Is Cryptocurrency the New Cocaine?

On June 4, an overflow crowd jammed the Mana Convention Center in Miami’s trendy Wynwood district to attend Bitcoin2021, sponsored by the leading cryptocurrency and headlined by such Silicon Valley luminaries as Jack Dorsey, the founder and CEO of Twitter, there to make the case that the blockchain technology is world’s best tool for achieving financial freedom and fighting government censorship. “We don’t need the financial institutions that we have today,” Dorsey said. “We have one that is thriving … that is owned by the community.” Miami Mayor Francis Suarez opened the conference, declaring his goal was to make Miami the “Bitcoin, blockchain and mining capital of the world.” 

The campaign seems to be working. Only the day before, Suarez announced that Blockchain.com, whose digital platform lets users buy, sell, and trade Bitcoin and other forms of digital payment, would be moving its headquarters from New York to Miami. Earlier in the week, Atlanta-based Borderless Capital announced the creation of the Borderless.Miami fund, which will use $25 million to “seed startups using the Algorand blockchain and Algo coin. It is also creating an Algorand Miami Accelerator in collaboration with Circle, another heavyweight in the crypto world.” Then on Bitcoin2021’s opening day, eToro, the world’s second-largest exchange by number of weekly visitors, announced it is seeking office space in Miami for a 50-person U.S. hub that will share duties with its current U.S. location in Hoboken, New Jersey.

To top it all off on that same day, the former American Airlines Arena–the home of the Miami Heat–was officially renamed the FTX Arena, part of a 19 year, $135 million renaming deal with FTX, a cryptocurrency exchange founded and headed by a little-known 29-year-old billionaire named Sam Bankman-Fried. It almost overshadowed news coverage of several mass shootings in Miami-Dade County during the same week.

If, like most Miamians, you had never heard of FTX and have only the vaguest idea of what a cryptocurrency is, you might well wonder what all of this is about. It sounds so cool and cutting-edge, but who are these people really? And what does this purported financial revolution mean for the city and the country? 

There is remarkably little information readily available about FTX or its wunderkind founder, and there is no evident connection to Miami. The company, founded in 2019, is based in Hong Kong and incorporated in Antigua and Barbuda, a Caribbean island nation that sells its citizenship for as little as $100,000 (plus processing fees). Forbes did a fanboy interview with Bankman-Fried in May, that ticked off the basic (and oft-repeated) milestones in his bio–MIT, working for Jane Street Capital, founding Alameda (“a crypto quantum trading firm”), and then FTX. “I wanted to incorporate the buyer, the seller, and the exchange. So we launched FTX in spring of 2019 and built it from nothing to where it sits today as the fourth largest global crypto currency exchange based outside of China.” The Forbes interviewer showed no curiosity about the source of the capital that fueled this meteoric rise, focusing instead on Bankman-Fried’s self-proclaimed “effective altruism”, comparing him to Victorian utilitarian philosopher Jeremy Bentham.

According to one report, Bankman-Fried is now the second most wealthy “blockchain billionaire”–up from being nowhere on the list the previous year. The stunning rise of FTX seems to correlate to a large investment in December 2019 by Binance, the world’s largest cryptocurrency exchange, founded by CEO Changpeng “CZ” Zhao in China, but later moved offshore to a succession of locations reportedly including Malta, Seychelles, and the Cayman Islands. Zhao now reportedly claims that Binance has no headquarters. In May, Bloomberg News reported that Binance was under investigation by the IRS and Justice Department. 

In the world of cryptocurrency, no one seems concerned by such things, but the Miami Herald editorial board expressed some serious qualms in an editorial entitled “Forgive us, but the heady prospect of Miami as a crypto hub makes us a little queasy“: 

“It’s an exciting time. It’s scary, too. To those of us without a Bitcoin to our names, it feels kind of unreal. Don’t get us wrong. We hope cryptocurrency — and the flashing neon welcome mat we’ve set out for the tech industry — elevate this city to new prosperity. We’d love it if this heady new world has real staying power, especially if it can provide the fuel for the gritty, unglamorous things this city needs, like affordable housing, ways to combat sea level rise and better transportation. We hope virtual currency and the underlying blockchain technology provide scads of jobs in this community. Just don’t blame us for being a bit wary.

“Because Miami has history, folks. We’ve been a smugglers’ paradise, the epicenter of the cocaine trade, a mecca for money laundering, ground zero for mortgage fraud, home to the biggest Medicare black market in the United States. When the “frothy” housing bubble burst in 2007, Miami’s overheated market got hurt badly.”

Indeed. Back in the ’80s–the days of Miami Vice–the flood of unbelievable amounts of cocaine cash fueled the local economy and built the glittering skyscrapers that line Brickell Avenue, but it came at a great price in crime and corruption when Miami became the US epicenter of the cocaine wars. No one is suggesting that the influx of cryptocurrency money will bring 80s-style gun battles in the streets. But there are serious concerns about where all of the money bankrolling these companies is coming from and who is paying whom on these platforms. Not to mention questions about whether the entire cryptocurrency phenomenon is just another bubble that will pop and leave another financial disaster in its wake. 

There are also serious concerns about adverse effects of unregulated cryptocurrency on society at large. The near-untraceability of cryptocurrency transactions makes it the ideal medium of exchange for organized crime, money laundering, terrorist activity, tax evasion, and cyber crime.  To cite only the most recent big example, when cybercriminals shut down the Colonial Pipeline last month causing panic buying and fuel shortages throughout the eastern US, the company reportedly paid the $4.4 million ransom in Bitcoin.

Technically, cryptocurrency transactions are not absolutely anonymous, but rather pseudonymous, i.e. the identity of the parties involved is masked by a public key which is published on the bitcoin blockchain and a private key or “signature” known only to the user. It is therefore theoretically possible to identify parties to transactions through cluster analysis of patterns in the keys, but there are also ways of evading this scrutiny, e.g., by using a different key for each transaction. Some cryptocurrency exchanges and digital “wallets” require some minimal level of personal information in order to set up an account. But there are also a number of cryptocurrencies whose primary selling point is that they offer enhanced security features or options that help to keep users’ identities and activities concealed. The bottom line is that it remains extraordinarily difficult for law enforcement or national treasuries and central banks to identify the parties to any given transaction and the odds of detection are extremely small, especially if someone takes measures to conceal his identity. So for all practical purposes, almost all cryptocurrency transactions are indeed virtually anonymous.

If you look for the one thing that most distinguishes cryptocurrency from fiat currency like the dollar, euro, yen, or pound, it would be precisely its secrecy and absence of oversight by government agencies. Since there are no intermediaries like banks that are subject to scrutiny and regulation, there is no entity to police what happens on the cryptocurrency exchanges other than the exchanges themselves, which have little or no incentive to do so.  That is exactly what makes it so attractive to individuals and organizations that don’t want their activities revealed. It takes little imagination to see applications in politics, like dark money payments to influence elections (already hard enough to trace) or bribery of public officials by opening up a cryptocurrency wallet invisible to prying eyes. 

To be fair, advocates claim that cryptocurrencies can do some things that traditional currencies can’t and are intrinsically more democratic by being available to people who lack access to traditional banking. For example, they assert that cryptocurrencies offer a safe way to store monetary value in countries that lack a stable currency, like Venezuela. The problem is that upon closer examination, these arguments start to melt away and seem more a specious rationalization for a medium best suited for illicit activities. A desperate Venezuelan may indeed see a cryptocurrency as a way to get money out of his country’s abysmally failed economic system, but access to an exchange would be largely limited to the richer strata of society, not those who have seen their meager savings vanish and have to scramble daily for necessities. Moreover, the value of individual cryptocurrencies themselves is highly volatile and subject to abrupt swings. For example, Elon Musk’s remark on Saturday Night Live last month that dogecoin, a bitcoin rival that he had been pushing, was really “a hustle”, sent its value immediately plummeting by 40 percent.

Still, it’s easy to understand the allure of speculation in cryptocurrency when the overall trend in the market value of cryptocurrencies like bitcoin continues to rise, fueled by the speculation itself and the belief that this is The Next Big Thing. Many people have made a lot of money by betting on Bitcoin and its rivals. At this point, however, the market value is based on faith and faith alone, which is why things like naming rights to Miami’s biggest sports arena become important. If the Heat are playing in the FTX Arena, it must be real, right?

What could make it Not Real is if the US Government decides to impose regulations that would pull back the veil of anonymity in cryptocurrency transactions. This is why it is critical now to get political support for the free-wheeling status quo and project an aura of both inevitability and Too Big to Fail. It’s no accident that Sam Bankman-Fried gave $5 million to the Biden campaign–the second-largest individual donation after Mike Bloomberg’s.  The party affiliation is unimportant, as long as politicians see the “industry” as legitimate and its survival to be in their interest. Any effective regulation is viewed as a threat that could bring the whole thing crashing down. The prevailing ideology in the cryptocurrency world is Libertarian where any regulation is a bad regulation. 

Governments and central banks around the world have been slow to react to the cryptocurrency phenomenon or recognize its implications. As long as cryptocurrency represented only a tiny fraction of financial activity, it could be essentially ignored as insignificant. But if, say, a quarter or a third of financial transactions took place with cryptocurrency, that would represent an existential threat not only to the established banking industry but also to governments’ ability to impose effective monetary and fiscal policy because an enormous chunk of economic activity would be beyond their control. That may be Jack Dorsey’s Libertarian dream, but it would be Janet Yellen’s nightmare. 

So far, the US government has not really tackled cryptocurrency-related issues. Back in February 2020, then-Treasury Secretary Mnuchin told Congress that regulations were being developed at Treasury for cryptocurrencies, which he cited as “a major threat”, but then nothing happened. The crypto industry has created its own lobbying force to try to insure that nothing does happen. There is even a bi-partisan “Blockchain Caucus” in the House of Representatives, whose website says “we believe in the future of blockchain technology” and “as a Caucus, we have decided on a hands-off regulatory approach, believing that this technology will best evolve the same way the internet did; on its own.” In May, Treasury announced that any crypto transfers greater that $10,000 would have to be reported to the IRS, adding that “cryptocurrency already poses a significant detection problem by facilitating illegal activity broadly including tax evasion.” It was unclear, however, how this could be enforced. China has also called for a crackdown on cryptocurrency trading and mining. 

As if all this weren’t enough, it turns out that “mining”–the computer processes that create and manage the blockchains that are the essential element of cryptocurrency trading–is a huge environmental threat because of the enormous amounts of electrical power that it requires. According to one study, the energy expended on this worldwide already equals the entire energy consumption of Sweden or Argentina. Moreover, powerplants are being put online specifically to power mining, which increasingly is being done by largescale “mining rig” farms rather than the decentralized individual computers of crypto mythology. About 70 percent of mining takes place in China.

There is a TV series now trending on Netflix called “Start Up“, which coincidentally takes place in Miami and involves a bitcoin-like cryptocurrency created by a brilliant young Cuban-American woman and the efforts taken by her and her associates to find the capital to realize it as a successful business venture regardless of what it takes. Without being too much of a spoiler, let’s just say that it doesn’t end well. But, of course, that’s fiction. In real life, she’d have the backing of the Mayor, and her company’s name would be going up on the Miami Heat’s downtown arena. Right?