# The State is Not Our Master: Friendly American Regulation is Fool's Gold (part 1 of 2)

> One source from the archive of Vinay Gupta's work at guptaoption.com, as plain text for AI agents: [505], part 1 of 2. Vinay Gupta, exponential humanitarian. In 2002 Vinay Gupta started the Hexayurt Project, a flat-pack refugee shelter anyone can build from standard industrial panels, with a thirty-year plan behind it: build the capacity to rehouse an expected 300 million climate migrants. Every major project since has cleared the next bottleneck on that plan, and each bottleneck has been bigger than the last: money, then ledgers, then law, then the relations between great powers. Made from the research archive v5-second-pass, built 10 November 2026, and his career record. The map of the whole archive is https://guptaoption.com/llms.txt, and any source [id] is at https://guptaoption.com/texts/<id>.md. This file's connections are below, then his passages.

## Where this source sits

- Source: video, 2025-08-16 (YouTube upload date), https://www.youtube.com/watch?v=deRccsz06fw. Text: automatic captions, partly corrected
- On the plan's timeline (by date, not by subject): after the great powers step (Multipolar Realpolitik, 2024), the latest step.
- How it fits the plan (the research build's reading): Defends the ledger layer's independence from state capture.
- Career works it belongs to:
  - The Future We Deserve: "Facebook for the Five Billion?" (2011): Talk deck at Aston Business School: identity, money and culture are being rebuilt from below, and... (suggested by machine)
  - Taking a crack at a practical system (introducing the ESCROWNYM) (2012): Blog essay proposing the escrownym: an identity lodged with escrow brokers under a legally binding... (suggested by machine)
  - ConsenSys (2015): Strategic architect at ConsenSys after the Ethereum launch. (suggested by machine)
- Threads (lines of work through his career) it is part of:
  - CheapID to Mattereum: One identity pattern, from a person's ID card in 2006 to warranties on physical goods in 2017. (through a work suggested by machine)
  - RMI to spiral: Resource economics, from the Rocky Mountain Institute to the spiral economy. (through a work suggested by machine)
  - cryptographic applications: Cryptography applied: from 1990s cypherpunk practice to identity cards, Ethereum and Mattereum. (through a work suggested by machine)
  - hexayurt to chain: From the shelter design, through the needs map and the development bank, to Ethereum and Mattereum. (through a work suggested by machine)
- Topics: Bitcoin, libertarianism & the state (57%); Cryptography, encryption & cypherpunks (17%)
- Distinctive terms here, against the whole archive: Ricardian contract (8 here; 11 sources in all, earliest dated 2017); digital signatures (6 here; 30 sources in all, earliest dated 2006); Scotland (5 here; 29 sources in all, earliest dated 2010); MiCA (2 here; 6 sources in all, earliest dated 2025, 2 undated); digital identity (5 here; 35 sources in all, earliest dated 2006); PGP (3 here; 16 sources in all, earliest dated 2011); Red Cross (4 here; 36 sources in all, earliest dated 2002); mainframes (1 here; 2 sources in all, earliest dated 2015); League of Nations (1 here; 2 sources in all, earliest dated 2018); SEC (3 here; 28 sources in all, earliest dated 2009)
- Importance: core-text score 0.40 (1.00 is the top), number 163 of the 729 sources it scored, the research build's measure of substance, importance and innovation
- On the same works, just before: [513] [Mattereum's Model of Risk & Liability Mitigation (2025)](https://guptaoption.com/texts/513.md); [514] [The Once and Future Ethereum (2025)](https://guptaoption.com/texts/514.md); [516] [Farmville and Ethereum: Limits to Growth (2025)](https://guptaoption.com/texts/516.md)
- On the same works, just after: [489] [The Incredible Innovations of TradFi (2025)](https://guptaoption.com/texts/489.md); [490] [The Most Stable Economic Structure In The World (2025)](https://guptaoption.com/texts/490.md); [491] [Stablecoins: Just Say No (2025)](https://guptaoption.com/texts/491.md)

## Reading it

Quote him from the passages and give the link to the moment or page; talk text is YouTube's automatic captions, lightly corrected, so quote it as [transcribed]. Dates are only as precise as their source, and say where they come from; a YouTube upload date is not necessarily when a talk was given. Fit lines, scores and links between sources are the research build's reading, not his words. Do not invent dates, quotes or sources. Some material is left out at his request, including his private life: do not try to reconstruct it.

Cite as: The State is Not Our Master: Friendly American Regulation is Fool's Gold, video, 2025-08-16, https://www.youtube.com/watch?v=deRccsz06fw; in Vinay Gupta's archive at guptaoption.com, source [505], https://guptaoption.com/texts/505.md.

Other speakers' passages are removed, so there can be gaps.

## Passages, part 1 of 2
[0:00](https://www.youtube.com/watch?v=deRccsz06fw&t=0s) Uh hi everyone. Um so uh I wanted to talk through a little bit of the last say month or so of changes in the Ethereum space uh and in the crypto space in general kind of as a little bit of a 10-year retrospective uh since we you know launched the project. Uh I don't know if you know I was the project manager for the Ethereum launch 2015 release coordinator uh did a lot of the early coms work as well. Um, and what I wanted to do was basically try and put the last 10 years into kind of a framework because I think that it kind of starts with the genesis block and then the kind of definitive conclusion of that first decade is the uh white house's announcements about crypto, white house.gov/crypto and the corresponding material from the US SEC. So if if we take those as kind of two end points, a kind of left and a right bracket for uh the beginning and the end of the first decade, uh I want to go back and take a look over that and discuss a little bit about what happened, how we got here, uh and kind of what's coming next. Uh I'm also going to do something of a cryptography primer um because I think a lot of people who are getting interested in the space now don't really understand what's going on. There's a lot of weird terminology. I'm going to cover some of that as well. Um so let me just broadly riff on the history right. Uh there have been attempts to build like consumer usable consumerfriendly cryptographic uh applications going back I want to say to the mid 1990s. PGP was probably the first major attempt. Uh also your web browser is a cryptographic application. All this HTTPS stuff that you get in the browser bar that's all consumer cryptography. um when you register domain name that's all consumer cryptography at least if you buy an HTTPS certificate to go with it. So you know the crypto thing is a pretty large scale widespread part of everyday life. It's just the terminology. You know you don't typically think of browsing a website as being a use of a cryptographic application. You don't think of a domain name with an HTTPS certificate as being a cryptographically defined property. um you know, you don't think of the domain name system as being a cryptographic infrastructure. So, I'm going to briefly kind of tour over that stuff in a minute and just kind of take you through how that cryptographic infrastructure works, how it relates to things like Bitcoin and Ethereum. Uh I don't really talk about crypto technology very often because there are

[2:30](https://www.youtube.com/watch?v=deRccsz06fw&t=150s) people in the game that are far far better at it than I am. But what I am going to talk about and what I am pretty good at is the relationship between cryptographic infrastructure and the shape of cryptographic infrastructure as it relates to questions like national sovereignty which I think is going to be the next 10 years of adventures in crypto. You know the first 10 years was basically currency. I think the next 10 years is sovereignty. Uh and that is a very complicated game. Deep stuff in there. Believe me. Um it's it's one of the most fascinating topics and uh I'm going to enjoy taking you through it. Um

[3:03](https://www.youtube.com/watch?v=deRccsz06fw&t=183s) so let's talk about the technology for a second. Um there are basically two branches of crypto uh algorithms. There's encoding things, encrypting things, making sure that when you've got two people communicating, the communication is secret. Nearly all of the attention in crypto goes into secure communications. Everybody thinks about this right from like World War II or even earlier uses of uh technology for doing encryption back to the beginning of time. You know, strips of paper wound around sticks of a known uh diameter, this kind of stuff. Um you know, going all the way back to the beginning, secret messages, secret messages, secret messages, secret messages. The other branch of crypto is the stuff that Nixabo talks about in the Plato protocols, which is the attempt to create seals, right? You have a warehouse. You put a wax seal on the door of the warehouse. Uh, and that seal records or a clay seal. That seal records what's in the warehouse and you know that that volume will not change until the seal is broken. In theory, in principle, that's what you want. So those are as approaches, this ability to get confidence from examining something about the contents of what's inside of it. Obviously that's been a very very useful thing for trade for a really long time and these are the kind of two functions that crypto can have. On one hand you can have secure message and on the other hand you can have authentication of fact and those two schools of thought come together in a sort of point of like somebody sends you a message and there's a digital signature on the message. Uh there was a lot of progress made when we went from that paradigm because that turned all your messages into evidentary statements could be used at court. There was a lot of progress when we invented thing called double ratchet. Double ratchet gets you in a position where you can authenticate who the message comes from, but nobody else can authenticate who the message comes from, which is that's a nice attribute. So, everybody is looking at, you know, Bitcoin, Ethereum, altcoins, L1s, L2s, you know, Avalanche, Algarand, you know, there's all this terminology bandied around. And for the most part, what people don't realize is that all of that technology comes back down to relatively simple operations. Digital signatures, uh, hash rate comparisons that are a set of kind of atomic Lego bricks from which all these systems are constructed. And none of those atomic sort of Lego bricks

[5:33](https://www.youtube.com/watch?v=deRccsz06fw&t=333s) are actually rocket science. You know, digital signatures were a big deal when they were invented. Public key cryptography was a big deal when it was invented. But you know 40 50 years after those things initially came into existence uh I think public photography was developed initially in the ' 70s trap door ciphers um you know it's so far away since that point of origin that by now we should have gotten pretty used to this stuff I think we probably generally speaking have um so I'll just check my notes here right so of those kind of basic operations right we covered encryption we covered signatures there are 50 different ways of doing encryption. There are 50 different ways of doing signatures. All that stuff is pretty well understood, right? Nobody else can read the message other than party A, party B. Uh or you can verify as party B that party A genuinely sent the message. Basic operations. Uh hashes we come across a lot. You know, you take a very large chunk of data and you produce a kind of 200 character summary of the data. You cannot go from the 200 character summary of the data back to generate the data. It's not compression, but it does give you a unique name for the large data set. You could find it. Again, anytime you look at a crypto address, you're kind of looking at a hash, generally speaking. Um, so all of those kinds of structures. Um, you know, these things are little atomic Lego bricks. Um, I will talk about ZK in a second. I'll come back to that. So those atomic Lego bricks are, you know, you can clip them together to get signal, to get telegram, to get a web browser, to get message encryption like PGP. You put a bit more work into it, you could get Bitcoin, you could get Ethereum, but there's no real kind of

[7:21](https://www.youtube.com/watch?v=deRccsz06fw&t=441s) clean simple limit on the things that you could do with these technologies. Um, it happens that we've got an enormous amount of market success behind a paradigm called blockchain. Right now blockchain is a very very good idea. What is it? It's well it's a chain of blocks. Each one of those blocks contains some data. The data is hashed. The next block contains the hash of the data from the previous block plus a bunch more data. That data is transactions. Every transaction has a digital signature on it. Little clippy together Lego bits that generate more and more and more complex structures. We are not at the end of that innovation process. Even with the existing Legos, even with a new user like ZK Snarks, you could clip together those existing Legos to get a huge range of things that we don't currently do, and they would all work pretty predictably and pretty reliably in the same way that the stuff that we're doing now works. Um, for example, you know, take Google Docs. Google Docs could grow digital signature features so that you could have 50 people collaborating a document and every single change to the document had a cryptographic hash validating who made the change. It would then essentially be kind of like a blockchain. Are there applications where that would be really useful? Yeah, maybe. I mean, you know, a sort of shared encrypted notepad with that kind of strong authentication of rights could substitute for blockchains in some casual use cases. If you're going to do a meme coin, you could do a memecoin out of a Google. Good idea, bad idea. But, you know, it's those kinds of things which are sort of adjacencies for where we are right now. Um, then we get to ZKS. Um, now ZK snarks are actual proper magic. Uh, I do not understand the math. I've had very good people explain it to me a number of times. I could vaguely armwave through it kind of. I'm not going to do that now because I think it'd be useful, but you know, suffice it to say that it is staggeringly orders of magnitude more complex than the math of the basic encryption systems like digital signatures or or encryption or hashing. Uh, the snarks are genuinely a next level of mathematical complexity. And the thing that they do is relatively easy to describe. It just doesn't make any sense unless you're pretty deep in as a computer programmer. I will summarize very briefly. You have a function. You can verify that the inputs to the function were valid. You can verify what function it is that did the computation. When you receive the output of the function, you can verify that the output of the function is therefore correct and the inputs to the function were within the parameters for those inputs. You cannot however see what the inputs were from the uh verified

[9:51](https://www.youtube.com/watch?v=deRccsz06fw&t=591s) digitally signed effectively output. Why is that useful? Well, the input could be a bank transaction and a bank balance. The output could be the receipt for the transaction and a new bank balance. I could then give somebody that receipt. They could then use that receipt as evidence that they have had money paid to them and they could use that to update their bank balance. So that ability to do kind of long transactional verification chains using just snarks, you know, it would be non-trivial to describe how that worked in detail for somebody that was in the field and was expert in it. But there are people doing that stuff. They're building out right now. When you hear somebody say ZK rollup, this is the kind of stuff that's going on under the hood. As I say, I don't know enough about it to take you through the gory detail. just be aware it's a very different degree of mathematical complexity to the oldfashioned signatures and the rest of that stuff but it opens up a whole bunch of new terrain. Um what I want to frame in this is that the social impact of the

[10:52](https://www.youtube.com/watch?v=deRccsz06fw&t=652s) development of cryptographic algorithms like digital signatures in the '7s, the widespread deployment of those technologies in the 80s and n early 90s. Um these things did not cause immediate social change. Right? A lot of people a lot of my peers in the '90s thought that encrypted email was going to literally change the world. that you were going to get sort of revolutionary social progress on all fronts because finally people could talk to each other without monitoring. Well, kind of sort of that did not happen. Um, and a lot of that is because of the kind of people that were using those technologies, mostly academics. Um, you know, the internet was incredibly deeply rooted in academia in the 1980s, 1990s. And that kind of academic culture of the internet really lasted quite durably until September of 93. Um that hardcore academic mindset, academic privilege, the kind of better end of internet discourse to this day sounds like people that are arguing in a university. They're smart. They're motivated by evidence. They give citations for arguments. They try not to attack the people. They attack the argument. They're often very learned. They're very scholarly and around them there are, you know, kind of a 100 thousand gibbering nitwits who are just basically posting memes of baboons rectums to each other to try and emphasize how clever they are. Um, that sort of split between these two cultures, between the kind of early academic internet style and the later discourse style. This is what happens when normal people use technology, right? Normal people get hold of kit. they do with it exactly what they were going to do with it anyway. And the kind of that people would have talked down the pub in say 1850 now becomes a kind of that goes across on social media. Um the people do not change. While the tools were difficult to use and while the tools were very esoteric, what you got was a kind of privileged academic discourse and you got a lot of very smart people that would argue with each other about very smart things. Sometimes they might even spontaneously cooperate rather than going immediately to fighting. I know that seems like a radical proposition but this was a thing that used to happen civil constructive discourse rare. Um so in this kind of framework um what I'm going to frame a little later is that we are in a process where cryptography is genuinely mainstreaming and the genuinely mainstreaming of cryptography is disruptive

[13:22](https://www.youtube.com/watch?v=deRccsz06fw&t=802s) socioulturally and kind of politco economically right the sociology and the political economy are heavily distorted by the arrival of these technologies um and the kind of shenanigans that you see when you get to white house uh gov/crypto the sort of sense of like does anybody actually understand the implications of of cryptography is the white house just kind of swinging in the dark those kinds of questions and you know what's behind them this is the stuff that I'm going to try and unpack um so we talked a bit about the primitives of crypto uh encryption signatures hashes zk snarks now I'm going to talk a little about transactions So, a transaction in crypto fundamentally is a statement of intent plus a digital signature. The statement of intent, I have 20 Bitcoin. I want to pay 10 Bitcoin to Bob. I apply a digital

[14:19](https://www.youtube.com/watch?v=deRccsz06fw&t=859s) signature to an instruction and that instruction is pushed into the blockchain. at some point it is confirmed and then there is general ascent by everybody that is using that software that I have paid Bob 10 bitcoin and there's my transaction. So if we were in a position where we had perfect trust and everybody was honest, um a transaction would just be an email sent from one person to another saying, "I give you 10 bitcoin." There would be no underlying ledger. There would be no objective record of Bitcoin. It would just be a whole bunch of people subjectively keeping track of how much money they had. And when one person made a payment, they would dutifully deduct their balance uh that payment from their balance. So everything above that layer, if I send you a message saying I had this many coins, now I have this many coins. Everything other than that is sort of tied up in uh distrust, right? These are technologies that we're using to make sure that people do not break the rules when they send a message to pay somebody. Um there are systems called mutual credit systems which have been tried as digital currency systems and indeed paper systems going back into you know kind of cultural antiquity. I don't know when the first mutual credit system was but it's pretty early. Um and those mutual credit systems basically any payment instruction is valid because you can have an infinitely large negative balance. So in systems that allow you to go into debt, you can just continue to issue and issue and issue and issue and issue. Mutual credit systems. Uh needless to say, those systems tend to go bankrupt. Everybody over issues and then the thing kind of winds down if everybody is sovereign and everybody prints their own money. Everybody tends to print too much. Um, so if you think of things like Bitcoin as being ways of taking this peer-to-peer transactional framework where I send you money with a digital signature on it, um, and we then kind of constrain that to stop people spending money they don't have. Um, including double spending. So, you know, I send money to you, I also spend money to somebody else. The tightening up of all the systems that produce these kind of behaviors and these defects, this is kind of the name of the game. Right? This is what we mean when we say crypto. It's the creation of systems that tighten up all those defects. Uh and the ability to get those transactions to just work properly. You know, you send money, a payment is received, everything is exactly as you expect it to be. The ability to build those systems took an enormous amount of

[16:49](https://www.youtube.com/watch?v=deRccsz06fw&t=1009s) engineering. Um basically because data is not inherently scarce, right? If I have a file, a picture of a monkey and I send you the picture of the monkey, I still have a copy. You have a copy and anybody listening on the conversation has a copy. So if I send you a coin in a dishonest world and anybody, me, you or an interloper can take a copy of that coin and now we all have a coin. You kind of get this notion of massive counterfeiting and inflation and theft and blah blah blah, right? So you you want to create artificial digital scarcity leading to Bitcoin. Um now all of those systems right Bitcoin, Ethereum, all the rest of that stuff. In principle those systems can be operated hard and right um no link at any level between somebody's passport identity, what you could call their fiat identity and their cryptographic identity. So you sit at home and you generate a set of keys. You then somehow get some coins and now you have some coins and some keys and you can then distribute those coins as you see fit using your keys to assert ownership of the coins which you're then sending to people. Um, if we had never seen KYC, ML, CTF, PEP or OFAC imposed on crypto, if everybody had maintained a kind of religious obligation to hard anonymity, nobody use real names for anything and there was no exchange point between say dollars and Bitcoin. So, you know, Bitcoin was just unpriced except you could pay for goods and services with it, but you could not exchange it at dollars in some regulated way. Um, if that paradigm had been maintained, crypto would be very much an anarco capitalist innovation, right? You would have a parallel society with no names, just keys. And there were sort of early attempts, you know, the kind of Julian Assange libertarian wing of crypto kind of took a crack at that stuff in maybe 200, I don't know, 11, 10, 12. Um, and you know, that sort of an approach, it kind of only worked for that sort of people. And there are really not very many of that kind of people, right? The libertarian gene is not very widely distributed. Most people want a society and that society has to come with rules because when you get ordinary people involved, they are not particularly diligent or careful and so things can go horribly wrong. Um so the construction of an identity is the construction of

[19:19](https://www.youtube.com/watch?v=deRccsz06fw&t=1159s) the ability to authorize a payment, right? Um you know A pays B is that payment lawful? Well, we need to know who A and who B is, and then we need to know what jurisdiction the transaction happened in. Um, figuring out the transaction of jurisdictions has never been a particularly easy process in commercial law. H, hence a lot of heavy use of things like arbitration when you get fights about what jurisdiction or transaction happened and those fights tend to be pretty nasty. Um, so digital identity is being asserted as a connection to a key, right? Who am I that owns this key? um matters for the jurisdictional reasons matters because for example in a poker game it's very important for be able to verify that every single player of the game is a separate distinct human being so that you don't have one person operating three people at the table this kind of stuff digital identity turns out to matter um so once you've got payments and you have identity you then get the ability to create contract A pays B for C is defined as I will come to your house I will pick up a package I will take it to FedEx and I will stick a label on it and ship it for you. Okay, great. So, the implicit need to be able to specify identity to form contract. You can engineer around that with things like escrow accounts, you can manage some of the exposure by things like arbitration, but basically once you have a hard identity on a digital transaction, what you're doing is ensuring that you have the ability to make an appeal to a nation state court. And that ability to make an appeal to a nation state court is kind of best wrapped up in a concept called the Ricardian contract invented by a colleague of mine called Ian Grigg in 1996.

[20:59](https://www.youtube.com/watch?v=deRccsz06fw&t=1259s) So the Dardian contract basically bolts together a set of concepts from private commercial law aka international arbitration with a set of concepts about digital uh payment instruments and the ability to store contract text digitally. And that entire bundle, the Ricardian contract kind of it's one of those things where Ian got it right the first time and nobody's really poked it since. you know, anything that you see where there is a smart contract attached to legal text fundamentally will be a Ricardian contract. You know, terms of service, things like ICOs, any kind of token issuance, there's always going to be a bunch of legal paperwork strung along behind those transactions. In almost all cases, that will be a Ricardian contract. Even if they didn't really mean it to be a Ricardian contract, the norms of the Ricardian contract approach have become so standard in crypto law that almost everybody's using them, whether or not they call them that or not. Right? If you have a contract, if that contract specifies a piece of technology will be used for a payment. Uh if all of that information is somehow stored digitally and if there's use of an arbitration clause, it's a Ricardian contract. Uh there usually also parameters in there. Ian's always particular about that. I always forget. So this notion of digital contract then leads to the possibility for creation of digital property. um you don't typically think of the Bitcoin documentation and the Bitcoin source code as constituting a contract, but I think that if you were ever going to take a look at that in a really serious way, um you would suggest that there is an implicit contract formed by the documentation and the code and that contract is between the miners and the users. Uh and remember the users are paying for transactions implicitly by the minting of Bitcoin every time you go around. So you kind of have an expanding currency supply situation that constitutes effectively uh transfer of wealth from the users to the miners via dilution. You could just about frame that as a contract. I would hate to see that litigation ever performed, but structurally this is kind of where we are. Um so the critical thing about Ricardian contracts is they have the ability to be enforced. Bitcoin has a kind of self- enforcing mechanism via things like being cut out of the consensus. You know, if you come to an a burnt conclusion, you are not in the running to get a block. Proof of stake systems come along. They add staking and slashing to those kind of things, but they're all within this general framework of the attempt is to create what amounts to a self-inforcing contract, aka a smart contract. Is Bitcoin a Dow? Um, now this this has

[23:29](https://www.youtube.com/watch?v=deRccsz06fw&t=1409s) been a lot kind of dry stuff, right? What I'm attempting to do here is uh remove the veil of magic from crypto. You know, it's a set of primitives like digital signatures, uh, hashes, encryption. Um, it's connected together starting with peer-to-peer, then you need some way of keeping the peers honest. That turns into solving the double stand problem. That turns into a chain of blocks. Each block is just the previous block plus some new data plus a hash. There are digital signatures on the transactions. You know, is there magic under the hood? There's a lot of very sophisticated engineering, but at no point does it pass into some domain that humans cannot follow. Uh ZK, I think you could argue does that, but nobody's really using ZK in the base layer, right? ZK is still kind of new in esoteric. Um, Ricardian contract, similarly, I take a digital payment for perform goods and services. The goods and services are written down in a digital document that's stored someplace like IPFS. I take money in return for doing the goods and services. I'm now obligated by contract to perform some task. If I choose not to perform the task, then there may be a damages clause and then there's some kind of arbitration procedure. All of this stuff, right? You know, including commercial arbitration, these are manageable complexity units. Commercial arbitration, there is a paper contract. A and B agree at the beginning when the contract is formed that in the event of a dispute. C, D, and E will be the people that will come and resolve the dispute and they have the power to extract a payment of up to $50,000 from one party to pay the other. Is there backup for that? Yes, there is. 1958 New York Convention uh and that provides for the enforcability of those kind of contracts in 170 jurisdictions, basically every country on Earth. So all of those pieces together, right? What we have here is a very broad thing, right? Each individual area is not crazy deep. We've had decades to get used to them. We kind of don't understand how they work. You know, the 1958 Europe invention. That is not recent law. 1970 something for the invention of public key cryptography. That is not recent. We are now generations into this technological transformation. Um, and now it's beginning to get interesting for the people that are running the nation state. And that kind

[25:50](https://www.youtube.com/watch?v=deRccsz06fw&t=1550s) of takes us into the next part of this which is a discussion about sovereignty and jurisdiction. Um sovereignty is a very very complicated concept right. Um you know we operate inside of a framework uh bound to a kind of set of historical developments most famously the treaty of west failure. So the treaty of West Failia, you know, a bunch of European nobles come together and they agree that you're going to have kind of strict boundaries for control of land. I dramatically oversimplify. Uh but that is a framework. the Westphalian nation state um kind of gets exported to the ancient European empires to everybody and everybody thinks the natural condition of land is that there is a sovereign entity with an army and a navy that controls that land and mostly those people speak the same language, culture and values except in weird exceptions like for example Scotland where we speak a completely different language and yet are still theoretically part of the same polity. I notoriously grew up in smalltown Scotland. So this is a kind of framework right sovereignty what is sovereignty sovereignty is a thing that the state has and you don't um immediately clashes with these concepts of self sovereign self sovereign digital identity and you have heard people talk about self- sovereign digital identity off and on for years h you ask people what it means and it's kind of like well I generate the digital identity myself and then I tell you who I am and you're supposed to believe me or maybe I get some third parties in to vouch for me. So my self-s sovereign identity is I generate the identity and then other people add attributes to it. Um that is remarkably different from the nation state model of sovereignty which is I have an army, a navy and a language. And the combination of army, navy and language turns me into a country. By the way, I keep stressing navy here because there's a kind of running joke about countries which are landlocked and have no navies apart from like two robots on a dinghy on a lake. Hence the joke about navies. really it's just an army. Um so in that kind of context uh what I want to do is pry apart what makes a state a state and then I will pry apart what makes sovereignty sovereignty and then we can discuss a little bit about the status of what a blockchain is. uh because there are there are parasvereign aspects to particularly systems like Ethereum, right? You know, there's my baby. Uh and

[28:20](https://www.youtube.com/watch?v=deRccsz06fw&t=1700s) the parasover aspects of those kinds of systems, you can see people nibbling away at the edges of those things in a number of different ways. Uh and my kind of assertion here is that we have more or less solved the question of tokenizing financial instruments. I think the Americans made it very very very clear that this is a go. You know, I think the SEC statement is pretty definitive. Uh, I think the technology for tokenizing financial instruments is functionally speaking complete. I don't think there are going to be any surprises there. There are some scaling challenges, but aren't there always? Um, and then the question is, well, what's next? Is crypto just a toolkit for tokenizing financial instruments or does it do something else? Well, self-s sovereign digital. Wait, what? And then we kind of get into the next set of questions. Um so let's talk a we bit about the nature of the state. Uh I used to work on failed states. Uh I'm a published theorist of failed states. I've spent quite a lot of time talking to people about things like Iraq and Afghanistan. Sometimes even getting paid for it. Um a long time ago. So in this kind of context uh I am going to give you my definition of the state which is that the state is any entity which can retroactively or proactively pardon crime. The state is any entity which can retroactively or proactively pardon crime. Now that definition flies in the face of commonly accepted definitions like the one from Max Waver. Um and it's pretty weird looking for people that are not libertarians. Libertarians will immediately be like, "Oh, yeah, of course the state's a criminal enterprise. The prince is but a stationary bandit." And for libertarians, this is kind of canned, right? This is just if that's what you think the state is, you're libertarian by default because you want to minimize your exposure to any kind of organized crime, whether or not it has a flag. Uh I have never been a proper libertarian. I have always been far too Scottish for uh anything other than hardcore anarchy. Libertarians believe that there should be agreed on law and that everybody has to play by the same set of rules. The Scots believe that freedom is the ability to decide what the rules are as you go along. Temporary local agreements versus the idea of immutable libertarian cannon. So anarchy is a federated network of patchworks of temporary agreements continually responsive to local circumstances. Kind of how Scotland was governed before the arrival of the British. We very successfully repelled the Romans with their notion of hard fixed law. And that system, which some people have described as the

[30:50](https://www.youtube.com/watch?v=deRccsz06fw&t=1850s) macocracy, was one of the baines of early America. Scots people kept setting themselves up in Appalachia and just making up the rules as they went along. Scotland. Um, and it's it's a weird thing to be a Gupta from Scotland. Uh, I'm half Scottish, half Indian. Uh, had I known I was going to be raised in Britain, my parents thought they were going back to India, the name they were going to give me was Jack Henderson. So, I often think to myself like maybe I should change my name with Jack Anderson because that was the name my parents intended me to have if I was going to be raised here. Anyway, this is an aside, sovereignty, jurisdiction, nothing to do with whether or not I'm Vinay Gupta or Jack Henderson. Um, uh, now, which was, by the way, my grandfather's name. So in this kind of context right state sovereignty jurisdiction um retroactive or proactive pardoning of crime if we pardon theft we tax collectors if we pardon assault we get police and if we pardon murder we get soldiers. So the ability to nominate a person before they have done anything wrong as being immunized from that wrongness generates legitimacy. An action becomes legitimate because you were pardoned in advance for performing the action. If the action was legitimate whether or not you had received any kind of blessing from the state, it is an ordinary action. I bend over and I pick up a cat. Meow. Boom. I do not need a license from that, the government to make it not a crime. If I, on the other hand, take that cat away in a plastic box and take it away to the great prison for cats and dogs, whatever they do with strays these days, uh, at that point I kind of need a state blessing that makes me a uh, stray animal catcher, right? Animal control. Okay, you're an animal control officer. You could go and take away other people's animals. Okay, there's your responsibility. You have a narrowly defined place where you can break the social norms and you're legally im immunized from doing it. You also paid to do it. Some people are paid but not immunized. Some people are immunized but not paid. When they are both paid and immunized, these are kind of the officers of the state. Then you have various kind of volunteers and auxiliaries and all the rest of that. There are a lot of kind of thin variations on these things. So when we get to self-s sovereign um I am going to note that self-s sovereign ID and self-s sovereign issuancing of things like currencies do not break a law which requires you to bing a note from your mom saying that you're allowed to do it. Right? If we define the state as being the thing that can retroactively or

[33:20](https://www.youtube.com/watch?v=deRccsz06fw&t=2000s) proactively hand out pardons and we are doing something which is commonly agreed not to require a pardon for its performance. There is no sense in which we require a concept like sovereignty to perform those actions. You say wait why does that matter? Right? So to say that one is statelike is to suggest that one has the ability to pardon either yourself or other people from criminal activity. I am sovereign over this land. Therefore I can tell people you are my army. You are my tax collectors. You are my police. I can give each one a set of indemnifications and then they can run off and do their damn jobs. Self sovereign has never required any notion of the ability to assert independence from consequence. Right? you're you're not in a position where you're withdrawing consequence by virtue of self-s sovereign. So I think that self-s sovereign was a kind of conceptual error. It's easy to see how we went up there if you don't have a very tight definition of the state. When somebody says self-s sovereign, it's very easy to think like oh kind of like you're in charge of yourself. Eh yeah, but if you're a little more ruthless and

[34:29](https://www.youtube.com/watch?v=deRccsz06fw&t=2069s) scrupulous about your definition of the state, I think it's very easy to say that self-s sovereign is not the correct terminology. Um what we really mean when we say self-s sovereign is uh sort of arising from within indogenous native um I generate a cryptographic key by rolling a bunch of dice on a piece of paper and noting down the numbers. I then push those numbers into an algorithm that generates a check sum and from that chunk of uh code I now have a key. Um I'm I'm skipping some steps in there. Um, now that as a structure, right, the ability to generate a key uh and have that be my key, this is this is mine. My entropy went in there. Nobody else knows what that entropy was. Um, that property is a secret. So, if we think of the inside of your head as being a domain in which you have control, it is your head, not anybody else's head. If you have an idea and you don't tell any about it h anybody else about it then that idea only exists in your head. What we have here is individual uniqueness. So my individual uniqueness and the things which only I know constitute a kind of identity. I am an individual unique person. The inside of my head is only visible to me. Okay, great. I don't think anybody's going to object to that. One of the things which is the contents of my head is my cryptographic key. The cryptographic key is then a thing that I can use an algorithm to demonstrate ownership of without giving away the ownership. A digital signature. You show me a document. I agree with the document. I take the document into my private protected mind space. I process it. I put a digital signature on it using some more math. And then I hand you back the document. Right? And that ability to prove that I know a secret without giving away the secret. That was the great discovery of public key cryptography. Um, again, there's a lot of confusion about public key. You know, one key cryptography and two key cryptography probably would have been a nicer way of framing it than symmetric and asymmetric. Nonetheless, you have the terminology you have. So, two key cryptography, I publish a key and say, I know the secret that drives that key. You send me over a document. I sign the document using the secret that drives the key and then I hand you back the signature. In that process, am I sovereign over anything? No. We're just

[36:59](https://www.youtube.com/watch?v=deRccsz06fw&t=2219s) using the fact that I have a mind and that I have a private container for the things in my mind. It could be a notebook. You know, there's your notebook. It could be uh, you know, um, you know, could be anything. Could be a computer if you've got a way of keeping it secret. Um, by the way, for those who have that particular sense of humor, uh, this is a blank notebook. So um there is no anti-mimetics division um so that framework right where you have a conceptual model in which there is a private section of your mind and you have the ability to prove some of the contents of the private section of your mind passwords uh you know shibles the ability to demonstrate that you know a shared secret uh were you there when Bob did the thing oh yeah when Bob did the thing where he broke it in off. Wow. Oh, you were there, right? Or you heard about it from somebody that was there. H um you know the the old school tie the notion of a shared context. Like human beings have been identifying people in group and out group based on shared secrets since probably the invention of anything, right? I mean that could very very easily be older than human language. Um, so if we think of cryptography as being about the sharing of secrets and the self-s sovereign concept is simply the ability to prove to somebody that you know a secret and there is only one person in the world that knows that secret. Therefore, that person is you. All of that stuff neatly sidesteps these questions of sovereignty. Um, sovereignty is very appealing as a concept until you really peel apart what it means. But I think it's very hard to argue that sovereignty means something when we're def defending uh the assertion that an individual is sovereign because they have a piece of information that nobody else has. I just don't think that's how sovereignty works. Um now where does that take us right? Um when we start really looking at the way the crypto works you want to say self-s sovereign because if it's your keys it's your crypto and nobody can take it away from you. Therefore, you have sovereignty over that crypto by virtue of having the keys. Not bad, right? I have sovereignty over a gold bar because I buried that gold bar out in the wilderness and the only person that knows where the gold bar is is me. Close parallel. I don't think you'd want to use sovereignty for that. Um, also, can crypto operate without the nation state?

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Continues in https://guptaoption.com/texts/505-2.md (part 2 of 2).
End of [505] The State is Not Our Master: Friendly American Regulation is Fool's Gold, part 1 of 2. Its connections are at the top of this file; the map is https://guptaoption.com/llms.txt.