Welcome back to our two-part series on everything Blockchain: crypto, coins, ICOs, and other “decentralized finance” concepts. We’re primarily using two books as sources for this discussion: one by the Bloomberg writer Zeke Faux entitled Number Go Up, Inside Crypto’s Wild Rise and Staggering Fall, and Easy Money: Cryptocurrency, Casino Capitalism, and the Golden Age of Fraud, by the television actor Ben McKenzie.
Last week we started with a discussion of the technology, and some of the personalities, behind the world of cryptocurrencies. This week we’re going to dive into some claims about the future that promoters of crypto as an investment often repeat. Starting with this little number:
“Crypto is the next phase of digital currency”
As we learned last week, the simple problem with this claim is that increasingly, crypto is just the United States Dollar, but somewhat anonymized and freed from the oversight of any banking authority or government.
Except, is it? If Tether, for example, is really just a one-to-one backed store of US dollars, then doesn’t the crypto ecosystem increasingly look like a publicly available version of a reserve currency? In essence: isn’t crypto just the dollar? Only with one major downside: all of it has a single point of failure: a $100 billion private company that doesn’t technically have to give any of that money back if it doesn’t choose to.
So what do companies like Tether offer in exchange for this service, and as compensation for this risk? As McKenzie argues, the key distinction between the dollar and Tether is that Tether facilitates transactions involving no due diligence, no “KYC” (Know Your Customer), and no guarantees of either anonymity or safety for the transacting parties. While the US dollar is capable of being used for purposes such as smuggling and money laundering, as well as illegal transactions using cash, it is at least limited by the necessity of using printed money – a limitation which cuts down tremendously on the ability of criminal organizations to commit all kinds of international crimes, such as identity theft, confidence schemes, blackmail, and other malfeasance.
Dealing with large amounts of cash is actually one of the major complications of running an international criminal organization. Just ask Pablo Escobar, who was estimated to have lost hundreds of millions of dollars to dry rot and fungus, since all of it was in buried cash.
But those days are long gone, thanks to Tether. McKenzie demonstrates in his book how an ordinary criminal can transact using Tether from any number of international crime havens, without ever showing an identity document or proving that the money originally belonged to them. Faux traveled to countries like Cambodia, where human trafficking operations employ slave labor to scam westerners online, transacting entirely with Tether. He also traces some $90m of stolen funds to a black market operation in Russia, where purported “treasure men” exchange crypto online for the locations of hidden stashes of cash, gold, and jewelry.
These are not crimes that Tether invented. Mail fraud, identity theft, money laundering and smuggling have been around, in many cases, for centuries. But Tether certainly makes them easier, which in turn makes them more common.
McKenzie also details how a large percentage of hacking losses in the domain of crypto currencies eventually finds its way into the coffers of rogue states, particularly North Korea, where it is used for anything from methamphetamine production to the testing of nuclear weapons. If you lost money via a crypto hack between 2014 and 2024, it’s likely that at least some of your money ended up going to fund North Korea’s nuclear program.
Of course, North Korea using international fraud to fund its nuclear program also isn’t new. It’s just a whole lot easier than using cash.
This is beginning to sound less like the next phase in digital currency, and more like the same thing we’ve already had for a long time, minus some protections against things like terrorism, human trafficking, drug and weapons dealing, and enterprise level scam operations.
And remember: the lack of protections that makes Tether so convenient to use, also makes it more convenient to steal. Which brings us to our next item:
“Crypto is trustless, and governed by code, so it’s more secure and more free and fair than fiat currency.”
Crypto like Bitcoin is undeniably trustless as a currency. In a purely technological sense, yes, you can transact with blockchain technology without ever knowing or trusting any of your counter-parties.
But hopefully we’ve demonstrated pretty clearly already why the crypto economy relies on an enormous amount of faith and trust in people who just might not have earned that degree of belief. Again, the technology may be trustless, but that doesn’t mean that the entire economy ever really can be. A currency, as McKenzie argues, is inherently built upon trust. We can transact via trusted institutions, or we can transact via trusted code, but ultimately we are only as safe as others allow us to be. As much as crypto might make certain kinds of theft difficult, it must inevitably make other kinds easier. There is no dealing with other people without some degree of trust.
If for no other reason, consider again that the vast majority of all the real world liquidity in the world of cryptocurrency, the real dollars that supposedly back up every transaction in a stablecoin like Tether, are being held by a single company that has never undergone an audit – something even legendary frauds like Enron have done.
Of course there have been large scale embarrassments for the crypto ecosystem. The failure of MT Gox, one of the first major crypto exchanges, or FTX, which stole at least $2 billion of supposedly secure customer deposits to cover trading losses from its sister company, Alameda Research. But crypto has really been defined by the smaller scale catastrophes that individual supporters have experienced since its inception.
Ask any crypto trader, and it’s more than likely that they too have been the victim, at some point, of a scam or a theft. The scale and complexity of fraud in the crypto economy is so great that it has become more the rule than the exception. As McKenzie highlights in his book, the nature of crypto really makes it ideal as a means of committing fraud and theft.
But wait, you may ask, don’t banks and regular companies commit fraud all the time? Indeed they do. The difference is that unlike in crypto, our banking and monetary system is fundamentally set up to protect small depositors from losses like the ones that crypto companies experience on a regular basis. A bank failure doesn’t wipe out small depositors because every bank is required to carry depositor insurance. Crypto has no such scheme. Though it’s technically possible to erase any given theft with a “roll back” of the blockchain to an earlier state, in practice, this has only ever occurred when large and influential “whale” accounts have experienced losses. In effect, crypto has a form of insurance for the super rich, not for the everyday investor.
The idea central to crypto, that “code is law,” really just provides a vector by which any cryptocurrency can be attacked by clever or resourceful thieves. And it only provides any form of protection for those with the influence to convince the majority of the validators in the network to change the code – something only very powerful people can do.
And crypto has another unique problem. Not only is it stunningly easy to copy-paste the code for a crypto asset in order to create a brand new currency that can then be used to facilitate a classic “pump and dump” scheme, but the public nature of any existing crypto asset means that those with access to the most tokens on any blockchain can be easily targeted, from anywhere in the world, with fraud and hacking attempts.
Imagine if the global banking system published a list of the accounts with the most money in them. How much do you suppose a criminal organization might invest in a scheme to rob the accounts with, say, $10 billion in them? One of the reasons crypto needs the ability to roll back such changes is that without this ability, those account holders would be in serious danger.
Yet “code is law” doesn’t protect a person from any manner of malign influence, such as extortion, blackmail, or theft of real assets. We are often told that shadowy figures with immense crypto wealth like Satoshi Nakamoto, who by some accounts still controls upwards of $50 billion in unused crypto assets, are merely secretive. But they may also be justifiably paranoid. When the entire world can see at a moment’s notice where your money is going and to whom, you don’t enjoy a great deal of privacy, or much safety either. Perhaps one of the reasons that Satoshi’s wallets have never been touched since they were created was that whoever Satoshi is, they understood that turning those wallets into real wealth would have had unintended, and unwanted, real world consequences.
Perhaps companies like Tether are secretive, and their executives and owners are reclusive for another reason: perhaps they fear what might happen to them if bad actors were determined to get at the currency the company controls.
Code being law also means that anything that isn’t code, is not law. A lawless world with a perfectly secure banking system is not a safe world. It’s merely a world ruled by the most ruthless people.
As McKenzie argues: while certainly the international banking system is guilty of a great deal of exploitation of the poor, taking excessive profits for simply moving money around the world, it also has protections which keep the meager fortunes of the poor from being stolen, or laws in place that will restore those fortunes if a theft is successful.
Many of the regulations that frustrate common everyday uses of currency, like wiring fees, ID requirements, card fees, delays, and currency exchange fees, are in place precisely because they are needed to make the global financial system actually safe and accountable to the actual law.
When governments want to shut down international and domestic terrorist or criminal networks, they generally focus on how those networks fund themselves. This is because nothing will stop a criminal or terrorist organization faster than a lack of funding. A global financial system without the ability to stop fraud and abuse, at any scale, does not make the world any safer or more free. Instead it offers criminals and terrorists the perfect means to grow and enrich their networks of operation.
In some ways, crypto offers the worst of all worlds: safety and anonymity for the technically sophisticated, and transparency and vulnerability for the average user, who is least likely to be completely current on all manner of information security best practices, like by storing their crypto assets in “cold-storage,” or using the strongest possible passwords. The international banking system is largely the opposite: harder to use anonymously for the most sophisticated users, and easier for the everyday customer to use safely.
Speaking of freedom:
“Crypto will free us from government oppression”
Often when crypto enthusiasts are challenged to explain exactly how crypto is making them more free from oppression, they will fall back on how the technology cannot be stopped or interfered with by a government. And this is true as far as it may go. Cryptocurrency cannot be stopped by any government, although countries like China have been quite successful in curtailing its use and impact on society.
However, governments can and do catch on to how crypto is being used around the world for tax evasion, money laundering, and other illicit purposes. In truth, because of the irrevocable nature of blockchain technology, crypto is easier in some ways to analyze and use to detect criminal activity. It may be hard to stop that criminal activity, but the large scale patterns are easy to see.
This is one of the reasons that companies like Tether are so secretive. It’s also one of the reasons that crypto frauds such as the collapsed exchange FTX, have been relatively easy to prosecute. The evidence is all on the blockchain. Governments and reporters can find it, if they know where to look. That may not help the police identify anonymous crypto users who make large transactions, but it does make those transactions easy to trace to real world touchpoints for the shadow economy. This is how we know, for example, that North Korea has dabbled heavily in crypto trading, while we still have no way of stopping them from doing so.
This is also why many of the large-scale scammer operations that currently spam people in the western world with unwanted “phishing,” messages of various kinds, operate in countries and regions where local governments tolerate or are even involved with the practice, receiving bribes or protection money. The scam operations, often located in southeast Asia, which Zeke Faux documents in Number Go Up, involve sometimes hundreds of victims of human trafficking, who are made to work up to 16 hours a day sending spam messages to richer countries in hopes of ensnaring people in an investment scheme that turns out to be a heist.
These human slaves, many of them young people who were promised jobs in customer service or sales, and were then kidnapped and imprisoned for years at a time, generate millions of messages a day to unsuspecting people in their target countries. The currency used to facilitate this shadow economy is Tether. Far from freeing the world’s poorest people from the shackles of government oppression, crypto has facilitated the practice of human slavery for thousands of people around the world.
From North Korea, to Iran, to El Salvador, crypto is used widely by corrupt and authoritarian governments. It is lauded for its ability to penetrate through international sanctions, among other benefits. It can also provide an easy means by which to funnel official funds into private hands.
And this leads us quite naturally to our next claim:
“Crypto is creating wealth for the world’s poorest and most oppressed people.”
Ben McKenzie and Zeke Faux each spent several years investigating the real impact of the crypto economy on the global third world, visiting countries like the Philippines, Cambodia, and El Salvador.
What they found, consistently, is that the global south is neither richer today because of cryptocurrencies, nor any more free. In the above mentioned case of Cambodia, thousands of people have been enslaved by criminal human trafficking rings that have been guilty of murder, sexual assault, and untold millions of dollars worth of financial losses for the western world.
In the case of a country like the Philippines, according to McKenzie, crypto has facilitated the country’s problem with weapons proliferation and private armies which defend drug smuggling empires and other illegal operations on a vast scale.
Meanwhile, the working poor in the Philippines have been ravaged by the crypto boom and bust cycle, driven by western investments in so-called “Play to Earn” games like Axie Infinity, which encouraged millions to invest real money in a game that paid rewards in crypto tokens that could be exchanged for cash.
As Faux reveals however, the real economics of games like Axie are similar to those of a Ponzi Scheme: the “profits” that earlier players enjoy are coming mainly from the money that incoming players are paying in order to get started. Because the game requires that players buy into the ecosystem by spending upwards of $100 or more on their in-game “team,” the company takes in more and more money, transferring some of that wealth to the earlier players, and pocketing a great deal for itself. Once there are no more players left to buy in, the in-game economy collapses. With no-one left to buy the in-game tokens for real money, those who bought in last are left with nothing.
Faux details how the poorest of Filipinos were convinced by the owners of Axie Infinity to hold on to their in-game currency, in the hopes of a “big surprise” that was soon to come. One never did. Many families lost savings and ended up in debt for thousands of dollars.
For a ridiculously in-depth look at how the economics of play-to-earn games works, you can check out Line Goes Up, a brilliant investigation into economics of Web 3 applications – particularly play-to-earn gaming.
And play-to-earn gaming is not the only scam perpetrated on the global poor. In some cases, corrupt and authoritarian governments have used crypto to scam and steal from the populations they claim to be working for. Such was the case with El Salvador, where authoritarian strongman Nayib Bukele attracted international attention by committing to use the country’s resources to buy Bitcoin – a scheme that McKenzie reveals to be a part of a corruption scheme that robbed the national wealth to pay Bukele and a ring of supporters.
Lately, a national scheme to roll out crypto wallets for the El Salvadoran population has resulted in widespread fraud and identity theft; an outcome that McKenzie claims is likely exactly what the government there intended to happen. As El Salvador continues to double down on its commitment to crypto, it has been building power generation plants for the purpose of mining Bitcoin, an activity that is further robbing the nation’s wealth (and its farming land) in service of a scheme to enrich a powerful elite. Again, this scheme has a disappointingly predictable twist: the new initiative is transferring valuable farm land from the hands of poor farmers into those of wealthy allies of Bukele, who are paying a fraction of the value of the land to obtain it.
Bitcoin supporters routinely point to El Salvador as a “success” in the realm of bitcoin as a legitimate currency. However, as we’ve detailed above, the adoption of Bitcoin by El Salvador’s government has certainly not furthered the stated goals of crypto currency to be a free, peer-to-peer, trustless currency. Instead, it has merely facilitated corruption on a scale heretofore unimagined.
Which brings us to our next and ultimate argument:
“Crypto is the future, so you would be better off investing in it than missing out.”
It would be wrong and dishonest of us to portray this attitude as one born purely out of ignorance or misunderstanding. We have heard these words echoed from every rung of society, from the working poor to the mega-rich, and everyone in between. It’s a universal fear: the fear of missing out.
But as McKenzie passionately argues in his book, the fear of missing out is an incredibly dangerous fear. That was the fear that led many investors to continue to allow the fraudster Bernie Maddoff to manage their money, even though they were sure that what he was doing must be illegal, if not altogether impossible. Fear of missing out caused dozens of high profile rich investors to continue to believe in Elizabeth Holmes, even after a common sense assessment of her fantastical claims should have rung alarm bells.
It is the fear of missing out that ropes many honest people into scams that eventually cost them their own hard earned money. What if I don’t put my money in, and it turns out to be the future?
Well, today we’d just like to ask you to consider the possibility: what if crypto does end up being the future? What sounds realistic to you?
Would the world’s economic system simply reward a few people who guessed that a particular technology was the future way of doing business by giving them unfathomable wealth? Would every bitcoin become worth $1m, and then $1bn, and then more? Sure, it could be possible. After all, small bets on the future have paid off big before. A small bet on Apple in 1980 would today be worth a large fortune.
But then again, in order to turn a few thousand dollars today into millions of dollars in the future, you’d need to bet on the exact right coin. And you’d need to leave your money in for a very long time, not withdrawing it even as its value spiraled upward to unimaginable levels. Most people don’t do this, which is why the number of people who turned a few thousand dollars in Apple into enormous fortunes is quite small. Apple was only one of thousands of companies in 1980 that one could invest in. How would people have known which one to pick? And how would people have known how long to wait?
Or, which seems much more likely, does the technology become widely used, but the initial projects, like Bitcoin, and Etherium, and all the other thousands of coins that have been created since the early 2010s, are eventually replaced by versions that have solved most of the problems we’ve raised in the last two blog posts?
Which do you think is most likely? That everyone who has bought crypto up to this point will become rich, or that very few will? If so, why do you think you’ll be among the few who do? Keep in mind that a lot of smart people sold Apple stock in the 1980s. Maybe they felt stupid later for doing that, but they had multiplied their initial investments many times over. How stupid did they feel at the time?
If you think that the world economy is just going to reward you with unlimited wealth because you bought a spot on one blockchain for some real world money a few years ago, why do you think so? Has the money you invested gone to developing that technology, as the money in a bond or a stock purchase might do (if it’s part of an initial offering)? Or has it merely been passed to someone else, as will someone else’s money be passed to you when and if you eventually sell your coins?
Speaking of which, what happens when cryptocurrency investors own most of the wealth in the world, and they need things like property, and people to work for them, and things to own, and food to eat? What will they use to pay for those things? Won’t they use cryptocurrency? So wouldn’t it be better, considering that crypto is the future, to invest in property that you will be able to sell for crypto later in life? Wouldn’t it be a better idea to invest in your education, or developing a skill, or starting a business, so that you can earn your crypto in a crypto future? Wouldn’t it possibly be better just to invest in a company like Apple, under the theory that the people of the future are still going to need iPhones, and will pay to get them?
Won’t businesses that can produce things that they can sell for crypto also be valuable in that future? And so, shouldn’t you really invest in stocks, instead of crypto, so that you will own something capable of producing income in the future? In any future where crypto wins, why do you assume that you will win also? What about history gives you that assurance?
In every case, as with any speculative bubble, it’s possible that the money you spend today may net you something someone else is willing to pay more for tomorrow, but anyone who believes that this can be known in advance is probably mistaken.
Meanwhile, the world still runs on goods and services that people still need to buy. Being good at something, or producing something people want to buy, will always be a certain path to success, whereas joining in a speculative bubble is really all about giving in to your own fear: the fear of missing out.
