Additional Comments on Cryptocurrencies

As I indicated in my review of Ben McKenzie’s book on cryptocurrency, my interest and knowledge of this subject is limited. Given this, here are some additional comments.

One place to get an analytical, though dated, view of cryptocurrencies is Gary Gensler’s 2018 MIT course on the subject. It is free, but you do have to spend the time to watch it and do the readings. (I have not done this.) The crypto enthusiasts were initially pleased by Gary Gensler being appointed to head the SEC, but the crypto press is now harshly critical of him because of SEC enforcement actions.

From what I gather, Gensler now thinks most cryptocurrencies are securities except for bitcoin. He does seem though impressed with blockchain technology, which could be used for other purposes than transferring crypto. However, that is uncertain.

The regulatory dilemma with crypto is that setting up a formal regulatory regime provides legitimacy for crypto. To me, trading in bitcoin and similar “coins” looks like gambling with no benefit for society. In effect you are betting that someone in the future will be willing to pay you more than you paid for your cryptocurrency. In the meantime, it is up to the courts to decide what role the SEC and the CFTC can play in this space. Congress can of course decide to pass legislation on the subject, but that will probably take some time.

Some people putting actual money into crypto may be betting that crypto will become like dollars and euros and become embedded in our financial system, but it is hard to see that happening. It does not inspire trust; it does not have a central bank and a banking system to create it; and it is not embedded in the economy and the legal system as money. Perhaps, bitcoin can be a little like gold as a place to park money and, if there continues to be enough people who believe in it, maintain some fluctuating value, but that is uncertain. That could happen, though, with a few cryptocurrencies playing a small role in financial markets.

Finally, some major players are getting into the crypto game. For example, Fidelity Investments offers a trading platform for bitcoin and ethereum. I think this is a mistake, but, to its credit, Fidelity says that accounts in its crypto affiliate do not have the regulatory protections that its normal brokerage accounts benefit from. Other firms, such as Blackrock, want to offer ETFs in crypto. The SEC has not yet approved this, but it may.

Book Review: Easy Money: Cryptocurrency, Casino Capitalism, and the Golden Age of Fraud by Ben McKenzie with Jacob Silverman

I usually do not pay much attention to cryptocurrencies except when they make a good deal of news. Call me a crypto skeptic: I have never understood the attraction. To begin with, what purpose do they serve?

One of the touted purposes is to eliminate the need for financial intermediaries and all the concomitant regulation. However, holding cryptocurrency without the assistance of some kind of intermediary is more than most people have the time or technical savvy to do. Moreover, the lack of regulation for trading platforms that are unregulated has given rise to investors and traders (probably a better term is “gamblers”) losing money due to scams.

It is hard to determine what crypto really is. Is bitcoin an asset, even if there is nothing underlying it but clever computer code and a network of computers? Stablecoins, by contrast, sometimes do have some underlying assets other than other cryptocurrencies and some sponsoring group or entity, but it is difficult to determine how trustworthy the backing is. We can say, though, that one thing crypto is not, and that is money. As taught in introductory economic classes, money serves three functions: a store of value, a medium of exchange, and a unit of account. Crypto does none of these things. While El Salvador has made bitcoin legal tender in that country; this experiment does not seem to have gone well.

Ben McKenzie, a TV actor in shows I have not watched, decided during the shutdown of television production during the pandemic to research and write a book on cryptocurrency. He had the same skepticism I do about crypto. However, while my inclination is generally not to think about it too much unless someone asks what I think, McKenzie was much more curious and decided to research and write a book about it. For assistance he recruited a journalist from his Brooklyn neighborhood, Jacob Silverman. The book, though, is written in the first person, with the narrator being McKenzie.

I decided to purchase and read this book after I heard McKenzie speak about his book on the public radio program Marketplace. I thought what he had to say was interesting.

The most interesting and readable portions of the book are the descriptions of the various encounters the authors had with various denizens of the crypto world. The interviews with Sam Bankman-Friedman, with whom they talked before and after his financial empire collapsed and indicted for fraud. It amounts to a fascinating portrayal of a very strange man.

Another episode is an encounter at the 2022 South by Southwest conference in Austin, Texas. This story seems a bit off. Two men, claiming they are CIA agents, take McKenzie and Silverman to dinner and, according to the book, attempt to recruit them as informants on crypto. The description of this makes the recruitment seem extremely amateurish. It also leaves questions. What is the CIA doing operating domestically? Doesn’t the CIA have better ways of learning about crypto than talking to a TV actor and journalist who are just beginning their research on the topic and are not players in this market? What was really going on here? If these guys are not with the CIA, who are they and what do they want? These and similar questions are not answered, probably because the authors do not know what to think about what happened. In any case, they got a nice dinner, and the two supposed CIA agents do not reappear in the book.

The weakest parts of the book are the description of both the 2008 financial crisis and the 2022 debacles in crypto. They seem to have been written quickly, there are some typos, and in one place there appear to be some missing words. This book does not provide a clear account of market developments or exactly how people were taken advantage of. There are probably better accounts of the skullduggery that took place elsewhere.

In other words, read this book for a description of the crypto world and an argument for why one should resist any feeling of “FOMO” (fear of missing out). If you are more interested in the technicalities of crypto than I am, you will probably want to go elsewhere.