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UC-Berkeley’s Nicholas Weaver has been studying cryptocurrency for years. He thinks it’s a terrible idea that will end in disaster.
Despite being hyped in expensive Super Bowl ads, cryptocurrency is now having a difficult moment. As the New York Times reports, “the crypto world went into a full meltdown this week in a sell-off that graphically illustrated the risks of the experimental and unregulated digital currencies.” One of cryptocurrency’s most vocal skeptics is Nicholas Weaver, senior staff researcher at the International Computer Science Institute and lecturer in the computer science department at UC Berkeley. Weaver has studied cryptocurrencies for years. Speaking with Current Affairs editor-in-chief Nathan J. Robinson, Prof. Weaver explains why he views the much-hyped technology with such antipathy. He argues that cryptocurrency is useless and destructive, and should “die in a fire.”
The interview transcript has been lightly edited for grammar and clarity.
Here’s a quote by you from 2018:
Cryptocurrencies, although a seemingly interesting idea, are simply not fit for purpose. They do not work as currencies, they are grossly inefficient, and they are not meaningfully distributed in terms of trust. Risks involving cryptocurrencies occur in four major areas: technical risks to participants, economic risks to participants, systemic risks to the cryptocurrency ecosystem, and societal risks.
In a 2022 lecture about cryptocurrency on YouTube, you are even more blunt and harsh:
This is a virus. Its harms are substantial. It has enabled billion dollar criminal enterprises. It has enabled venture capitalists to do securities fraud as their business. It has sucked people in. So either avoid it or help me make it die in a fire.
But perhaps before we get to your justifications for these verdicts, you could start by telling us what you think is the best way for the average person to begin to think about what a cryptocurrency is.
Well, I’d start with what it’s supposed to be in theory. So in theory, it’s supposed to be a way of doing payments with no intermediary. So the idea is that if Alice wants to pay Bob a bet for 200 quatloos…
Hang on, you’ve dropped a word that isn’t a real word. Quatloos is a fictional currency?
It’s actually specifically a Star Trek reference. So if you want to gamble with your imaginary currency, there should be no intermediary that is responsible for executing the transfer. It’s just direct peer to peer electronic cash. Or at least that’s the idea.
Now the problem is: how do you know who has what balance? Electronic cash is actually something we’ve had for decades now. If I want to transfer you money, I use PayPal or M-Pesa or Visa or a wire transfer or this or that. Those all have a central intermediary. And there’s a disadvantage of central intermediaries: They don’t like drug dealers. So as a money transmitter, you are under legal obligations to block a lot of known bad activity.
With cryptocurrencies, the idea is, let’s eliminate the notion of the intermediary by making our balances public, but pseudonymous. So you’re no longer you, you are just some long sequence of random-looking numbers. And let’s create a ledger in the town square so that everybody’s bank balance is public in the town square, but only identified by the pseudonyms.
So for Alice to pay off her wager, she writes a check: “I, Alice’s Random Pseudonymity, pay Bob’s Random Pseudonymity 200 quatloos. Signed, Alice’s Random Pseudonymity.” Bob then checks to make sure that Alice indeed has a balance, and if so, posts that check to the public ledger. Now everybody knows that Alice is down 200, Bob is up 200. And that’s how it works.
The problem is: how do you keep somebody from adding to the ledger and faking stuff? Well, that’s where the notion of the “mining” comes in. What the miners are doing is literally wasting tons of electricity to prove that the record is intact, because anybody who would want to attack it has to waste that similar kind of electricity.
This creates a couple of real imbalances. Either they’re insecure or they’re inefficient, meaning that if you don’t waste a lot of energy, someone can rewrite history cheaply. If you don’t want people to rewrite history, you have to be wasting tons and tons of resources 24/7, 365. And that’s why Bitcoin burns as much power as a significant country.
So this criticism that you hear about Bitcoin, that it uses the energy of a small to mid-sized country, that is true? You point out in your YouTube lecture that there are a number of ways that the enthusiasts of Bitcoin make excuses for this. They say “Well, it’s actually clean” or “It’s not too much of a problem.” But it’s actually very, very wasteful.
Yes. The biggest one is “this incentivizes green power.” Which it does in the same way that a whole bunch of random shootings would incentivize bulletproof vests.
But wait, it’s worse! The problem with the Global Public Square is that it is a single, limited entity, and you have only so much you can add to it at any given time. So Bitcoin burns that much of the world’s electricity to be able to process somewhere between three to seven transactions per second across the entire world.
That’s not many.
It’s not many. And worse, it never could work for payments. So we’ve seen waves come and go of companies saying “We’ll accept payments in Bitcoin.” They’re lying. Because they aren’t actually accepting payments in Bitcoin. They are using a service that allows them to price in dollars, presents Bitcoin to the customer, transfers the Bitcoin, turns it into dollars, and so the merchant is getting actual money. Which means if the system has to balance and you want to buy with Bitcoin and you don’t have Bitcoin, you have to convert dollars to Bitcoin. And this is, by design, a horribly expensive process, because Bitcoin and the cryptocurrencies are fundamentally incompatible with modern finance.
Modern finance has this rule that anything electronic needs to be reversible for short periods of time. This allows an undo in case of fraud. Have you had your credit card compromised before? I’ve had my credit card numbers stolen a couple of times. The amount of money I lost is zero. Because we have both good fraud protection and good ability to reverse transactions. That does not exist in the cryptocurrency space. If your cryptocurrency wallet is compromised, all your apes are fudged.
All your what, sorry?
Your apes are fudged. Because the cryptocurrencies are often used for buying these “non-fungible tokens” that have pictures of ugly little apes. They just get liberated. But the result is, you cannot store cryptocurrency on an internet-connected computer. Because what will happen is, if your computer ever gets compromised, all your money gets stolen and there’s nothing you can do about it.
And that’s a fundamental problem. But it just doesn’t work for payments because of that throughput limit. And the volatility means you get people converting it to real money. And so what is it good for?
Well, there are classes of payments that the intermediaries don’t allow. The big ones are drug dealing, child sexual abuse material, and ransoms. As a consequence, the cryptocurrency actually used for payments is really only used seriously for: ransomware payments, where companies have to pay $10 million. Drug deals—drug dealers hate it, but it’s the only game in town. And we’ve had cases of websites selling child exploitation material paid with Bitcoin.
And the reason I’ve gotten so sour on the cryptocurrency space is the ransomware. It’s doing tens to hundreds of billions of dollars worth of damage to the global economy. And it only exists because people can pay in Bitcoin.
How does ransomware work, for people who aren’t familiar?
So the way it works is that some bad guys in Russia break into, say, Colonial Pipeline. They encrypt all the data and say “Hey, Colonial Pipeline, pay me 5 million bucks or your data’s gone forever.” And Colonial Pipeline pays the 5 million bucks and is offline for a while anyway, and there are gas disruptions on the East Coast.
That exists only because there’s the ransomware payment method of cryptocurrency. Because the alternatives are cash or bank transfers. The banks will not allow payments of 5 million bucks to known criminals in Russia. (Gee, I wonder why.) And if the known criminals in Russia want to pick up a $5 million block of cash, well, that’s a 50 kilogram suitcase that they’re going to have to pick up, and when they go to pick it up they might just get a .308 caliber gift courtesy of the U.S. Marines. And so Bitcoin is the only game in town for them.
So it doesn’t work for payments. And it doesn’t work economically either. It’s effectively a giant self-assembled Ponzi scheme. You hear about people making money in Bitcoin or cryptocurrency. They only make money because some other sucker lost more. This is very different from the stock market.
I’m a savvy investor, and by “savvy investor,” I mean I put my money into index funds and ignore it for several years. During that time, there are dividends and share buybacks where the companies put their profits into me. I then eventually sell it to somebody else. And my gain is not just the difference between what I bought it for and what somebody else bought it for, but that plus the benefit of all the dividends and interest.
So the stock market and the bond market are a positive-sum game. There are more winners than losers. Cryptocurrency starts with zero-sum. So it starts with a world where there can be no more winning than losing. We have systems like this. It’s called the horse track. It’s called the casino. Cryptocurrency investing is really provably gambling in an economic sense. And then there’s designs where those power bills have to get paid somewhere. So instead of zero-sum, it becomes deeply negative-sum.
Effectively, then, the economic analogies are gambling and a Ponzi scheme. Because the profits that are given to the early investors are literally taken from the later investors. This is why I call the space overall, a “self-assembled” Ponzi scheme. There’s been no intent to make a Ponzi scheme. But due to its nature, that is the only thing it can be.
Is that why you see the pile of Super Bowl ads for investing in cryptocurrency? Because the people who are the early investors need to keep finding new suckers and trying to convince people that putting their retirement savings into cryptocurrency is a sound idea?
Yep. Because it’s a self-created pyramid scheme, you have to keep getting new suckers in. As soon as the number of suckers dries up, it collapses. And because it’s not zero-sum, but deeply negative-sum, there are actually a lot of mechanisms that can cause it to collapse suddenly to zero. We saw this just the other day with the Terra stablecoin and the Luna side token. This was basically another Ponzi scheme implemented in the larger space of Ponzi schemes.
So the idea is, you had these two cryptocurrencies, “Terra” and “Luna.” Terra is supposed to be tied one-to-one with the U.S. dollar. Luna can float around. If Terra costs more than $1, you can turn Luna into Terra and make a profit, while if Terra costs less than $1 you can turn Terra into Luna and make a profit. But this only works as long as the value of Luna is greater than the value of Terra.
Now, why would you use Terra at all? Well, one, this is a stablecoin and these are necessary for the gambling aspects of cryptocurrency. They act basically as casino chips, because almost all of the cryptocurrency exchanges are really cut off from the banking system. But the other reason is, because you could take your Terra stablecoin, put it in a lending protocol that was created by the creators of Luna and Terra and get a 20% rate of return paid for by Luna and Terra, a.k.a. a Ponzi scheme.
And so billions of dollars of notional value went into this Ponzi scheme. And the backing of Luna just slowly crept down, down, down. And then all of a sudden, there was a crisis of faith. People no longer believed that Terra was worth $1. It pegged to 95 cents. The folks behind Terra and Luna go “Everything’s fine. Nothing to see here.” And then it collapsed amazingly quickly over the space of two to three days. And we’re now at the point where the Terra stablecoin that was supposed to be worth $1 is now worth 10 cents, and the Luna token has basically gone down by 99.99%. And people keep finding out that just because something’s gone down 95% doesn’t mean it can’t still go down another 95%.
What about the other major “stablecoin,” this “Tether”? Is that subject to the same kinds of risks?
Yes and no. It is subject to the same kind of risks, but it’s different. It doesn’t have this algorithmic collapse model, but it does have the potential for bank runs causing collapse, because it’s unbacked.
Tether is almost certainly what we’d call a “wildcat bank.” So, back in the 1800s, we didn’t have the Federal Reserve. Do you ever wonder why those pieces of paper in your pocket are technically called “bank notes”? It’s because the original model was not the government issuing pieces of paper. The government only issued coins. But heavy or bulky coins are hard to deal with. So you take your coins to the local bank, and they would give you a banknote, literally an IOU saying “if you want a $1 gold coin, take this IOU back to the bank and you get this dollar gold coin.”
What happened is, basically, fraudulent banks sprang up. They were called wildcat banks because they’d often have animal pictures on the bank notes. What they would do is take deposits and issue pieces of paper, completely unbacked. And when state bank regulators would come along, the wildcat banks would have barrels of coins that were fake. All but the top layer was just junk, with a top layer of gold coins. Or they’d cart around a barrel to all the branch offices just ahead of the inspectors.
And Tether is clearly doing the same thing. Because if Tether was backed by real money, this would mean that there is some $80 billion worth of money from institutional savvy investors that wanted to invest in the cryptocurrency space, but didn’t want to just buy in CoinBase. So they had to go to this third party that has been caught lying about its reserves, run by who-knows-who—the CEO is basically MIA. [Slate reported in 2021 that he “hasn’t been seen in public in years.”] It keeps its reserves in the Bahamas. Why would you invest that way? It’s just complete nonsense.
So what’s really almost certainly happening with Tether is Tether creates new Tether tokens, loans them to their big colleagues in the cryptocurrency space—so Alameda Research and a couple of others like that. Alameda Research provides IOUs so Tether says they’re backed by loans. Then Alameda goes out and buys Bitcoin, driving up the price. And now the Tether is backed by Bitcoin. And so Tether in the end is backed by underlying cryptocurrency.
They refuse to get audited. [Bloomberg reported that Tether CFO, an Italian former plastic surgeon, was “urged … to hire an accounting firm to produce a full audit to reassure the public,” but “said Tether didn’t need to go that far to respond to critics.”] They refuse to even do more than the most basic attestation, which is literally “Here, accountant, sign this.” We’re honest, Scout’s pledge. It’s just a house of cards. And the problem is that when these houses of cards fail, they fail so catastrophically and so swiftly that things go from being worth $1 to being worth nothing in the space of three days.
I want to zoom out again to talk about cryptocurrency in general and go back to some of the broad critiques you have. Is it accurate to summarize what you were saying before as, essentially: There is no problem that cryptocurrency solves, and to the extent that it is functional, it does things worse than we can already do them with existing electronic payment systems. To the extent it has advantages, the advantage is doing crimes. And every other claim made for the superiority of cryptocurrency as currency falls apart if you scrutinize it.
Yes. So let’s take the cost of a transaction. The cost of a transaction in cryptocurrency systemically is the amount being used to protect it. I could build a system that would have the same throughput as Bitcoin, three to seven transactions per second, but with a centralized trusted entity. In fact, not even a centralized trusted entity. Ten trusted entities, only six of which need to be honest, because I use a majority vote system. I could do it on ten computers that look like this, that would burn as much power as a light bulb.
For listeners and readers, he is holding up a tiny … uh, what is that?
I am holding up a Raspberry Pi computer module. This entire computer is like 50 bucks. So for 500 bucks worth of [computing power], I could do the same functionality as Bitcoin, with just 10 named entities. Why don’t I do this? Because those 10 named entities would have to follow money laundering laws. And apart from getting a structure where the named entities don’t follow money laundering laws, there’s no advantage for the cryptocurrencies, despite burning nine orders of magnitude more power.
One of the kind of jaw-dropping moments in your YouTube lecture is when you show just how wasteful this is, how easily you could do the exact same thing, and not have this pathetic three to seven transfers per second all around the world.
You do note that it suggests that Elon Musk—who is touted for the electric cars that are supposedly going to be an important contribution to stopping climate change, but has invested billions of dollars of Tesla’s money in Bitcoin—probably isn’t that serious or consistent about reducing our carbon emissions.
Phony Stark over there has a walking talking Dunning-Kruger syndrome going and his investment in cryptocurrency is clearly one of those. The cryptocurrency that he often highlights is Dogecoin. Dogecoin was a literal joke invented in the early days of cryptocurrency about, “Hey, this stuff is so stupid. Let’s make a coin about a meme of a talking dog.” The founder of Dogecoin says, “This is a joke, avoid the cryptocurrency space, it is total garbage.” [Note: Dogecoin creator Jackson Palmer concluded: “After years of studying it, I believe that cryptocurrency is an inherently right-wing, hyper-capitalistic technology built primarily to amplify the wealth of its proponents through a combination of tax avoidance, diminished regulatory oversight, and artificially enforced scarcity.”] This joke is now the 10th most valuable cryptocurrency.
I am sure you have heard people say things like “Well, blockchain technology itself has lots of potential applications, it’s really interesting, offers lots of possible solutions to problems.” But one thing you point out in your lecture is that often, they are pretty vague about what these uses are, and usually when you get down to the facts, there’s a much simpler solution to whatever problem it is that wouldn’t use blockchain. You cited the example of someone who touted how blockchain could help with vaccines in India.
So the thing is, the idea behind a blockchain is actually a 30-plus-year-old idea. It’s called a hash chain. And we’ve known how to build these for longer than most of my students have lived. But people who spout “Blockchain!” don’t understand the technology. This [the vaccines suggestion] was a concrete example that made me create [Weaver’s Iron Law of Blockchain], which is: When somebody says you can solve X with blockchain, they don’t understand X, and you can ignore them.
So it’s useful in that sense.
Yes, it is useful as a filter [to know if people know what they’re talking about]. So, this was an example given by a purported expert in a blockchain class at Berkeley: Okay, we have the cold chain problem. Vaccines, you need to ship cold, and if they ever get out of temperature spec, you have a ruined batch. And we can solve this with blockchain.
And my reaction is: No. The problem is you need to know when it got out of spec, and know that the receiver can know that it had gotten out of spec. And there’s an easy solution. It’s called a $1 ShockWatch label. So the ShockWatch group makes these temperature labels. You stick them on the package. And if it ever gets too warm, the color changes. No blockchain necessary.
The fact that somebody was purporting this to be a real-world application meant they had not even thought about the problem for five seconds. They had no familiarity with how cold chain works. They had no familiarity with how the sensing process works.
We see the same thing when people talk about cryptocurrency being able to “bank the unbanked.”
Oh, yeah, that’s a big argument for it. This is going to be very useful in the developing world.
If you take any of these people and you ask them what M-Pesa is, they will look at you like you’re speaking [Swahili]. Because, well, you are. So for those who aren’t familiar, M-Pesa is a payment system started in Kenya by Vodafone about the same time as Bitcoin. [Note: Pesa is Swahili for money, and the “m” stands for “mobile.”] It has eaten the Third World. It’s huge. Because it just basically attaches a balance to your phone account. And you can text to somebody else to transfer money that way. And so even with the most basic dumb phone you have easy-to-use electronic money. And this has taken over multiple countries and become a huge primary payment system. [Whereas] the cryptocurrency doesn’t work.
So, El Salvador. The president of El Salvador is a totalitarian nutcase. And one of the things he did as a totalitarian nutcase is pass a law saying Bitcoin is legal tender. But you aren’t actually using Bitcoin. Instead, they created a new wallet, the Chivo wallet, that’s an electronic payment channel that takes Bitcoin and dollars and just updates your balance in a central database. It’s not actually doing a transfer. And the Bitcoin folks like to go, “Oh, but there’s this lightning network thing that allows these layer two transfers in a trustless environment, so you aren’t trusting the central Chivo app.” That is still limited to adding three to seven people per second globally to the system. So you can’t actually onboard that system. It just doesn’t scale.
And so the one case where we’ve had an attempt to do a wide-scale “pay with Bitcoin” system, El Salvador, they gave up and aren’t actually using Bitcoin. They’re using a centralized database in an app. And because the value of the numbers in the centralized database bounces around, nobody actually uses it. People just signed up for the free money, then transferred it, and have since stopped using it. [Note: Seeking Alpha reports that “virtually no downloads [of the Chivo app] have taken place in 2022” and “it seems that people were incentivized to download Chivo given the $30 bonus offered by the government.”] So even when you have a central database and a central authority, cryptocurrencies don’t work for payments, because they bounce around in price.
One of the things you’ve said, if I recall, is that the cryptocurrency space is “speed-running 500 years of financial history.” By which I take you to mean that all of the financial disasters of centuries past are playing out in short order, and then they have to rediscover the solutions that were put in place for those things not to happen. So you start off thinking, “Oh, wouldn’t it be fantastic if there were no central authority?” and then all of a sudden you realize, “Actually, it really would be nice if we had a central authority to regulate fraud and such” and you rediscover the virtue of banks and government.
Yeah. Cryptocurrency: teaching libertarians about market failure since 2009. The thing is, though, the cryptocurrency space itself has the object permanence of a horny mayfly. They simply don’t remember their own scams.
So Ponzi schemes in the cryptocurrency space have existed since 2012, 2013. Back in those days, a huge amount of Bitcoin—10% of all Bitcoin at the time—got invested into a Ponzi scheme. This Ponzi scheme was so big in the cryptocurrency space that the editor of the Bitcoin magazine bet $90,000 that it wasn’t a Ponzi scheme. And so the investors in the Ponzi scheme were then taking the other side of that bet in order to protect themselves. So, when the Ponzi scheme inevitably failed, well, they were out their money, and the bets didn’t pay off because the editor of Bitcoin magazine didn’t have the money. But it gets better. Guess what the name of the guy running the Ponzi scheme was? “[email protected].” Ten percent of all Bitcoin at the time got invested into a Ponzi scheme run by a guy calling himself [email protected]
And then they keep repeating it. So like Celsius as a system is clearly Ponzi economics. They’re claiming 10 to 20% rate of return lending out cryptocurrency. The only way they can be providing that is by providing either money from venture capital or money from previous investors. It’s a self-created Ponzi scheme.
Can we discuss “smart contracts”? I don’t understand what these are.
A smart contract is not a contract. The theory behind smart contracts is “code is law.”1So let’s do programs that cannot be updated that handle money. Now, we’ve had programs that handle money for decades now. So I’m a savvy investor, I have an index fund, my index fund is run by a computer that’s running a fairly simple set of programs, trading on my behalf to make sure it matches the index.
Now, there’s two things about that program: It’s not generally accessible to the internet, so no random person can go up to it. And it’s running on a fabric that’s reversible. So if there’s a catastrophic screw up, you get the people involved and can undo the mess.
The smart contracts really are computer programs that operate on money. But there’s a few riffs on them. There’s no mechanism to fix problems if they occur. There’s no undo button. In fact, there’s often no way to upgrade at all. So if a bug is found, you’re out of luck. They are written in a truly awful set of programming languages, but that’s just the icing on the cake. And any random person in the world can interact with them.
And so the question is: if I can go up to a “smart contract” and say, “Hey, smart contract, give me all your money” and it does, is that even theft? But catastrophic theft and catastrophic bugs occur all the time. So the first smart contract, the DAO, back in 2016, was “Hey, let’s make a voting distributed mutual fund.” So anybody can invest in the DAO and get a say in how we invest the money. Ten percent of all Ethereum got invested in the DAO. And it basically got invested because it’s got a cool name. And it was basically a self-assembling Ponzi scheme.
What happened is: somebody realized there was a bug in it, where what they could do is do a deposit, then a withdrawal, then that withdrawal they could withdraw again and again and again recursively. Because what would happen is it would transfer the money, then decrement the balance, but in transferring the money you could trigger another withdrawal. So you would basically be able to withdraw a gazillion times, then the balance gets decremented. And, oops, all the money’s gone. And so somebody did this. So the first smart contract of note failed catastrophically due to a bug. Yet they keep doing this over and over and over again.
And as a bonus, remember that whole “code is law” business? No central authorities [the code determines the outcome]. That’s a lie. Because the developers of Ethereum have their 10% in this self-assembled Ponzi scheme. So they updated the code to steal all the money back.
The reason why I say it’s rerunning half a millennium of failure is that at the start, there’s a huge amount of “tulip mania.” Back in 2018, we had a tulip mania of these deformed cats called “crypto kitties” that shut down Ethereum. Now we have a tulip mania of these deformed apes that shut down Ethereum, because of course it can’t really do all that much. And so the thing is, there’s just no object permanence in the space. They don’t remember their old mistakes. And so they just keep making them over and over again.
I suppose we have to talk about the apes. I really, really don’t get this NFT thing. I really don’t understand what people who pay large sums of money think they’re getting. I don’t know how you can own a JPEG without owning the copyright to it. I don’t know what you’re buying. What is this? Can you tell me how this fits into the picture and the best way to conceive of it, as a normal person?
So most of the NFTs are as follows: A bunch of computer generated variants are created. They’re put up on a web page. I sell you a receipt to a URL that says you theoretically own this receipt. And that’s it. You can trade this receipt to somebody else. By default, an NFT gives you no rights. It is literally just a receipt for your purchase that you can trade to somebody else.
Can I just stop you? I want to break this down. What does “own” mean?
You have a receipt that says “I am the owner of this.”
But what does it mean to “own” it?
You can sell that receipt to somebody. Now, the apes are a little bit different. Because there is a part outside of the smart contract for the apes, which is that you have a license to make as many derivative works as you like of the apes you own as long as you own it. And that is actually pretty unique. Most of the NFTs don’t offer that option. The apes do. So what ends up happening is the big market for the apes is for people to make derivative apes. So buy four or five ape NFTs, use that to create the base for 400 to 500 algorithmically-derived alternate apes, like caked apes or spaced apes or apes that eat their “slurp juice” or whatever, to create more derivative apes that you then sell to more suckers.
So they’re like baseball cards, essentially? You have to convince people there’s some pleasure in owning these things, or that they’re going to go up in value?
That they’re going to go up in value. The only part of it that isn’t [speculation] is the conspicuous consumption, like “Oh, I’ve got the Rolex.” But the problem is the ownership is so weak that all you have to do is right-click “save” and you have your own copy. So Elon Musk inadvertently, I hate to say it, but he actually did something right. He showed the whole stupidity of this place by temporarily putting his profile portrait to a collage of apes he didn’t own.
Which shows you that “ownership” really does not mean terribly much, because the people who own those apes can’t enforce a copyright claim against him for doing that.
No, because the copyright is still owned by Bored Ape Yacht Club, and the owners of the apes just have licenses to be able to produce derivative works.
Also, the other thing is: they’re ugly!
They’re really, really hideous.
The actual usability of the intellectual property outside the space of the lunatic ape collectors is zero. So like MeUndies, which is a company that does underwear, bought themselves a Bored Ape, and they were going to make Bored Ape underwear with the ape. The backlash was so swift that they gave up and sold their ape because the intellectual property was useless.
We’ve talked about a lot of different aspects of what is called the “cryptocurrency space.” We’ve talked about the inefficiency, the volatility, the way that “irreversibility” is touted as a feature but in fact enables fraud and ransom. We’ve talked about the environmental destruction. One other thing I wanted to ask you is: you said in your lecture that cryptocurrency enables venture capitalists to “carry out securities fraud as a business model.” Could you explain what you mean by that?
So there are a lot of securities regulations out there. And the definition of “security” is very broad. It dates back to the Howey Test in the Great Depression era. That happens to be one of the cleanest legal tests ever for “Is this an investment contract?” and therefore a security that should be regulated by securities regulators. It’s very much “if it walks like a duck and quacks like a duck and swims like a duck and flies like a duck, it’s a duck.”
So in the old days, like a few years ago, you’re Andreessen Horowitz, you invest in several companies. And these companies get to a point where either they implode and you lose your money, or they get bought by a bigger company, and you make a profit, or you go public. But in order to go public, you have to do a lot of paperwork. Basically, you have to do honest financial disclosures, etc.
But how they work now is basically securities fraud by inducement. So they invest in a cryptocurrency-related company. They strongly encourage that cryptocurrency company to issue a token that acts as a promise for some eventual service, like say dental care or an orange tree in Florida. And they sell that token to the venture capitalists at a huge discount. So the venture capitalists get a huge pile of these tokens. And then what happens is they encourage the company to go out and sell the token to the general public. And ideally they get that token listed on CoinBase, which is partly owned by Andreessen Horowitz. And if not, they just use the decentralized exchanges or whatever.
And now the venture capitalist is able to sell their tokens to retail investors. This is blatantly an unlicensed security. This is blatant securities fraud, but they didn’t commit the securities fraud. It was just the companies they invested in that did the securities fraud, and the SEC has not been proactively enforcing this. They only retroactively enforce against the initial coin offerings after they fail. So what will happen is Andreessen Horowitz and company invested in a bunch of startups that all issued tokens, that all got dumped on retail including Andreessen Horowitz dumping a lot of them on retail, and when things fail, the only people to prosecute are the companies, not Andreessen Horowitz itself. So they’ve been able to make securities fraud a business in such a way that they are legally remote, so you will not be able to throw them in jail.
Well, what you said suggests that to some degree they’re working carefully within legal loopholes but also that there are ways in which regulators ought to be stepping up. You wrote an article in Slate with the security expert Bruce Schneier about the way that, without banning cryptocurrency outright, we can regulate it sensibly. So perhaps you could outline what you think is the necessary approach to mitigating the various harms that this is doing.
The first thing is, you don’t in many cases need new laws. You just need existing laws to be enforced. So every initial coin offering, every single one of them, checks every box of the Howey Test. The SEC has the authority to stop those proactively rather than reactively. They choose not to.
Most of these “decentralized” organizations are not actually decentralized. They are identifiable entities. So when you have regulations that apply to identified entities, like say money transmission laws, apply them to the named entities. Cryptocurrency is pseudonymous, not anonymous. So actually enforce requirements on transfers to make sure that money that’s been contaminated by bad stuff is not allowed. That would disrupt a whole bunch of bad activity.
To put it bluntly, the SEC needs to grow a pair. Because this space is provably negative sum. It can only harm investors. Everything in this space, for the most part, ticks boxes for stuff that the SEC is allowed to regulate, which it should regulate.
Basically, there’s a fear among regulators—that I think started in the ‘80s—of being accused of “stifling innovation.” There’s no innovation to stifle. So regulate away. Because the problem with the current regulation model is they’re doing “let’s pick up the pieces afterward.” So after the things fall apart we’re going to go pick up the pieces, rather than “Hey, let’s stop things from falling apart in the first place,” which would save billions of dollars of investor money.
What is the future of cryptocurrency in the absence of changes to existing regulation? Is it doomed inherently through features internal to it? Where’s this going if allowed to follow its own logic?
It will implode spectacularly. The only question is when. I thought it would have actually imploded a year ago. But basically, what we saw with Terra and Luna, where it collapsed suddenly due to these downward positive feedback loops—situations where basically the system is designed to collapse utterly and quickly—those will happen to the larger cryptocurrency space. Because, for example, the mining process is horribly expensive. We’re talking [a measurable percentage] of the world’s electricity consumption, most of that has not been paid for. So the mining companies for the most part have been taking the cryptocurrency and borrowing against the cryptocurrency that they create, rather than sell it, because the market’s actually very thin.
This means there’s a huge amount that is subject to potentially catastrophic margin calls. And that creates a feedback loop where the price drops a little, somebody’s forced to sell. That drops the price more. They’re forced to sell more. This creates a feedback loop that drives the price into the ground, catastrophically.
The previous times this has happened, we had the bubble at 100, powered by fraud at Mt. Gox. And that imploded down to 10. We had a bubble a 1000 powered by fraud, it imploded and went back down to 100. We had a bubble at 10,000 powered by Tether, it blew up and went back down to 1,000. And now we’re at a bubble where Bitcoin blew up to 60,000, fueled by Tether and falling. But I don’t think there’ll be a fifth bubble. Because basically, they will have broken all the suckers left to break. There’s only so many more suckers that can be brought into that space. Once you burn out a sucker, they don’t come back. They’re a non-renewable resource. So they’re going to end up running out of greater fools.
So I suspect that the cryptocurrency space will go fine absent regulation, until one day it goes and collapses greatly.
What you said about finding suckers, I think I’d like to end on this. Because I was in New York City recently on the subway, looking around at the ads, and a bunch were for investing in some new crypto thing. They were encouraging people to put their money in, saying it was a safe investment. And I mentioned the Super Bowl ads earlier. And I think the thing that it might be worth emphasizing is when we say “sucker,” we’re talking about people being taken advantage of. When you talk about the ransomware, the fraud, the child exploitation material, when you talk about people who put their savings into these things, even leaving aside the environmental destruction, we’re talking about pain being inflicted upon people by the proliferation of this.2
Yes. That’s the problem, and that’s why I’ve actually changed my view over the past decade. Back in 2013, I thought it was amusing and silly, and I could get cool papers out of it. In 2018, I thought it was amusing, but pretty bad. [In 2022], it’s time to really think about burning it down. Now I just want to take the entire cryptocurrency space and throw it into the sun. I know astronomers will tell you it’s easier to throw something into the void of space than to throw it into the sun. But it’s worth the extra energy to make sure some alien doesn’t find this mental virus.
Well, good luck. You’re battling Bill Clinton and Tony Blair, who both showed up at a cryptocurrency conference recently.
And I bet they got paid in actual money. Like, the Washington Nationals just the other day started doing a lot of tweets for their business relationship with Terra. That was $5 million for five years prepaid in advance in cash. So for the next five years, the Washington Nationals are obliged to hype a cryptocurrency that failed spectacularly already.
But they got their money.
They got their money. They just have to hype it now. For five years.
Well, Professor Weaver, thank you so much for joining me and explaining this. There’s so much bullshit to wade through and there are so few people who are talking about this in a really intelligent way and I really appreciate your work. Good luck with your mission to throw it into the flames.
Thank you very much for having me.
Olga Mack of Above the Law explains this notion further: “My blockchain colleagues, especially the more technical ones, use the phrase “code is law” to suggest that code—for example, a software that usually underlies a smart contract—will one day in the future replace law. They believe that code will one day be the final authority. Accordingly, if a code has an inadvertent glitch and performs in an unexpected, perhaps unfair way, they would shrug their shoulders and respond: ‘Well, code is law.’” ↩
The Terra/Luna subreddit has recently been full of desperate people panicking and even discussing suicide after losing all their assets in the collapse. Crypto critic Stephen Diehl comments that “Any returns people make on crypto investments are zero-sum and dripping in human suffering. There’s likely a dozen people (some with gambling problems) who lost everything on the other side of a dog coin trade.” ↩
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