The modus operandi of the crypto-bros in responding to criticism and calls for regulation is to talk about "innovation" and gaslighting about hypothetical future benefits, to deflect attention from the actual current costs of their favorite technology (see also autonomous vehicles). Below the fold I point out an egregious example of the genre.
What we see as I write this is that the anti-regulation forces (Binance) have destroyed the pro-minimal-regulation forces (FTX):
After days trying to shore up his teetering crypto empire, Bankman-Fried sought Chapter 11 bankruptcy for more than 130 entities in the FTX Group, including Alameda.This leaves the "investors" in FTX facing an indefinite but long wait to get any money back, if they ever do, because as Adam Levitin takes 77 pages to point out, the legal status of their "investments" in bankruptcy is obscure. What we also see is that apparently Binance suffers from exactly the same problem that it used to take down FTX:
Bankman-Fried resigned as chief executive officer of the FTX Group as part of the filings, and John J. Ray III was appointed to replace him, according to a statement. Ray, a turnaround and restructuring expert, has previously served senior roles in bankruptcies including Enron.
Binance holds $74.7 billion worth of tokens of which around 40% are in its own stablecoin and native coin, according data shared by Nansen.But the crypto-bros argue that these disasters are simply the price to be paid for the huge benefits of "financial innovation". Today's example of the genre comes from Aaron Brown in FTX Collapse Is a Feature, Not a Bug, of Financial Innovation:
Of the $74.6 billion termed as networth, about $23 billion was in its own stablecoin BUSD and $6.4 billion in its Binance Coin, according to Nansen.
The exchange has also allocated 10.5% of its holdings in Bitcoin and 9.8% in Ether, Nansen data shows.
The problems at FTX have already led to calls for more regulation of crypto, but there are three big problems with that idea. First is that these same disasters happen frequently in the regulated financial world. Particularly large examples lead to more regulations, but that never seems to stop people from finding new ways to make old mistakes. Second is that in all material respects relevant to these problems, FTX was already subject to regulations. FTX was not a bunch of anonymous offshore hackers nor was it run by regulation-dodging libertarians. Its three pieces were regulated, audited entities that — at least until someone proves different — complied with regulations.So, Aaron Brown, how are these "good ideas — vetted by many smart people" working out in the actual present as opposed to the hypothetical future? Are they really managing to "avoid financial disasters via technology rather than regulation"? He even admits that, so far, they haven't. They have actually caused financial disasters. But not to worry, we'll just try something else. Eventually we'll find something that works.
The third and biggest problem is that FTX had good ideas — vetted by many smart people — about how to avoid financial disasters via technology rather than regulation. This was the main impetus for the introduction of Bitcoin after the 2008 financial crisis. We can’t dismiss those ideas because FTX failed. It’s not as if “more regulation” has any track record of success. Failure means we need more experimentation with more new ideas until we find a mix that works.
No new regulations will help FTX’s customers and creditors. They might stop someone from starting a copycat FTX, but no one is likely to do that now, nor would anyone trust it. What new regulations would do is block one of the most exciting areas of crypto innovation, which is a new type of financial exchange. Most of the promising ones are simple, pure exchanges without attached entities and that hold no customer funds. Automated market makers, frequent batch auctions, zero-knowledge orders, portfolio trading and other innovations attempt to use cryptographic security to take away the ability of people to cheat rather than just telling them not to do it and occasionally fining or jailing a few of them afterwards. These are padlocks rather than “Do Not Enter” signs. And if they prove successful, the new exchange mechanism can re-engineer trading in traditional assets as well as crypto assets.
No doubt there will be failures and scandals associated with these innovations, just as no doubt there will be failures and scandals associated with regulated financial institutions. But the innovations have the potential to fix problems and eventually eliminate them, while no one can believe that some future round of regulation will be the one to finally solve the ancient problems of finance.
What he cavalierly dismisses is that the costs of "financial disasters" aren't paid by the SBFs of this world, who escape with only a paltry few hundred million dollars, or even the Aaron Browns, but in the wrecked lives of ordinary people. He needs to read Molly White's heartbreaking collection of Excerpts from letters to the judge in the Voyager Digital bankruptcy case or the Consumer Financial Protection Bureau's 46-page Complaint Bulletin: An analysis of consumer complaints related to crypto-assets:
The majority of the more than 8,300 complaints related to crypto-assets submitted to the CFPB from October 2018 to September 2022 have been submitted in the last two years with the greatest number of complaints coming from consumers in California. In these complaints, the most common issue selected was fraud and scams (40%), followed by transaction issues (with 25% about the issue of “Other transaction problem,” 16% about “Money was not available when promised,” and 12% about “Other service problem”). In addition, analyses suggest that complaints related to crypto-assets may increase when the price of Bitcoin and other cryptoassets increase.Actually reading the report is something that should, but likely wouldn't, upset Aaron Brown's world view. The CFPB reports that:
An increase of "nearly sixty times" in losses in three years is just the price ordinary people need to pay for the awesome benefits that accrue to the Aaron Brown of the world from "financial innovation".
- The top issue across all crypto-asset complaints was “Fraud or scam.” This issue appears to be getting worse, as fraud and scams make up more than half of “virtual currency” complaints received thus far in 2022. Some consumers stated that they have lost hundreds of thousands of dollars due to unauthorized account access. The prevalence of fraud and scam complaints raises the question of whether crypto-asset platforms are effectively identifying and stopping fraudulent transactions.
- Consumers report many different scam types, including romance scams, “pig butchering,” and scammers posing as influencers or customer service. Crypto-assets are often targeted in romance scams, where scammers play on a victim’s emotions to extract money. According to the FTC, of all romance scam payment types, crypto-asset romance scams accounted for the highest median individual reported losses at $10,000. Some of these scammers employ a technique law enforcement refers to as “pig butchering,” where fraudsters pose as financial successes and spend time gaining the victim’s confidence and trust, coaching victims through setting up crypto-asset accounts. Some scammers try to use social media posts by crypto-asset influencers and celebrities to trick victims. Finally, lack of customer service options for many cryptoasset platforms and wallets creates opportunities for social media scams where attackers pretend to be customer service representatives to gain access to customers’ wallets and steal crypto-assets.
- Crypto-assets are a common target for hacking. Consumers reported “SIM-swap” hacks, where an attacker intercepts SMS messages to exploit two-factor authentication, and phishing attacks, social engineering, or both. Companies oftenresponded to these complaints by stating that consumers are responsible for the security of their accounts. Crypto platforms are a frequent target of hacks by malicious actors, including certain nation-state actors. Hackers affiliated with one nation state have stolen over $2 billion in crypto-assets total, including more than $1 billion from Jan 2022 – July 2022 alone, and their hacks have included several prominent crypto platforms, including a “play to earn” crypto-asset game.
- There are signs that older consumers are also impacted by crypto-asset frauds and scams. Older consumers report a higher rate of crypto-asset related frauds and scams compared to complaints overall: 44% versus 40%.
- Complaints suggest that servicemembers are facing issues with crypto-asset scams. Servicemembers have submitted complaints about “SIM-swap” hacks, identity theft, and romance scams. Servicemembers have also submitted complaints about transaction problems and poor customer service at crypto-asset platforms.
- Complaints about frauds or scams continue to rise, making up more than half of all total crypto-asset complaints received by the CFPB thus far in 2022. Crypto-asset complaints and fraud reports have also been increasing at other federal agencies: The SEC has received over 23,000 tips, complaints, and referrals regarding crypto-assets since fiscal year 2019, with a particularly sharp increase in the last two years, while crypto-asset losses reported to the FTC in 2021 were nearly sixty times more than in 2018
The point of financial regulations is not to "avoid financial disasters". It is to prevent the inevitable financial disasters affecting ordinary people, by ensuring that their costs fall on the perpetrators.
Patrick Boyle's FTX Bankruptcy Explained! is well worth watching.
Dennis Kelleher's Setting the Record Straight on Crypto, FTX and Sam Bankman-Fried, Jamie Dimon, and Financial Regulators is excellent antidote to Aaron Brown, and well worth reading. It is especially good on the role of regulators:
"As detailed below, the SEC and banking regulators also clearly understood the fraud of crypto, although the CFTC decided to become a crypto cheerleader in an attempt to expand its jurisdiction (even at the expense of gutting the SEC’s ability to properly regulate the capital markets."
More gaslighting about the hypothetical future from Jill Gunter in Crypto’s bad incentives are dying:
"Since the early days of the crypto industry, the incentives have just been about making money. These incentives have, unfortunately, held the industry back from focusing on creating actual, real utility."
The problem with Gunter's optimism is that decentralized systems cannot function without speculation in a cryptocurrency because they need to be costly in order to defend against Sybil attacks. The idea of non-speculative utility is a fantasy.
One of the best pieces inspired by the collapse of FTX comes from Dean Baker. In Sam Bankman-Fried’s Truly Effective Philanthropy: Teaching he uses SBF to argue that:
"We should all recognize that Sam Bankman-Fried is much smarter than the rest of us. After all, outwardly he looks to be one of the biggest frauds of all time. By the age of 30 he amassed a fortune that dwarfs that of your average billionaire. He did it by running a crypto Ponzi-scheme. While claiming to be using his wealth to support philanthropies that were carefully selected to maximize human welfare, he was actually living a high life-style with his friends.
Now that the Ponzi has collapsed, the investors who trusted him look to be out of luck. And, of course there is no money for the philanthropies that he supported, many of which will are now struggling because they won’t get contributions they had been counting on.
That all looks pretty reprehensible, but maybe that’s the point. See, Sam Bankman-Fried was so committed to his philosophy of effective philanthropy that he was prepared to make himself appear to be the epitome of a despicable human being, and spend many years in prison, all to teach us that finance is a wasteful cesspool that needs to be reined in for the good of humanity. And, the place to start is his particular corner of the cesspool: crypto."
The key to his argument is:
"The broad finance, insurance, and real estate sector has more than doubled as a share of GDP over the last half-century, increasing from 5.5 percent of GDP in 1971 to 12.0 percent in 2021. The additional 6.5 percent of GDP being devoted to finance in 2021 is equivalent to more than $1.4 trillion being absorbed by the sector. That comes to more than $11,800 a year for an average family"
Here is disgraced former Prime Minister Boris Johnson gaslighting about the potential future of blockchain technology:
"In his speech, the former prime minister suggested the advent of blockchain was full of possibilities and appeared to compare it to major technological innovations such as the invention of fire, the railways, and the internet."
Quite the expert, isn't he?
James Surowiecki's Here Come the Crypto Hypocrites starts:
"When Representative Tom Emmer, a Republican who’s been one of crypto’s strongest advocates in Congress, went on Fox Business to talk about the firm’s downfall, his message was clear: What happened at FTX had nothing to do with any problems in the crypto industry generally. Instead, it had been a failure of “government oversight and regulatory procedures.” Regulators in the Biden administration, Emmer suggested, should have spotted that Sam Bankman-Fried, FTX’s founder and former CEO, was a bad actor, and stopped him. Emmer specifically called out Securities and Exchange Commission Chair Gary Gensler, accusing the SEC of “working backroom deals … with people who are doing nefarious things.”
This might have been a powerful dunk on government regulators—except for one inconvenient fact: In March of this year, Emmer was one of eight congressmen who wrote a letter to Gensler complaining that the SEC was overstepping and unnecessarily harassing cryptocurrency firms by having its enforcement division ask them for information about their businesses. One of those firms that the SEC had been inquiring into? FTX."
Charlie Warzel interviews James Block of Dirty Bubble Media in Crypto Was Always Smoke and Mirrors and it is worth a read:
"The vast majority of people who got involved in this have no interest related to the technology or in the political or ideological aspects of crypto. They just see an opportunity to get rich. And a lot of those people end up absorbing and parroting some of the crypto ideals back to you, but they don’t really care to understand what’s going on. It’s just their excuse for what they’ve already done, which is gamble on something they thought was going to make them wealthy."
Dirty Bubble Media's A forgotten banking scandal suggests FTX is the tip of the crypto iceberg explores tha analogy between FTX's collapse and that of the Bank of Credit and Commerce International (BCCI) in 1991. I paid a lot of attention to BCCI at the time, in part because of its involvement in the Iran-Contra affair, and I think the analogy is suggestive:
"BCCI was a criminal enterprise that bought the appearance of legitimacy through donations and political contributions. BCCI used a convoluted corporate structure to obfuscate its activities. BCCI also managed to covertly take over a U.S.-based and -regulated bank and use it for money laundering. BCCI stole customer funds to hide losses, cover expenses, and give to insiders. BCCI was involved in massive money laundering and some of the biggest scandals of the time."
The post goes on to raise important questions about the relationship between FTX, Tether and Deltec:
"The connections between FTX and Tether are well-established, as Alameda Research was Tether’s largest customer. Between 2014 (Tether’s creation) and October 2021, Tether distributed $108 billion USDT to other entities, receiving back $32.7 billion. Alameda received over $36 billion USDT from Tether up until October 2021, accounting for over 30% of the total USDT issued. According to Protos, 81% of this was issued between October 2020 - October 2021. This corresponds to a period of rapid growth in Tether’s market cap from $15 billion to $71 billion"
Ben McKenzie Schenkkan's testimony to the Senate Banking Committee is worth reading
Prof. Hilary Allen's testimony to the Senate Banking Committee is even more worth reading. The TL;DR is:
"A ban on crypto would be the most straight-forward way of protecting both investors and the financial system: it would end the uncontrolled creation of cryptoassets and also ensure that cryptoassets never require a bail-out. If policymakers don’t wish to proceed with a ban, then they will need to be careful to ensure that any laws they do adopt don’t inadvertently encourage the proliferation of cryptoassets or bring those cryptoassets closer to the core of our financial system. Crypto should not be regulated like banking products (that would give crypto access to the government support that we afford to banking because banking is critical to broader economic growth). Banking regulation should, however, continue to keep banks away from crypto. Crypto should also not have the CFTC as its primary regulator. The CFTC has no statutory investor protection mandate, has limited experience regulating retail-dominated markets, and the application of the CFTC’s self-certification regime to crypto would allow an unlimited supply of cryptoassets to proliferate. Energetic enforcement of the SEC’s registration requirements, on the other hand, would limit the creation of cryptoassets. Securities regulation could also help address problematic affiliations and asset custody problems in the crypto industry. Although the SEC’s jurisdiction has geographical limitations, if properly funded and supported, the SEC could make significant strides in protecting US investors – and it could do so without conveying the message that crypto is “too big to fail.”
The testimonies from Kevin O'Leary and Jennifer Schulp are classic examples of the gaslighting about potential future benefits from "innovation" that I described in this post.
The sting in the tail of Molly White's Gemini founder writes open letter to Barry Silbert begging for the return of $900 million is precise:
'"More than 340,000 Earn users ... are looking for answers. These users aren't just numbers on a spreadsheet, they are real people. A single mom who lent her son's education money to you. A father who lent his son's bar mitzvah money to you. A husband and wife who lent their life savings to you. A school teacher who lent his children's college funds to you. A policeman, and so many more. All together, these people entrusted more than $900 million of their assets to you," wrote Winklevoss, without any apparent self-reflection on the fact that these words could just as easily have been (and should also be) addressed to him by those same customers of his service.'
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