Exporting Institutions

The bear market has been tough for crypto. Capital and attention have left, largely for good reasons. Nonetheless, I remain excited about the opportunities ahead. While I have a handful of less crystallized or more speculative theses about crypto’s comeback, I thought I’d share one that’s a bit more formed. And while not much is new in this post, the particular framing has helped anchor my conviction throughout the bear.

The 2024 Nobel Prize in Economics was awarded to Daron Acemoglu and James Robinson for developing a theory of what causes nations to succeed (or fail). Their theory focuses on institutions as the primary input to prosperity. 

According to Acemoglu and Robinson, institutions reinforce themselves. Political institutions determine how economic institutions operate. Economic institutions determine who becomes wealthy. Who becomes wealthy determines what political institutions persist going forward. A nation’s success or failure is thus determined by the institutions its people are exposed to. Good institutions are “inclusive.” Economically, this means secure property rights and free markets with broad participation. Inclusiveness is valuable because it creates the right incentives for investment and innovation. The economy becomes positive-sum: things become better and cheaper for everyone involved, spurring even more investment and innovation. 

If only there were a way to export high-quality economic institutions into countries severely lacking them. Doing so would cut short the doom loop of wealth destruction from extractive institutions. New classes of people could amass wealth, gain political capital, and enact lasting change in the spirit of the inclusive system that allows them to amass and maintain wealth.

Luckily for us, we have technology for exporting quality institutions: crypto. Stablecoins provide the base case. Anyone, anywhere, can import America’s economic and political institutions. The GENIUS act, which provides guidelines on how to issue secure digital dollars, is the product of American political institutions. And the usefulness of these digital dollars (and the treasuries that back them) are the consequence of American economic institutions. 

And while one can debate the merits of American institutions ad nauseam, that’d miss the point. The important thing is that anyone, anywhere, can choose for themselves — and many have chosen stablecoins for various uses. For someone used to currency debasement and unreliable or unconnected banking systems, stablecoins are a strict improvement over the shaky property rights and market access they previously had. 

What makes crypto uniquely suited for this is its ability to add minimal additional trust assumptions (similar to what my colleague Daniel calls solving “Hourglass Markets”). Without crypto, people’s access to markets is mediated by local correspondent banks, laws, and the politicians that govern over them — in addition to any issuing institutions involved. With crypto, local correspondent banks, laws and politicians are replaced by cryptography, smart contracts, and consensus algorithms — with only the issuing institutions involved.

While today stablecoins are the primary successful example of exporting institutions, in the future we will see many more countries and many more asset classes export their institutions via crypto as well. The reason is simple. The countries that export the most with the highest quality will have access to more capital, catalyzing innovation (and in turn wealth creation). And the countries that import high-quality assets will have access to better investment opportunities, catalyzing wealth creation (and in turn more capital to influence and innovate).