Cryptocurrency: Why?
/
y this point, almost everyone’s heard about cryptocurrency…and almost no one understands it. I’m not here to explain it, because I can’t. But I think I can shed some light on the why—the forces that fuel it. To some, crypto is a financial savior—a new form of freedom that could revolutionize not only banking and finance, but also the Internet. They say it could topple Apple, Google, Facebook, and Amazon. A lofty vision, to be sure. On the other hand, to critics, it’s a digital Bernie Madoff: pure scam.
This disagreement is also playing out on the world stage. Joe Biden recently signed a bill attempting to rein in crypto. On the other hand, the United Kingdom is welcoming crypto with open arms. And thousands of crypto donations have poured in to help Ukraine--including one valued at $3 million.
I’m not equipped to settle any of this. But I can point out three motivations that gave birth to crypto, and continue to sustain it:
1. Death to current finance, banking, and governmental regulation.
The movement began with a group of computer coders, and quickly enlisted a small army of libertarians. On the flanks stood the spiritual remnants or the Occupy Wall Street protest. Their target is the corrupt nexus of corporate America and government (which is, in my mind, entirely justified). In 2008, this unholy house of cards stacked by real estate and finance crashed, creating a near-meltdown of the world’s economic system. (Government deregulation played no small part in making that whole mess possible.) But the penalties for those sins were hardly meted out fairly. While billions of taxpayer dollars were used to prevent a catastrophe, not a single fraudster from the private sector wound up behind bars. So, it’s perfectly understandable for bitter people to remain resentful, looking for the kind of vengeance that crypto promises.
2. Behold the blockchain.
Actual digital currencies, like Bitcoin, are not as important in the long run as the skeletons that supports them. That skeleton is called a blockchain. It’s a record or ledger of all digital currency transactions, no matter their form, amount or complexity. The blockchain is decentralized—no one controls the flow of transactions and keeps track of the participants. Instead, that work is distributed to thousands of individual computers, owned by citizens. In theory, it costs nothing, it assures privacy, and it lasts forever. Banks, stock exchanges, and credit card companies become irrelevant. Which means no one is siphoning off a percentage or a fee, the way the “house” always does in a Vegas casino.
Most people can remember when they deposited their money in a bank, for which the bank would pay a pittance of an interest rate. The bank would then turn around and loan that money at a much higher rate of interest to people looking to buy a house or start a small business. That’s how banks made money. Back then, depositors would have to pay a “checking fee” in order to transfer their own money to someone else. Today, few checks are written, but if you withdraw cash from ATMs owned by anyone other than your bank, you’ll pay a few dollars—for the right to get to your own money. Banks, like the casinos, “always win.”
Blockchains are changing all that. The established business world is jumping on board, quickly adopting this blockchain technology without the encumbrance of inventing a new currency. Walmart and Amazon are using them—blockchains can solve supply chain disruptions. Other firms are putting them to good use to maximize energy efficiency. NASDAQ is on board. Even the World Bank has introduced “blockchain bonds.” Companies like Bitcoin and Ethereum and Doge may or may not change the world. But the blockchain is a tool that seems here to stay.
3. Make a bundle! —legally or otherwise.
Last—and certainly not least—is the opportunity for crypto to make people very rich. At the start, it did. And sometimes, even now. But the rise and fall of the cryptos has been both exhilarating and harrowing. For example, Bitcoin shares at this writing are selling 30% below where they were last November. That, in turn, was up more than 50% from its price nine months earlier.
But more importantly, the reality of a currency operating outside the grasp of government, the banks and financial markets has a distinct downside. The lack of any controlling authority means that anything goes. A highly prominent example was the collapse of the online drug bazaar called Silk Road. It extended the libertarian concept of “freedom” to this assertion: “it’s my body, so I should be free to put anything in it I want.” That included cocaine and heroin, seamlessly delivered from that online site. It was entirely Bitcoin-based, which sidelined law enforcement. But when the owner decided to cash in some of his Bitcoins for actual cash, he stepped into the regulated financial world. And thus, agents swooped in and arrested him. He’s now spending a life sentence—plus 40 years for good measure--in federal prison.
In a similar vein, detractors also state that crypto could be used to support prostitution, child pornography, weapons sales, and terrorism. But defenders say all that stuff is going on anyway, so what’s the difference?
In current practice, the invasiveness of crypto is often far from criminal, and more widespread. The nation of Venezuela requires all businesses to accept Bitcoin. The man entrusted with writing regulations to control crypto currencies in New York state resigned--to form a consulting firm instructing crypto companies how to successively navigate that state’s licensing applications. The woman banker largely acknowledged as the inventor of “credit default swaps”—which were instrumental in the 2008 crash—is now working to merge big Wall Street banks with the world of crypto. And, to no one’s surprise, the venture capitalists have long since descended. For them, crypto or cash? It doesn’t matter. Money talks.
oney has been around for about 5,000 years. Whether the form of that money was grain or shells or coins…whether the money was backed by a king or an empire or a gold standard—it all relied on a common foundation: trust. In the world of crypto, there is no one to trust. Without a controlling authority, trust seems tenuous, if not substantially detached from reality.
If there’s an army of global consumers incensed at the current financial system—an army that viscerally mistrusts it all—its commander-in-chief is Sen. Elizabeth Warren. She built an entire political campaign—in fact, a political movement—on radically reforming the current system. Which seems to make her an ideal proponent of crypto.
Not so. Currently, she sees it as only making matters worse:
“Being able to hide money is something that drug dealers do, that guys who do ransomware do, that tax cheats do, and, it turns out, that Russian oligarchs do. Some of the very rich and very powerful folks out there want to protect all their wealth and power and hide it from any kind of scrutiny. Crypto is an almost entirely unregulated system for moving value around…and (it’s) really difficult right now to enforce tracking who put the value into a “wallet” and who’s taking it out. Crypto platforms should abide by the same sanctions we’ve put into place in other areas. The crypto world has said, ‘we could be an alternative, because we’re cheap…we don’t have to go through the old formal banking system.’ And I get the point—but deliver! Come on! With no regulation, right now, it means that many crypto currencies are subject to…all kinds of scams.”
urthermore, one added compelling issue about crypto: energy consumption. Without getting into detail, people “mine” for bitcoin online in order to make money. Crypto.com (an investment exchange that IS regulated) reports that there are currently 114 million bitcoin accounts worldwide. Collectively, those accounts require enormous amounts of energy to conduct their “mining” computations. In fact, crypto’s daily energy usage is already comparable to that of the entire nation of Norway. And then there’s this: an estimated 60%-70% of that mining energy comes from burning fossil fuels.
s I said at the outset, I am not equipped to judge cryptocurrencies from a technical or economic standpoint. Same thing goes for its worthiness as an investment vehicle. It could be fair to conclude that cryptocurrency is crazy--stay away! On the other side, one level-headed insider says the smart play is to invest 5% of your holdings in it. If it tanks, no great loss. But if it succeeds, you’re a winner in the gold rush.
Even as life changes, maybe the ancient Latin phrase still holds: buyer beware. Good luck.
Have a comment or thought on this? Just hit the Your Turn tab here or email us at mailbox@cascadereview.net to have your say.
