I felt bad about the April Fools' joke so over the weekend I whipped up the game so no one was disappointed.
These days so much of my free time is booked with calls to explain to people outside the software industry why crypto assets are such a destructive force and why I support forceful regulation to halt this financially corrosive enterprise from spreading further into markets. I basically have to repeat myself on the basic arguments for every call covering the same basic monetary theory, American history and technical limitations. Thus I’m going to summarize the basic argument so we have a reference and I don’t have to keep repeating myself all day.
The crypto project has had 13 years to try and find a problem to solve. It has not found one.
The real world has fundamental constraints that make the technology unworkable, whenever it has to interact with the outside world the benefits of decentralization disappear and the solutions end up simply recreating slower and worse versions of processes and structures that already exist.
Despite that, for the last thirteen years these projects have done nothing but scam people by creating synthetic asset bubbles for gambling and destroying the environment. There are fundamental limitations to the scalability of blockchain-based technologies, and every use case is better served by another simpler technology except for crime, ransomware, extralegal gambling, and sanctions evasion; all of which are a drain on society not a benefit. Taken as a whole the technology has no tangible benefits over simply using trusted parties and centralized databases.
Crypto coins are simply speculative gambling products that only create a massive set of negative externalities on the world. It is introducing artificial volatility into markets untethered to any economic activity and creates an enormous opportunity cost where the only investment opportunity is as an economically corrosive synthetic hedge against all productive assets. This is not innovation, this is technical regression and flirtation with ecological disaster in a time when we cannot afford to gamble our planet’s fate on pyramid schemes and dog memes.
Money exists to exchange for goods and services in an economy. It is created to mediate the exchange of goods so that we have a common unit of account we can trade instead of bartering goods directly. Money needs to have a reliable and stable value compared to a domestic basket of common goods and services, in order to achieve that the supply of the money needs to be controlled by a monetary authority which can expand or contract the supply according to market fluctuations.
A dynamic money supply is a fundamental necessity for a modern economy. A small amount of inflation discourages hoarding and incentivizes investment into productive enterprises which grow the economy and produce prosperity. Conversely a static fixed money supply encouages hoarding, and is inflexible in times of crisis because it does not allow intervention. Economies do not stabilize themselves and require active intervention to curb recessions.
In an environment in which multiple currencies can commingle there is a perverse incentive to create counterfeit currency or to create parallel currencies. Counterfeit currencies dilute trust in commerce, create counterparty risk and catalyze crime. Parallel currencies introduce exchange risk and create artificial barriers to commerce. The optimal solution within any economic region is to thus have a single currency with a single authority to control the supply, protect against counterfeiting and lower barriers to commerce by discouraging other systems through creating demand. The only possible entity that can fulfil this role is the State and it creates demand for a single currency by requiring citizens to extinguish their obligations to the state in that currency. A single currency and single monetary authority is the inevitable role of the state because of its singular monopoly on taxation and justice.
Historically commodity-based money (so called “hard money”) was based on backing by metals and was used extensively in the 18th and 19th century. Instead of vesting power in democratic controls, it instead vested power in non-elected international parties who could source, mine and mint metals. Under a gold standard, inflation, growth and the financial system were all less stable due to trade imbalances. This led to frequent recessions, larger swings in consumer prices and perpetual banking crises. When these events occurred in one part of the world, the distress would be transmitted more quickly and completely to others and thus created a politically unstable, unequal and more violent world. We saw this in the Gilded Age of the 1870s to 1920s in which hard money created a world of massive wealth inequality, thus ultimately leading up to the speculative market manias that lead to the Great Depression. The United States ultimately devalued its currency with the policies of the New Deal which slowly decoupled the dollar’s dependence on gold and which led to an era of economic growth and prosperity. Conversely Europe largely did not engage in these corrective policies and this era saw the rise of populist strong men and fascists who promised to correct the wealth inequality of the common man, and ultimately plunged the continent into the most violent period in human history.
Money is always going to be inseparable from politics. As much as some libertarians want to believe that value should be determined by a God-given order independent of the will of men, they cannot escape the logical and historical contradictions at the heart of this idea. The fixed-supply ideas of deflationary coins like Bitcoin fundamentally misinterpret the properties of fiat money as bugs when they are in fact features. The crypto project contains unresolvable logical and economic contradictions in its stated purpose. State controlled money embeds control and accountability for fiscal stability and market intervention in the democratic process where it inevitably and rightly belongs.
Even playing devil’s advocate and assuming cryptocurrency could function as money—which they can’t—we come up against the hard limitation that everytime private money has been tried in history it creates a form of corporate feudalism coupled to a toxic environment that encourages fraud and discourages commerce. The lessons of history are quite clear on this issue because the United States flirted with such a system back in the Free Banking Era from 1837 to 1863. In this time period there were hundreds of private entities that went about issuing their own private bank notes allegedly created one-for-one with state bonds.
The problem with these so-called wildcat banks is that their reserves were not always verifiably backed and were thus subject to runs on the bank in which customers could not access their funds. The second issue is that unlike public money which is universally accepted at par, the wildcat bank notes had a massive secondary exchange market where notes from different banks would not trade at par. A dollar note from Wyoming bank could be worth $0.60 to a note from a Nebraska bank and these values would fluctuate depending on market conditions. As a merchant this would make business rather complicated as you would be forced to purchase goods in one set of notes, accept notes from customers and give change in a different set of notes. This was great for bankers who had access to non-public information and could arbitrage these notes for their own profits, but for the average person it was a terribly predatory and exploitative system. Private bank notes are a needlessly complicated, risky and inefficient way to run an economy and this was remedied by the National Bank Act of 1863. It was a truly terrible idea.
History tends to rhyme with itself, and today we are flirting with the same bad ideas of the past. Except now instead of wildcat banks we have wildcat tech platforms with the same aspirations. They don’t want to interface with public money, they want to become issuers of private money themselves. A fully vertically integrated form of company scrip that they issue to their investors, employees and customers to create not just a walled garden, but a walled garden where every path has a toll booth that takes only their coin. The elephant in the room that no venture investor in these projects wants to talk about is that creating private money, just like in the wildcat banking era, is a license to print money by creating markets for these coins/notes with massive position and information asymmetries baked into the design. These kinds of private money regimes are just as exploitative today as they were in the 1800s, and the so-called “web3” notion of embedding this form of institutionalized corruption as a first class structure into the internet is a terrible idea that ignores the lessons of history.
When we logically deconstruct the crypto narrative by tossing out the phoney populism and cult-like structure of faith in economic absurdities, we end up with an inescapable conclusion that fits firmly within our existing regulatory framework. Crypto assets are simply unregistered securities on ventures whose stated aspiration is to develop technology to become digital wildcat banks. They’ve just synthesized their corporate equity and alleged notes into one financial product.
Cryptocurrencies aren’t currencies and have no mechanism to ever become currencies. They are effectively unregulated securities where the only purpose of the products is price appreciation untethered to any economic activity. The only use case is gambling on the random price oscillations, attempting to buy low and sell high and cash out positions for wins in a real currency like dollars or euros. Yet crypto cannot create or destroy real money because unlike a stock there is no underlying company that generates income. So if you sell your crypto and make a profit in dollars, it’s exactly because a greater fool bought it at a higher price than you did. So every dollar that comes out of a cryptocurrency is because a later investor put a dollar in. They are inherently zero-sum by design, and when you take into account the casino (i.e. exchanges and miners) taking a rake on the game then the entire structure becomes strictly negative-sum. For every winner there are guaranteed to be multiple losers. It’s a game rigged by insiders by hacking human psychology.
For cryptocurrency to have any real utility, the volatility needs to cool off. If that were to happen, there would be little reason for the public to speculate on cryptocurrency prices, given that there would no longer be the potential for massive returns. The smart money exits, the liquidity disappears and the bubble collapses. This is the inevitable fate of all cryptocurrencies, and we see this reflected in the simple fact that the median return on all these thousands of flash-in-the-pan coins is zero. Every crypto coin is just on a random walk to zero by a different path.
The argument laid out in this article is a quite complicated edifice, and requires a large amount of knowledge at the intersection of several fields of study that, quite frankly, the public should not have to concern themselves with learning to safeguard themselves against fraud. Public money should just work for most people without them having to be concerned with the details. This is ultimately where cryptocurrencies tap into the ignorance, desperate faith in technical solutionism and political resentment of the public and weaponize it for the aims of these libertarian private money charlatans to engorge themselves. These guys aren’t building a new financial system, they’re just lining their own pockets.
History repeats itself first as tragedy and then as farce. The wild economic oscillations of yesterday’s gold standard is today’s dog meme mania. Human nature is remarkably invariant through the ages and if we don’t learn the lessons of history then we’re doomed to repeat the mistakes of past generations. This time around If we’re very lucky then crypto assets simply end in a market crash and a series of progressive New Deal-like reforms to our financial system. If we’re unlucky then they accelerate the expansion of a shadow financial system used to enrich the already wealthy, increase wealth inequality to historically unprecedented levels, decrease faith in democracy and further fan the flames of populism. These trends ultimately converge to leave humanity’s fate to the wild oscillations of market manias, charismatic demagogues and strong men who promise to save us from ourselves. And we’ve seen how that story ends.