzi investors, 60.3% cited harsh economic conditions as their reason for joining Ponzi schemes.

For a young Nigerian with few prospects for advancement, a cryptocurrency that promises to moon by 100 times serves the same purpose as a Ponzi scheme like MMM.

If Nigeria’s failed institutions are driving a culture of long-shot financial bets, these bets aren't genuine escapes. Volatile zero-sum games allow citizens to temporarily dissipate their desire to escape their lot in life, but they don't create any real economic value. The elites that control institutions in undeveloped nations may even welcome these sorts of financial games. Not only do they not threaten their control over national resources – they may also distract people from their plight.

And that's why crypto usage is tragic. It is a symptom of an underlying sickness. But just as Nigeria’s Ponzi schemes do nothing to solve the actual problem, neither does its rampant crypto speculation.

Which view is correct, crypto-as-redemption or crypto-as-tragedy?

Both crypto-as-redemption and crypto-as-tragedy counter the simplistic IMF connection between crypto and corruption, suggesting a deeper explanation for the relationship.

Both stories are accurate, to a degree. There are some neat non-speculative crypto use cases where the stuff is being used as a life hack to help those living in dysfunctional nations, such as the example of Cuban crypto remittances. At the same time, a big chunk of developing nation usage involves crypto serving as the focal point for the gambling impulses of the downtrodden, not as a useful life hack or an agent of change.

In its purest form, the crypto-as-redemption view elevates crypto to more than just a personal hack for those coping with bad institutions. Crypto is a peaceful revolution. It sneaks in like a Trojan horse and destroys the extractive institutions that bedevil less-developed nations, setting them free.

While crypto can certainly be a good life hack, this hyper-idealization of crypto is dangerous. It gives people the mistaken idea that a product that serves their gambling instinct can somehow solve the developing world's problems.

To reform the institutions that keep citizens of poor nations, crypto won’t cut it. Deep change requires real work.

Should we legalize the act of paying a bribe?

From the website IPaidaBribe.com

A few months ago  I stumbled on Kaushik Basu's fascinating and readable 2011 paper Why, for a Class of Bribes, the Act of Giving a Bribe should be Treated as Legal. In the context of Narendra Modi's massive demonetization campaign, which has as one of its goals a reduction in corruption, I thought it was a timely moment to shine the spotlight on Basu's idea.

To reduce bribery, the act of giving a bribe should be legalized, suggests World Bank Chief Economist @kaushikcbasu https://t.co/xORxMAjcNq pic.twitter.com/bqOI0uOI36

— JP Koning (@jp_koning) September 25, 2016

One reason that bribery often goes undetected by authorities is that the bribe giver and the bribe taker are incentivized to cooperate with each other in order to keep a bribe secret. After all, the law typically treats both parties as equally guilty—work together and no one gets in trouble. Basu's idea is to upend this symmetry by having the bribe giver face a different set of consequences than the taker should the bribe be made public. Once they face different fates, the motivation that the giver and taker have to cooperate will disappear, or at least be diminished, making it easier for the authorities to cut down on bribery.

In the case of a specific kind of bribery, harassment bribes, Basu proposes completely legalizing the act of giving a bribe while maintaining the prohibition against the taking of a bribe. Harassment bribes are amounts that must be paid to get government services to which one is legally entitled to, say like an official who requires a 'gift' before stamping a document or a teacher who won't correct his/her students' final exams without passing around a hat.

In addition to granting the bribe giver full immunity, Basu also wants to implement a requirement that the taker, once convicted, pay the giver back. So if they successfully offer a bribe and then report it, not only does the bribe giver get the required service that the official had been withholding—they also get the full amount of the bribe returned to them. Knowing that he/she can no longer count on a giver's cooperation post-bribe, the bribe taker will now suspect that all bribes offered and solicited will be made public after the fact by the giver, leading to prosecution. Far safer for the taker to simply stop asking for or accepting bribes.

What about other types of bribes, say like a bribe paid to win a government contract? Here Basu suggests that while the giving of this sort of bribe should not be legalized, the giver should face a more lenient penalty than the taker so as to reduce their motivation to collude.

A policy of allowing bribe givers to tell on bribe takers can backfire, as Basu points out in a more formal paper. Say that a government legalizes the act of giving a bribe, but that the probability of a bribe-giver's information being acted upon by the government is low (perhaps a very high bar for conviction has been set or the department for registering cases of bribery is not sufficiently responsive). In this case, the expected penalty for bribe-taking remains small enough that bribery will not be abolished. Rather, average bribe sizes will rise since government officials will require more compensation to make up for the odds of being detected. Since the same nations that suffer from bribery may be the same ones that fail to run effective departments for taking complaints about bribery and verifying them, the odds of policy failure are not small.

Another problem with this scheme is that it might encourage citizens to blackmail government officials. After all, once a bribe-giver has lured an official into accepting a bribe, he/she can now turn around and tell the official that without some form of compensation, the bribe will be revealed. In response to this, Basu notes wryly that "there is nothing fool-proof in economic policy design," but also suggests increasing the punishment for blackmail.

If the idea of legalizing bribe-giving seems odd on first pass, just think of it as a whistle blowing rule, say like the one recently implemented by the SEC. Whistle-blowing laws are designed to break the psychological incentive for employers to go along with their rule-breaking employees. After all, deviating from an employer-enforced consensus can cause a lot of stress. An offer of financial aid may go some distance to alleviating what is sure to be a difficult experience. In the same way that Basu's legalizing of bribe-giving deputizes bribe givers to come forth and help the authorities pinpoint fraud by government officials, compensation for employees deputizes them to pinpoint corporate fraud.

As I pointed out in this post, Modi's demonetization is a gamble. Sure, it could work out magnificently. But at what cost? With no academic literature documenting the effect of aggressive demonetizations on black market activity, it's hard to know what to expect. While my sense is that the demonetization will probably enjoy some degree of success, a series of incremental changes—including a legalization of bribe-giving (for which their exists a growing body of empirical literature)— would be a far more certain, albeit less dashing, strategy for encouraging growth in the official sectors of developing nations.