Cryptocurrency is a scam

"A clever and ingenious scam"

Some of these things are scams.

I’ve been invited to give a talk under the title “Criminal digital economy” later this week. This post and tomorrow’s post are my preparation notes for the talk. I’ll post my presentation and notes about the discussion that follows it in a future post.

Today’s post looks at cryptocurrency generally, and tomorrow’s post will look at some of the crypto outfits that are tokenising carbon credits.

Stephen Diehl’s writing seems like a good place to start when looking at cryptocurrency as a scam. Diehl is a software engineer who has written a series of critical pieces about crypto.

He has co-written a book called “Popping the Crypto Bubble”, that starts as follows:

“Cryptocurrency is a giant scam, although a complicated scam that uses technobabble, heterodox economics and populist anger to obfuscate its functioning. A pitch perfect scam for the post-truth era of social media where trust in institutions and experts is at an all-time low.”

In a January 2023 post on his website, Diehl writes that crypto is a “clever and ingenious scam”.

Diehl explains what crypto is not: “Crypto is not a currency. Crypto is useless as a unit of account. Crypto is not a reliable store of value. Crypto is not a hedge against inflation. Crypto is not a medium of exchange. Crypto is not a new financial system. Crypto is not a new internet.”

Diehl acknowledges two “defensible narratives” for crypto:

• something that can be collected; and

• a gambling contract.

Cryptocurrencies, beer bottle tops, and indulgences

Diehl notes that, “People assign value to all manner of bizarre curio”. But, he argues, in most cases these things have value from their use. Art, training shoes, can always be used.

A friend of mine collects beer bottle tops. I’m pretty sure that once the bottle is opened the value from use has vanished. Nevertheless, the walls of his house are slowly filling up with beer bottle tops.

There are several advantages to collecting beer bottle tops compared to crypto. (This is not financial advice, by the way!) You’re unlikely to make a fortune collecting bottle tops, but you can always sell them for scrap metal (if you have enough of them).

It’s very unlikely that you’ll find that your bottle tops don’t exist, are stolen, or you can’t access them because you’ve lost your password. And unlike crypto, there is no exchange where you store your bottle tops that can, pretty much without warning, go bust.

Diehl moves on to indulgences, which were sold in the 15th and 16th centuries to redeem sins. Churches sold indulgences in a remarkably similar manner to the way carbon brokers sell carbon offsets to absolve the sins of carbon emissions from burning fossil fuels.

“Indulgences were the first purely narrative-driven collectible bubble in human history,” Diehl writes. Were indulgences a scam? If you’re a believer then you’re buying an afterlife in heaven. But if you don’t believe, then indulgences are a scam.

The same is true for both crypto and carbon offsets.

A gambling contract

Crypto is a gambling contract. But, as Charlie Munger, chairman of Berkshire Hathaway, writes in the Wall Street Journal cryptocurrency is “a gambling contract with a nearly 100% edge for the house”. Munger argues that the US should ban crypto, and should thank the communist government of China for its “splendid example of uncommon sense”, when it banned cryptocurrencies.

Diehl quotes Martin Walker, a financial software product manager, who writes that,

Big Crypto firms have been buying and selling “nothing” for so long, mostly in return for different lumps of “nothing”, that many have genuinely come to believe that taking nothing, giving it a name — and sometimes a story — combined with a little bit of trading back and forth with friends, gives “nothing” enormous value.

Whether huge valuations for “nothing” tokens came from simply pumping up the market price of old school cryptocurrencies or creating complex DeFi (Decentralised Finance) structures, the belief in the value of nothing makes is easy to lose sight of the fact of the underlying reality: it is the inflow of real money rather than “the technology”, “the community”, “the network” or “freedom” that gives crypto assets value.

Buying and selling “nothing”, of course, is precisely what carbon brokers have been doing with carbon offsets for the past two decades.

Diehl calls crypto the nothingness game in which people bet on get-rich-quick schemes for “lumps of nothing” based on which lump of nothing is most attractive at any given moment.

Gambling is fine, if that’s what you want to do with your money. But crypto is based on the fraud that crypto actually represents something. It is sold as if it were a financial investment, and not a gambling contract.

The FTX fraud

Diehl’s book was published in June 2022. Since then, FTX, one of the largest crypto exchanges, collapsed. Sam Bankman-Fried, who founded FTX, was the crypto boy-wonder before FTX was declared bankrupt in November 2022. Bankman-Fried was arrested in the Bahamas in December 2022 and charged with wire fraud, securities fraud, and money laundering, among other things. He faces 100 years in jail.

In November 2022, Coindesk reported that a large part of the balance sheet of Bankman-Fried’s trading firm Alameda Research was made up of billions of dollars worth of cryptocurrency created by FTX. Coindesk wrote that,

While there is nothing per se untoward or wrong about that, it shows Bankman-Fried’s trading giant Alameda rests on a foundation largely made up of a coin that a sister company invented, not an independent asset like a fiat currency or another crypto.

FTX customers tried to withdraw their investments, and the exchange collapsed.

It turns out that there was plenty “untoward” and “wrong” about what Bankman-Fried, FTX, and Alameda were up to.

“I think it's fair to say that ... this is one of the biggest financial frauds in American history,” Damian Williams, U.S. Attorney, Southern District of New York, said.

FTX, of course, is just one crypto collapse among many. Molly White has been documenting the hundreds of others on her website Web3 is Going Just Great and Stephen Findeisen has exposed several crypto scams on his YouTube channel Coffeezilla.

Regulators are trying to catch up with crypto. In March 2023, the Commodity Futures Trading Commission filed a legal case against Binance, the world’s biggest crypto exchange. CFTC accuses Binance of operating illegally in the USA.

The Financial Times recently warned against crypto, describing it as “a high-risk, opaque and ill-understood industry that should be thought of as something between a multilevel marketing scheme and a Ponzi scheme, that preys on - and indeed relies upon - those who cannot afford to gamble their money away”.

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