By Bartlett Naylor, Public Citizen
Following the collapse of crypto exchange FTX, the indictment of crypto king Sam Bankman Fried, along with guilty pleas by his top confederates, beltway outsiders might reckon that Capitol Hill’s cryptocurrency proponents would temper their wet embrace of this fake-money Ponzi scheme.
But the “crypto bros,” as U.S. Rep. Brad Sherman (D-Calif), a level-headed critic, dubs them, are doubling down.
At a congressional hearing Dec. 13, 2022 on the collapse of Bankman Fried’s wholly owned $32 billion FTX exchange (in which he was supposed to testify but for his arrest the night before), the “bros” were anything but temperate.
U.S. Rep. Patrick McHenry (R-N.C.), ranking member of the U.S. House Financial Services Committee, argued that Bankman Fried’s massive fraud shouldn’t tarnish cryptocurrency. Other great innovations suffered financial scandals as well. There were railroad investment frauds; a huckster tried to sell the Brooklyn Bridge; and gas-producer Enron proved to be an accounting fiction. But we didn’t stop building railroads, or ban real estate, or drop our use of energy, McHenry intoned.
So, is cryptocurrency as important an innovation as the railroad — as vital as real estate and energy?
The introduction of the railroad around 1825 proved to be one of the greatest innovations in history. For thousands of years, humans could travel on land no faster than a horse could gallop. Within years of the first rail experiment, humans could travel distances in hours what once took days.
America went railroad manic, accounting for about half of the world’s track at the beginning of the Civil War. By 1869, the transcontinental railroad opened and passengers and freight could whisk from New York to San Francisco in a few days; half a century before, it took Lewis & Clark a year to row the Missouri from St. Louis, then trek over the Rockies to Astoria, Oregon. (They returned on a ship, sailing around South America, which took five months.)
Other crypto bros have echoed the “railroad” line, including U.S. Sens. Pat Toomey, (R-Penn.), Cynthia Lummis (R-Wy.), and Kristin Gillibrand (D-N.Y.), so it may be the industry’s go-to talking point now.
Other innovations similarly burgeoned quickly after introduction. Gutenberg developed an efficient printing press with moveable type in around 1450. Book publishing soared, from less than a million volumes during his lifetime, to 200 million in the next century, 400 million the next, and a billion by 1800.
Will cryptocurrency deliver such miracles?
The pseudonymous Satoshi Nakamoto unveiled his Bitcoin white paper in 2008. Since then, tens of thousands of cryptocurrencies have joined this initial digital token. (I made one, as an experiment to see how easy it was.) None are used as a currency, except, perhaps for drug traffickers and extortionists. That’s 14 years to prove value, and yet . . . nada.
Perhaps blockchain and crypto must serve the gestation period of Boolean algebra before its value is fully realized. George Boole gave the world Boolean algebra in 1847, but it wasn’t until 1937 that this math branch of “if-then” decision trees using only zeros and ones figured into the development of the earliest computer software. (This joke explains Boolean algebra: A spouse sends her mathematician husband shopping: “Please get a gallon of milk, and if they have eggs, buy a dozen.” He comes back with a dozen gallons of milk.)
Similarly, Carl Gauss developed modular arithmetic (counting like a clock: 6 hours after 7 p.m. is not 13 but 1 a.m., which is modular 12) in 1801 but it wasn’t until the late 20th century that an application became profitable: bar and QR codes.
The difference with crypto, however, is that Boole, Gauss, and their peers didn’t sucker people into spending hard-earned money on these logic chains and modulars.
Crypto bros have dressed up their Ponzi scheme with various fashions. The name, as noted, implies it is currency. A nation that adopted personal computers, the internet, and smart phones in metaphorical seconds after they were introduced certainly doesn’t use Bitcoin to buy coffee.
Then crypto was supposed to help reduce the cost of international remittances, a burden for immigrant workers sending back their American paychecks to families in their home country. Facebook started this but found that the transaction fees on the blockchain were uneconomical. It abandoned the project.
And there’s the libertarian promise to “decentralize” finance, a means to escape dependence on the Wall Street mega-banks that crashed the economy in 2008. Yet “decentralizing” means a computer guessing contest that absorbs more energy than some smaller countries use, and most of that is truly wasted since most competitors “lose” the competition. (Crypto transactions on the blockchain are verified by so-called volunteer “miners” who compete in this computer guess game; the winner is remunerated with a bit of the digital currency.)
The generation that rightly resents Wall Street also rightly respects the need to combat climate change, so the two are incompatible. And crypto really isn’t “decentralized.” Bankman Fried’s demise alone shows the industry’s reliance on a few individuals.
Bankman Fried wasn’t the first huckster to be exposed. In November, 2022, two were indicted for money laundering using crypto. Another two were indicted in an NFT fraud. (A NFT, or non-fungible token, is a computer file, such as a digital photograph that is owned by one person, even though it could be copied by anyone.) Bankman Fried won’t be the last. After all, folks that sell fake money may not be inherently scrupulous.
Meanwhile, a growing of technologists agree on the corruption of crypto generally. Fifteen hundred technology experts emphasized this in a letter to Washington lawmakers warning against legislation and rules that legitimize and enable these schemes.
Why are so many members of Congress crypto crazy? It’s tough to ignore the impact of the $40 million in campaign contributions that Bankman Fried slathered on Congress along. There’s also his contribution of an unknown amount of “dark money” (courtesy of the U.S. Supreme Court’s misguided Citizens United decision), which Public Citizen Executive Vice President Lisa Gilbert has explored.
But Congress must heed the likes of Rep. Sherman and U.S. Sens. Elizabeth Warren (D-Mass), Sherrod Brown (D-Ohio), Roger Marshall (R-Missouri), Robert Menendez (D-N.J.), Jack Reed (D-R.I.), and others and fight this Ponzi scheme.
Climbing further out this limb will not end well for any political “bro,” and certainly not for any new victims of this giant con job. Crypto is not the greatest innovation since the railroad and is certainly not equally essential with real estate and energy. On the contrary: its only claim to history may be as the biggest Ponzi scheme ever.
Congress should supercharge the enforcement branch of the U.S. Securities and Exchange Commission to shut down these Ponzi schemes. Railroad crypto out of the economy.