Sticks and stones can break a server but words will never stop a blockchain. Even so, a subtle trend of reproach on cryptocurrencies has surfaced.
Driven by statements from prominent individuals in a variety of influential capacities, this trend is based on an outdated and potentially dangerous assumption. Every time a prominent figure refers to cryptocurrencies like bitcoin as a fraud, they are indirectly regurgitating a myth that has been upheld as absolute truth for centuries: money cannot be money if it is not backed by the government. To understand why accusations of fraud are potentially problematic, the argument needs to be dissected.
Not Technologically Fraudulent
JP Morgan’s Jamie Dimon and Saudi Prince Al-Waleed bin Talal harp on cryptocurrencies like bitcoin while their respective company and country are fast at work building blockchain-based systems.
Likewise, Al-Waleed recently claimed that he doesn’t “believe this bitcoin thing,” that bitcoin “doesn’t make sense, it is not regulated,” and that “it is not under the supervision ... of a central bank.” The prince also used the word “fraud” to describe bitcoin. As with Dimon, these comments come at a time when the prince’s own nation is allowing the Islamic Development Bank to integrate blockchain technology.
Clearly, this illustrates that a distinction is being made by these influential figures between cryptocurrencies and the blockchain technology that underpins them. While there is validity to this distinction, one cannot disregard the symbiotic nature between the two.
It is illogical for one to imply that cryptocurrency is somehow fraudulent because of the technology that it is built on while simultaneously championing said technology. It follows that the issue some people have with cryptocurrencies is not their ability to technologically function properly. Thus, the belief that cryptocurrencies are fraudulent must then somehow stem from a lack of faith their ability to function as a type of money.
Not Economically Fraudulent
Whoever Satoshi Nakamoto is or was, their creation is still functioning online and, at time of press, bitcoin has a market cap of nearly $100 billion. There continues to be core-developer tinkering under the hood of bitcoin, but the cryptocurrency engine is largely unchanged and running as smoothly as ever, essentially replicating the bureaucratic procedures of a central bank. It is this principle of cryptocurrencies as an autonomously functioning computer program that directly challenges allegations of fraud from an economic standpoint.
Dimon’s portrayal of bitcoin as a tool for “criminals” or “people in North Korea” is a nod to the anonymous ways cryptocurrencies can be used to protect their users’ identities. But, as we learned from the infamous Silk Road case, bitcoin isn’t as untraceable as some might think. At any rate, if anonymity is a point of contention for Dimon, it seems contradictory that Quorum would support Zcash, a cryptocurrency designed specifically to keep the identities behind transactions secret. Moreover, untraceable fiat cash is used in black market transactions across the world for a variety of illicit purposes.
If these arguments aren’t the underlying justification for claims of fraud, perhaps it is the perception that cryptocurrency is a market bubble that begets this bad rap. Several individuals in the financial world, including Warren Buffett, have recently been vocal about sharing this belief.
Yet, hardly anyone disputes that the decentralized crypto-movement does not have the same narrative of the dotcom bubble. As ConsenSys founder Joe Lubin recently declared, “of course it’s a bubble.” Moreover, Vitalik Buterin himself recently informed the public that “90 percent of these ERC20s on CoinMarketCap are going to go to zero.” Because Buterin and Lubin are so paramount to the development of Ethereum, it seems hardly likely that they would be willing to offer such cautionary advice if their end game is to scam people. That said, there are many scams that persist despite the best efforts of some ethical entrepreneurs.
The Fraud Meta-Conversation
Richard Thaler from the University of Chicago won the Nobel Prize this year for his studies into behavioral economics. Generally speaking, his work highlights the impact of the human condition on economic systems, like financial markets. The recognition of The Royal Swedish Academy of Sciences does a lot for legitimatizing behavioral economics and moves the field closer into the mainstream canon of economics proper.
If this notion is true and human behavior is deeply and intimately connected to economics, perhaps the reason cryptocurrencies like bitcoin continue to be called a fraud is that the code is agnostic to our human condition. Perhaps the reason a high profile banker can call bitcoin a fraud is because he understands that no matter how perfectly the code of a cryptocurrency governs its behavior, people are flawed and likewise operate best in a flawed system we can control – rather than a perfect system our behavior doesn’t fit into well.
Another Nobel Prize winner in economics, also from the University of Chicago, once had something interesting to say about this topic. Milton Friedman predicted cryptocurrencies in 1999 and told John Berthoud of the National Taxpayers Union, “The internet is going to make it very difficult to collect taxes on services of all kinds ... I think that the internet is going to be one of the major forces for reducing the role of government. One thing that is missing, but that will soon be developed, is a reliable e-cash. A method whereby, on the internet, you can transfer funds from A to B – without A knowing B or B knowing A – the way in which I can take a $20 bill and hand it over to you, and there’s no record of where it came from ... That kind of thing will develop on the internet and that will make it even easier for people to use the internet. Of course, it has its negative side. It means that the gangsters [and] the people who are engaged in illegal transactions will also have an easier way to carry on their business. But I think that the tendency to make it harder to collect taxes will be a very important positive effect of the internet.”
These comments by Friedman reveal two things. First, even before the advent of cryptocurrencies, it was understood that once money was digitized and transactions moved online, collecting taxes would be made increasingly difficult for governments. According to the National Priorities Project, “The federal government raises trillions of dollars in tax revenue each year, [through] a variety of taxes and fees.” In 2015, $1.48 trillion (47 percent of all tax revenues) was paid by individuals. If a significant portion of this revenue was to be lost through digitization, the government would suffer the loss (though it begs the larger question of why certain corporations are able to avoid paying taxes on traditional fiat activity through tax code loopholes).
Second, even in 1999, Friedman referred to “gangsters” and “the people who are engaged in illegal transactions.” The comparison to Dimon’s comments about “criminals” and “people in North Korea” is as striking as it is disheartening. It denies the reality on the ground by creating a narrative counter to the positive progress that many in the cryptospace are attempting to achieve. It creates fear and endorses fractional reserve banking as the only option. The establishment bureaucracies that have arranged the world around centralized power structures, like central banks, are right to feel threatened by the decentralized systems that are encroaching on their spheres of influence. Perhaps the real fear isn’t fraud at all, but disruption. If there is anything fraudulent about cryptocurrencies, it’s how people use them to defraud each other, but we do that with regular money anyways.