Three-quarters of Americans who have heard of crypto have little confidence in its safety or reliability. Even the chip-making giant Nvidia has declared that crypto adds nothing useful to society
Lynn Parramore is Senior Research Analyst at the Institute for New Economic Thinking
Cross-posted from the Institute for New Economic Thinking
Source: CryptoDragons LP/Creative Commons
If Sam Bankman-Fried’s conviction for perpetrating one of American history’s most jaw-dropping financial frauds has made you less keen to embrace the crypto trend, you’re in good company. Three-quarters of Americans who have heard of crypto have little confidence in its safety or reliability. Even the chip-making giant Nvidia has declared that crypto adds nothing useful to society, a sentiment recently voiced by legend short seller Jim Chanos, who stated that the technology is “well-suited for the dark side of finance.”
Yet, miraculously, Bitcoin’s value has been on the upswing as BlackRock, the world’s largest asset manager, goes full steam ahead with its crypto investment product plans. Cryptomania is still with us, with many intelligent individuals holding on to their optimism.
Elected officials like Senators Elizabeth Warren (D-MA) and Roger Marshall (R-KS) have registered urgent concern about digital assets and their potential ties to criminal activity by introducing, and reintroducing, the Digital Asset Anti-Money Laundering Act, legislation aimed at mitigating risks and providing scrutiny over industry members, such as miners and validators.
Nevertheless, politicians like Congressman Tom Emmer (R-MN), often referred to as the “crypto king of Congress,” continue to champion cryptocurrency as an inherently patriotic pursuit, akin to apple pie. He is supported by numerous enthusiasts in Congress – a fact which may be attributed in part to what was revealed in a report from CoinDesk: One in three members of Congress took donations from FTX-related entities alone. And of course, who can forget Donald Trump’s release of an NFT collection in 2022, featuring the former president decked out as, among other things, a cowboy? Trump, once presenting himself as a crypto skeptic, now seeks to enrich himself from the NFT craze.
Prominent MBA programs still tout the wonders of crypto, like Columbia Business School, which promotes crypto classes for students who can learn what it means to “unleash the power of blockchain in the world of traditional finance.” The Wharton School of the University of Pennsylvania offers an online certificate program on the economics of blockchain and digital assets, boasting that it was the first Ivy League school and the first American business school to take enrollment payments in cryptocurrency.
In the field of economics, a bewildering mix of skepticism and active promotion of cryptocurrency prevails. Nobel laureate Joseph Stiglitz has repeatedly cautioned against the appeal of crypto to criminals and its apparent lack of any socially useful purpose. In 2018, four other Nobel Prize winners, namely James Heckman, Thomas Sargent, Angus Deaton, and Oliver Hart, collectively labeled Bitcoin a bubble during a press conference, with Heckman drawing parallels to the infamous tulipmania in 17th-century Netherlands. Deaton expressed his view that “the only advantage as far as I can see is you can be a crook.”
By contrast, former Treasury Secretary and economist Larry Summers spent several years as an advisor to the disgraced crypto firm Digital Currency Group (DCG), currently under investigation for defrauding investors to the tune of over $1 billion.
Into this fraught landscape comes Peter Howson, a technology writer, researcher, and Assistant Professor in International Development at Northumbria University, who once embraced the possibilities of cryptocurrency and blockchain to help solve global problems like poverty and climate change. The idea of reimagining money was, to him, “like reimagining power itself,” but when he began to look more closely, he was troubled. In the end, he concluded it was all a mirage and that only people benefitting were the least deserving – the criminally-minded and the greedy. Howson calls crypto “the biggest scam in history” in his new book, Let Them Eat Crypto: The Blockchain Scam That’s Ruining the World. He believes that cryptocurrencies and blockchain have progressed beyond being just scams or bubbles, becoming destructive forces with the potential to severely impact economies, societies, and the environment. It’s time, he believes, to get rid of them altogether.
Howson spoke to the Institute for New Economic Thinking about the dangerous social visions and economic ruin that crypto and blockchain bring in their wake.
Lynn Parramore: Let’s go back to the beginning. The cypherpunks, techno-libertarian coders who pioneered digital currencies in the 1990s, drew inspiration from Friedrich Hayek’s libertarian concepts of limited government power to protect free markets. How did these ideas influence the creation of Bitcoin?
Peter Howson: The story behind Bitcoin’s creation is fascinating. “Satoshi Nakamoto” — whoever that mysterious person or persons might be — is thought to be the mastermind behind the Bitcoin white paper published 15 years ago. The techno-libertarian coders pulled together existing innovations in order to make Bitcoin work, like block timestamping, the data stored in each block used to determine the exact moment in which it was mined, and the SHA-256 hashing algorithm used for cryptographic security. These things had been around for decades. The cypherpunks put it together and shared the concept through a mailing list.
Two key figures emerged at the outset. There was Timothy May, a crypto-anarchist and author of “The Crypto Anarchist Manifesto” in 1988, who had a penchant for privacy, gun collecting, sci-fi, and harboring libertarian fantasies of building a kind of virtual “Galt’s Gulch” – the name of the libertarian paradise at the bottom of the sea described in Ayn Rand’s novel Atlas Shrugged. May gets introduced to software architect Chip Morningstar, who came up with the first graphical virtual world or metaverse with a game called Habitat. Morningstar then introduces May to entrepreneur Phil Salin – weirdly like Jeff Bezos when you describe him – who created an e-commerce business called AMIX and dreamed of a commercial space exploration company, which he put together.
These guys are hi-tech Hayekians. They believe devoutly in the teachings of economist Friedrich Hayek, who held that any interference in the functioning of free markets destabilizes what he thought of as the “spontaneous order,” a self-correcting social system that emerges as a result of the voluntary activities of individuals. They think the best way to keep the government from meddling in this beautiful free-market utopia is to come up with a system of money governed by cryptographically secured software programs. So they create this digital metallism, which you can think of as a gold standard for money that can’t be fiddled with by political actors. These techno-libertarians wanted to push human society back to a state of the gold standard using cryptocurrencies. That’s what Bitcoin was meant to be: Take the Hayekian principles and enable a global economy built on those foundations.
LP: Proponents of blockchain hail it as a wonderfully innovative and useful technology, claiming that it is able to establish trust and security in decentralized transactions, reducing the need for intermediaries and enhancing transparency. What’s your opinion of these claims?
PH: The big proponents of blockchain don’t trust government at all. They suffer from what UN Secretary-General Antonio Guterres called a “Trust Deficit Disorder.” A lot of them see the answer to a problem of trust not in fixing our political institutions so that they can become more trustworthy, like addressing underlying corruption, but in dreaming that you can just get rid of political institutions entirely and just have a world governed by software — trustless software. The idea is that if everyone just does their own research and acts as a kind of pure homo economicus rational actor, then who needs political institutions? This is the thinking behind it. The problem is that this technology corrodes trust in political institutions: it doesn’t fix anything. This is not what we need at a time when you’ve already got so much distrust. Here in the U.K., no one has any faith in either political party, labor or conservative, especially around what’s happening in Ukraine, the Middle East, and with Covid.
LP: Very similar to what we’ve got in the U.S.
PH: Yes. Trump and everything. We’re in unprecedented times where even the sanest people find it tricky to put faith into our democratically elected leaders. Blockchain plays into that and corrodes it even more. It doesn’t make things better. It makes things a lot worse.
There’s something I talk about in the book — perhaps too lightheartedly — which is popular among Bitcoin enthusiasts called the “Bitcoin Citadel.” The idea is that from the ashes of the impending social breakdown, the early adopters of crypto projects will live in Bitcoin fortresses, and everyone else will be their eternal “no-coiner” slaves or whatever.
LP: That sounds a bit unhinged.
PH: It does, but I actually think some of these people really do thrive off the idea that there will be a sort of massive breakdown in our social and political institutions to enable them to push through with economic experiments. If this cryptocurrency cult had a bible, it would be William Rees-Mogg’s The Sovereign Individual: How to Survive and Thrive During the Collapse of the Welfare State. Peter Thiel, one of the Bitcoin whales, wrote the forward for it. William Rees-Mogg was the father of Jacob Rees-Mogg, who pushed the Brexit calamity forward. The book advocates that we need to accept the fact of this collapse of social institutions. The message is: Are you going to be a slave or a slave owner in the aftermath of that? Cryptocurrency will be the decider.
When you talk to people who are very au fait with the techie aspects of blockchain and cryptocurrency, like the software engineers and computer scientists, they are very realistic about the limitations of what blockchain and crypto can do. The people who get really enthusiastic are the ones who tend to advocate on a political level. With a few exceptions, they don’t come from a computer scientist background.
LP: Because if they did, they wouldn’t harbor these grandiose visions.
LP: What about the idea that crypto is sound money? There are still people in the general public who believe that crypto is a reliable store of value and a medium of exchange.
PH: I was writing this book during the Covid lockdowns, when a lot of furlough checks were being written, and some people became concerned about how it would be paid for. Meanwhile, influential techies in Silicon Valley like Balaji S. Srinivasan, Marc Andreeson, and Jack Dorsey, are parroting the benefits of using cryptocurrencies as a way of returning us to monetary metalism. They use a lot of right-wing rhetoric in order to push these claims: We can’t trust institutions, etc. In 2016, the late David Golumbia had written a book, The Politics of Bitcoin: Software as Right-Wing Extremism, that was ahead of its time. He looked at the antisemitism of some of the promoters of Bitcoin.
We might say we need to rein in the ability of corrupt political institutions to think in a short-term way in terms of managing the economy, but Bitcoin and blockchain can’t do that. It’s a dead end. It makes things a lot worse. Bitcoin, just like any other cryptocurrency is homemade funny money. If you take a payment rail used every day by most people, like Visa, Mastercard, Paypal, etc., that can scale. Visa on its own can currently carry out 7,000 transactions every second, no problem. As more people use it, they just need more service, more point-of-sale machines, and it’s fine. Bitcoin is so conservative in the way it’s coded that it could only ever manage seven transactions per second. That limitation has been imposed on it as part of this one-megabyte block size limit thought essential for Bitcoin security. It can’t scale. Obviously, seven transactions per second doesn’t work globally. It’s only going to be a niche toy for enthusiasts. It couldn’t ever overtake the U.S. dollar, or even a payment rail smaller than Visa.
Crypto just can’t function as money. It’s far too volatile to ever be a reasonable store of value. It can’t fulfill any functions of money or gold. We’ve got to stop thinking about it as money.
LP: Are crypto and blockchain good for anything at all?
PH: Bitcoin was released 15 years ago. Since then, no one has come up with a reasonable use case for blockchain or cryptocurrencies. That being said, they do have one use case, and that is to subvert the state in order to transmit something of value across the internet. That’s its only real use case other than as a speculative asset, which is just a dream, really. When it comes to subverting the state, we’re talking about sanctions evasions, money laundering, buying ghost guns, paying ransomware, and paying ransoms, even. Anything that a government or a regulator wouldn’t want you to do with your money.
Let’s say a refugee is kidnapped in Eritrea and sold into slavery in Egypt and you want to get them released. Obviously, there are ways the government tries to restrict you from being able to pay a ransom because they don’t want to promote the interests of international terrorist organizations who are kidnapping people to fund their activities. That’s a reasonable kind of restriction that they have put on money transmitters. Bitcoin just enables you to go around it. Unfortunately, we’ve got this network of cryptocurrency exchanges that are facilitating all of these things. That is why fraud is baked into this technology. Its very purpose is to weaken the state and its ability to control the economy. We shouldn’t be surprised when we see that happen. We can’t just claim that sometimes we need to rein in the ability of the state to do things, because the state does other, necessary things as well. The tradeoffs are too intolerable.
LP: Sam Bankman-Fried claimed to adhere to effective altruism, a popular philosophy among wealthy tech people in Silicon Valley. In keeping with this philosophy, he claimed to want to make money in order to benefit humanity, to devote himself to the greater good. How has that worked out?
PH: He was able to pull this scam off because of his philanthropy. There’s a history of influential scammers doing this—Bernie Madoff made lots of philanthropic gestures, for example. People engaged in all sorts of scumbaggery do this. Look at the Sacklers, owners of Purdue Pharma. They were one of the great philanthropic families and were also involved in criminal activity. A lot of these crypto philanthropists gave money to Oxford University, by the way. I refer to them as the “Oxford mafia” in the book. They’ve been really important in making it easier for Sam Bankman-Fried to pull off his crimes.
If you look at the FTX court case, you’ll see that a lot of investors are going to get their money back through various clawback mechanisms. But the people who are not going to get anything are the people in West Africa and the other poorest parts of the world, where even on the day before the whole House of Cards collapsed, Bankman-Fried was still soliciting from the poor there to give what little they had to this Ponzi scheme.
LP: So he was encouraging them to buy crypto.
PH: He was encouraging them to buy FTT tokens, which he obviously knew were completely made-up funny money. FTT was the proprietary token used on the now-bankrupt FTX exchange.
In the book, I try to show just how tragic this situation was for people in West Africa, specifically. Bankman-Fried, along with people who are not in court at the moment, like the people behind the Coinbase exchange, pooled their resources to launch start-ups in Africa, including Mara, designed to drive crypto and blockchain adoption in Africa through the creation of an African cryptocurrency exchange. The job of the Coinbase people was to go into these poor African countries and get themselves in with corrupt governments in order to bring about favorable crypto regulatory environments. The goal was to come in and basically extract as much real money from the poorest people as possible and give them made-up internet money. A good example of this is the Sango project in the Central African Republic. The president there, thanks to Coinbase and Bankman-Fried, has made Bitcoin and cryptocurrency legal tender with parity to the local currency. If businesses don’t accept cryptocurrency as payment, they can be put in prison. So it isn’t just Silicon Valley investors who are the victims of the FTX fraud. The poorest in the world are suffering at the hands of these people. That’s where I want to draw the focus.
LP: Let’s talk about the criticism of crypto as environmentally destructive. Some argue that with transitions to more energy-efficient systems, blockchain technology may be more sustainable. For example, Ethereum has turned to the Proof-of-stake (PoS) mechanism for validation to replace the energy-consuming Point-of-work (PoW) mechanism used by Bitcoin and a lot of other currencies and platforms. But since PoS relies on a lottery system in which token owners are picked to receive rewards for validation, is there a different risk here in the sense that it favors the wealthy, and could it lead to a concentration of power and control in the hands of a few rich participants?
PH: Yes, totally. This goes to the bizarre nature of this scam and how language is used to facilitate it. Proponents use terms like “decentralization” or “distributive networks” to convey a sense of complex equations used to ensure this trustless technology. In reality, it’s the opposite. It centralizes power far more in the hands of people we really shouldn’t be trusting. The worst scumbags in the world are able to grab more power than they deserve using this technology. Ethereum is not a PoW cryptocurrency anymore because it switched to PoS, which only uses a small amount of electricity to secure the network. But it still pulls all of the decision-making capabilities around this cryptocurrency within a very small handful of whale investors.
LP: Could the concentration of wealth ultimately lead to more problems for the environment?
PH: Some research has been done showing Bitcoin has a Gini index – a ranking of inequality — of 0.8, while Ethereum is 0.9. Imagine if these projects were countries, if they were sovereign currencies. In that case, no country on Earth would be as unequal as Cryptoland. We know from books like Richard Wilkinson and Kate Pickett’s The Spirit Level that more equal countries do better environmentally. Less equal countries do far worse in terms of environmental outcomes and pro-environmental behavior.
But I don’t think we should entertain the crypto boosters’ dreams of Bitcoin and Ethereum ever being able to become actual working currencies. No one right now is using any of these technologies as money. In fact, there are some big cryptocurrencies, like Bitcoin cash, for example, which nobody used for several days as currency. No one made a single transaction with it. These things are still using massive amounts of energy in order to validate the blocks, and yet no one is using them as currency. They’re just holding them as speculative assets. Ethereum is no different. We don’t need to think about what a future world would look like if these things were successful. They never could be.
LP: Should crypto and blockchain should be banned? Is there any reason we should hold onto them?
PH: I think we should hold on to cryptocurrency in terms of its potential future use case in the same way we should hold onto mustard gas and little polystyrene balls and all of these crap innovations that made the world inevitably far worse. There’s nothing of use here. It’s been 15 years. The technology has proven itself to be a worse-than-nothing solution to anything it touches. It is designed purely to weaken democratic institutions, and yes, it has proven itself very good at that. But that’s it.
Proponents of blockchain and cryptocurrency want to constantly tell us – it’s too early! Don’t be anti-innovation! Don’t stop us trying to make the world better and fairer with computer code! But this is just deliberate smoke in order to keep the scam going. I think people are sick of it. I think right now there’s a real appetite for banning crypto. With FTX, people already have put these clawback mechanisms in place. I think we should be doing that for all crypto projects. Everyone who has a sad story about how they’ve lost money on their crypto investment, well, they should be able to access money from the people who benefitted from it. That’s what we would do in any other case of fraud or illegal investment. We should be thinking about reparative justice.