Back when sailcloth and gunpowder ruled the waves, and the oceans were rich with plunder and pirates chasing it, Her Majesty’s Government (amongst others) decided to try financing itself the same way Blackbeard did.
It was called “privateering”, and was effectively state-sanctioned piracy. Think of Richard Nixon’s famous saying that “when the president does it, that means it’s not illegal” but applied to entrepreneurial sailors carrying a certain letter in their pocket.
What differentiated a pirate from a privateer in practice was a letter of marque – written permission from the government to loot the ships of enemy countries, provided they saved a slice of the treasure for the government. Why tax your own citizens when you can tax your enemies?
The US tax department, the IRS, is considered exceptional in its bold attempts to tax Americans anywhere they go on the planet, but privateering took it to the next level: incentivising mercenaries to tax the private sector of your enemies.
Privateering was very cost effective, as the Treasury didn’t have to buy a ship, pay its crew, or provide equipment – the privateers had to source all that themselves. They took all the risk, and then subsidised the government if successful – from the taxpayer’s perspective, it was a win-win…
I bring up privateering as the US Naval Institute recently recommended that the practice be brought back to take on China if necessary. As the conventional US naval force would be thoroughly occupied countering the China’s military navy (the PLAN), there would be few ships available to plunder China’s merchant navy.
From the article, titled “Unleash the Privateers!” by a former US Marine colonel:
Naval strategists are struggling to find ways to counter a rising Chinese Navy. The easiest and most comfortable course is to ask for more ships and aircraft, but with a defense budget that may have reached its peak, that may not be a viable strategy. Privateering, authorized by letters of marque, could offer a low-cost tool to enhance deterrence in peacetime and gain advantage in wartime. It would attack an asymmetric vulnerability of China, which has a much larger merchant fleet than the United States. Indeed, an attack on Chinese global trade would undermine China’s entire economy and threaten the regime’s stability. Finally, despite pervasive myths to the contrary, U.S. privateering is not prohibited by U.S. or international law…
Cruise the Seas for Chinese Gold
Capitalizing on Chinese vulnerabilities requires large numbers of ships, and the private sector could provide them. The ocean is large, and there are thousands of ports to hide in or dash between. While the Navy could not afford to have a multibillion-dollar destroyer sitting outside Rio de Janeiro for weeks waiting for Chinese vessels to leave, a privateer could patiently wait nearby as U.S. diplomats put pressure on (presumably neutral) Brazil.
Neither recruiting crews nor the need to arm ships would constitute a major obstacle. Privateers do not need to be heavily armed, because they would be taking on lightly (or un-) armed merchant vessels, choosing vulnerable targets, or acting cooperatively with other privateers. Since the goal is to capture the hulls and cargo, privateers do not want to sink the vessel, just convince the crew to surrender. How many merchant crews would be inclined to fight rather than surrender and spend the war in comfortable internment?
Looks like Cold War II will have echoes not just of its prequel, but from the Age of Fighting Sail too. The question is, are letters of marque going “paperless”? Would the enterprising sailors “cruising the seas for Chinese gold” be granted a digital certificate? I think I’d want such a document in writing – wouldn’t want any virus, computer glitch, or accidental use of the “Delete” key to land me in international court…
There’s a romance to the idea of becoming a privateer that appeals all the more as lockdown continues. I expect many of us already have the haircut for it. But today, I’d like to dwell on the more modern version of privateering which already exists and is becoming rapidly more mature.
Freebooters are expensive
Cybersecurity companies are akin to digital privateers, using offensive software for legal enrichment. They spy on enemy hacking groups, and get their hands dirty breaking into existing security infrastructure to help their clients build stronger defences. All for a fee of course.
“White hat” hackers (as opposed to “black hat” or “grey hat” hackers), who work in a strictly legal capacity, can do so while conducting some pretty nefarious activities. For example, some companies set up digital bounty hunts on themselves, offering a reward to the individual or organisation that can break their digital security, if they show them how they did it.
Right now is a prime time to be in the cybersecurity business, as the WuFlu has made a previously small weakness gigantic: employees working from home.
When everyone is in an office using a network computer, their cybersecurity is uniform and can be kept up to date and monitored by their tech department. They exodus of people leaving the office to work from home means unsecured computers are now being filled with sensitive information which they hadn’t previously, rich with secrets that can be monetised in one way or another. It’s a digital pirate’s paradise… and a digital privateer’s paradise when said companies start hiring the security firms to keep them safe.
$HACK, a cybersecurity ETF, ain’t far off all-time highs right now:
Digital privateering is paying off
Source: me, on Twitter
But that’s only half the story. In a way, this appreciation by the market for cybersecurity is reflective of just how valuable the cyber space is – how much treasure there is out on the digital ocean.
That’s illustrated by this next chart, which surprised even me.
Amidst this economic calamity…
After the brutal crash in March…
$FDN, an ETF designed to simply track the value of internet stocks…
… has broken to new all-time highs:
The digital ocean is indeed full of treasure, especially as we’re all now stuck with little to do but sail around in it, with little land in sight…
A while back, my colleague Charlie Morris described the advent of bitcoin as “the internet discovering how to transact value”, which he classed as a monumental step forward for the internet. For bitcoin to really grow, it requires users to actually transact value on it, not simply buy it as a speculation.
Could lockdown bring this event forward, as we are now even more tightly plugged into our devices? Not if you’ve just been made unemployed… but that internet ETF is still pricing in enormous value in internet applications, and it feels like that must be coming from somewhere (unless of course it’s just blind bullishness from market participants).
Whatever the case may be, the Halvening is now due to take place earlier than previously expected – the bitcoin faucets will be gushing 50% less in a few hours’ time. Either the miners have been working overtime, transactions have been easier to process, or both. There’s never been more eyes on the price… I know I’ll be watching what happens.
I spoke to Charlie this morning about what he thinks it means for the space on our daily broadcast – you can find out what he makes of it here.
Until tomorrow,
Boaz Shoshan
Editor, Capital & Conflict
For charts and other financial/geopolitical content, follow me on Twitter: @FederalExcess.
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