Crypto's shaky foundation

Is it more than a giant Ponzi scheme? The early returns aren't promising.

FTX’s naming rights for the Miami Heat’s arena outlived the now-bankrupt company’s crypto exchange. (Megan Briggs/Getty)

The collapse of the cryptocurrency exchange FTX, and the subsequent arrest of its founder Samuel Bankman-Fried on fraud charges, have focused public attention on the shaky foundation of digital finance. FTX’s customers and traders lost billions of dollars as the company imploded, which is leading some observers to wonder, justifiably, is cryptocurrency a sustainable monetary exchange or simply a giant Ponzi scheme?

The answer isn’t clear, even to those close to the industry. John Mack, the former CEO of Morgan Stanley, told the Financial Times last November that even he was confused by the phenomenon: “I’ve played in the crypto market. I still don’t understand it. Believe it or not, I made money and I still don’t know how I made money in crypto. I don’t know what crypto is.” 

Part of peoples’ confusion about crypto seems to stem from the fundamental misunderstanding that cryptocurrency is about digital finance. It’s not. If the world of cryptocurrency seems nebulous and uncertain, that’s because its entire existence is meant as a repudiation of conventional monetary policy and the trust mechanisms that undergird the world’s economies.

Crypto isn’t actually useful, and that’s a big problem

Crypto-entrepreneurs like Bankman-Fried ply their trade in what amounts to a post-digital universe. That is, they curry favor with techies willing to try anything new that holds the promise of destroying the old. The aim is to create — or purport to create — a wholly independent form of value that so far has no real use within accepted systems of transacting.

FTX was an exchange (like the NASDAQ) where one could speculate in crypto, a platform where your high-risk-tolerant neighbor or relative went to buy crypto for the sake of owning a share of a new asset class that it was believed could only go up. What one was actually buying was never clear. Federal charges allege Bankman-Fried defrauded investors in two companies he ran, FTX and Alameda, by diverting money for political campaign donations and to cover losses both firms were steadily running up.

The question of what the crypto asset class actually consisted of apparently doesn’t matter when it comes to crypto. What matters is that it is presented as something wholly unique in the monetary world, and for this reason it is regarded as game changing. Because crypto really isn’t used much (yet) as a currency, its appeal is brought about through its cachet — as a new investment vehicle that condemns mainstream ones. Of course, crypto is usually presented as a currency as well, and this is where the nebulous becomes politically concerning.

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Currencies are means of transacting, to be sure, but historically they also have been about much more than a way to pay for goods. Major currencies — the dollar, the yen, the euro — are also regarded as stable stores of value because they’re tethered to governments. In this way, major currencies serve people and communities; they are meant to serve society as a whole.  

Crypto devotees either don’t grasp — or simply reject — the critical role currencies have as brokers of public power, how they help to ensure transparency and facilitate trust among many different actors, small and large, domestic and foreign. With national currencies, it’s the integrity of governments in relation to market mechanisms that is fundamentally at stake in monetary transactions. 

Currencies that are tied to countries are sometimes tied (or “pegged”) in an additional sense. They can be tethered to a fundamental touchstone of the world economy like gold or the US dollar, which in the latter case has served as the world’s “reserve currency” for over three-quarters of a century. Alternatively, currencies whose values float freely in foreign exchange markets are assigned value by market participants — buyers and sellers who are in need of a particular currency. But most often these participants are mindful that a currency’s underlying value is tied to the government’s commitment to act (hopefully with integrity) in monetary and fiscal policymaking.

Crypto skirts central banking systems entirely. Indeed, that is one of its principal objectives. Emerging in the wake of the Great Recession, it was conceived out of concern that public monies were not being managed properly by governments — an essentially political indictment.

But what’s rarely acknowledged by crypto proponents and critics alike are two aspects that together manifest something thoroughly “postmodern,” and post-digital, about it. First, crypto’s value is generated not because goods or services are bought and sold through crypto (thereby creating a demand for the currency). Crypto is still not an easy form of currency to use. Instead, crypto acquires value largely through self-fulfilling expectations among speculators about what its value should be. 

Second, crypto aficionados have been quite skillful in deflecting attention away from the question of what crypto actually is. It is remarkable how few seem to be able to explain it, never mind suggest how one might actually use it. Even a Nobel Prize-winning economist like Paul Krugman has acknowledged being mystified by crypto, suggesting the “technobabble” generated around it points to a much larger problem.

But here’s the kicker: What’s so remarkable is that crypto actually flaunts its very artificiality. And by doing so, it arouses scarcely any concern that there may not actually be a there there. There’s a further rub: Accepted national currencies tend to be viewed likewise — as wholly artificial, essentially questionable, and perhaps even unnecessary stores of value. In other words, crypto's damage extends beyond this still small asset class. Its greatest toll will be felt in terms of encouraging politically dangerous attitudes about what is ultimately the critical public function national currencies have in an economy.

Disrupting the status quo isn’t enough

Crypto is a fictive currency whose symbolic value is more important than its actual value. In the wake of the crypto craze, few seem inclined to ask what conventional currencies are and do. Most worrying of all is that so many are seduced by crypto’s allure as a completely untethered, wholly symbolic form of capital beholden to no named entity beyond the essentially vacuous global commons of token-based financial speculation.

Contrast crypto with actual digital currencies, those that have been in existence for several years now. Many governments – including the US and the EU – have been studying what are called CBDCs, or central bank digital currencies. Some governments have even started issuing digital notes in their own currencies. While entirely digital forms of payment, these “tokens” are irrevocably tied to nations’ government-backed currencies and, consequently, their monetary policies, which in democracies the public underwrites and regulates.

Fortunately, crypto is still a relatively small asset class. But any hope of grounding crypto in actual social relations is off the table entirely. The very nature and quality of capital that we should pay attention to as the basis for all political communities are precisely what crypto avowedly denies.

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That’s it for today!

I’ll be back with more Wednesday.

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