Fact-check: techy letter to congress on crypto-assets
They "urge you to consider our objective and independent expert judgments"
Concerned techies penned a letter to congress hostile to “crypto-assets”. I thought I’d do a little faction checking.
Neither objective nor expert
The techies claim their “expert judgments” are “objective”. This is obviously a lie.
It’s obviously politically biased. It’s a mindless repetition of left-wing orthodoxy, indistinguishable from the political criticisms levied by non-experts. If their expertise advises their judgements, I see no evidence in this piece. The errors describe here suggest expertise isn’t involved (see “externalities” below).
While many signers of the letter are experts in their fields, none seem to be experts in the topics they are discussing. Being a cryptographer doesn’t make you an expert in finance, law, or economics, which are the bulk of the criticisms. In the one claim that is actually in their bailiwick (“reversible transactions”), they are wrong (see below).
Not really independent
These techies claim to be independent, and their opponents have “a financial stake in the crypto-asset industry”.
This is cynicism. Obviously, if you believe in crypto-assets, you are likely to acquire some. It’s like criticizing Al Gore for his investments in carbon-credit companies, that his whole Global Warming spiel is just an attempt to profit by them. It’s likely the opposite is true, that Gore’s sincere concern over climate chain makes him invest in solutions.
Many criticizing cryptocurrencies have vested interests in doing so. Some signatories of the letter have fame derived from opposing cryptocurrencies. Others are obviously political, very much anti-libertarian.
Every orthodoxy has attacked heresies. It’s disingenuous for the orthodox to claim they are “independent” when their interests are very much in defending the status quo. It’s disingenuous to claim only the heretics have been corrupted, only the heretics who have bias.
Note: I have Bitcoin and Ether, but they represent less than 1% of my net worth. I don’t have any great stake in either direction.
The only reliable object expert judgments you are going to get is when seek out such experts and pay them to analyze the situation. The ones writing letters to you are biased activists hoping to achieve a political goal. Objective political activists writing letters to congress are an oxymoron.
“Blockchain technology cannot, and will not, have transaction reversal mechanisms”
This is the only claim in the letter that’s within the techies own field of expertise. It’s false.
Blockchains are certainly hostile to fraud protection and reversible transactions (as the letter says, “antithetical to its base design”). This is clear from Satoshi’s whitepaper on Bitcoin: fraud protection has a cost that prevents some types of transactions.
It’s also true that the transaction record can’t be reversed: once on the blockchain, it’s always on the blockchain. But this doesn’t stop new records from being added that’ll reverse the transaction.
There are many smart contracts on the Ethereum where there’s a third-party to the contract who can reverse them. It’s one of the exciting things about smart contracts, that you can select exactly the sorts of terms you want for transactions, fraud control if you want (controlled by an entity you trust), or no reversibility if that’s what you want instead. It’s optional for some transactions rather than imposed unwillingly upon you for all transactions.
“disaster for financial privacy” and “gift to money-launderers”
The letter makes two claims in the same sentence, that there’s not enough anonymity and too much anonymity. These are contradictory claims, and neither is true.
The truth is that privacy is simply different, sometimes better, sometimes worse. The criticism is only that it’s not the same as the status quo, and therefore bad.
Money-launderers are quick to exploit any change, so it’s true that money-launderers have leveraged the technology. On the other hand, blockchain money-launderers also keep getting caught, because law enforcement is also quick to adapt to change.
Most of the blockchain technologies are only pseudonymous instead of anonymous, meaning transactions can be traced with those who put enough effort into it (e.g. law enforcement). The exception to this is known as ZCash, which offers perfect anonymity. This appears to be “game over”, allowing perfectly untraceable money-laundering.
Even here, it doesn’t offer perfect laundering. All “currencies” are just accounting, tracking transactions in the real-world. When you transfer $1-million out of the ZCash blockchain into the real-world, the feds are still going to know, even if they can’t trace where that $1-million came from.
Perfect money laundering already exists in the fine art world. Just wait for some the NYC Met hosting some obscure artist, then go buy up all their art work really cheap, then sell the art work at obscene multimillion dollar prices — to buyers who owe you millions in illicit drug profits. This is what critics worry about for “NFTs” on the blockchain, but it’s a technique simply copied from the real-world, and actually nothing special to the technology.
Blockchain causes change. This forces other change. It doesn’t mean things are bad. It just means the status quo no longer holds.
“Financial technologies that serve the public must always have mechanisms for fraud mitigation”
No, they really don’t.
When my niece studied in Canada, I went online to buy her school supplies from a local Canadian company. They wouldn’t accept my credit card, because of fraud mitigation. But they did accept my Bitcoin.
In this case, I didn’t want fraud mitigation.
The same thing happens in the real-world. Merchants will sometimes accept only cash because they aren’t willing to deal with the fraud mitigation features of credit cards.
Bitcoin “technologies” is simply the manifestation online of features we expect from offline transaction. (My arguments here may not be so strong, however, since there is a war on cash in much the same way there is a war on Bitcoin, it’s too anonymous, allows money laundering, and isn’t reversible).
Note the use of “public interest” here. It doesn’t mean in your own personal interest, but the public’s interest. It’s an expression of the political orthodoxy, that public interests trump personal interests. Bitcoin should be repressed because public interest, even though individual members of the public clamor for it.
Poorly suited for just about every purpose currently touted
Well, I suppose this is technically true, since there is a rabid pro-blockchain crowd that touts it as the solution for every problem.
But there are serious people who tout it for specific purposes, such as those described in Satoshi’s whitepaper. In this case, it works really, really well.
Their letter is just mixing the crazies with the sane and pretending they are all the same.
Blockchain technologies facilitate few, if any, real-economy uses
Of course it does. It’s just that you have a narrow definition of what you assume are legitimate real-economy uses.
Most people have an idea of “real-economy” uses, such as buying things at the grocery story, or buying a house. These are a tiny percentage of transactions.
Take bank transfers like SWIFT, CHIP, and Fedwire, which transfer quadrillions of dollars per year. Every few days, enough dollars are transferred between financial institutions to equal the yearly GDP of the entire country.
From the average person’s perspective, this is all witchcraft, and probably a system that’s exploiting them. Bankers aren’t well liked.
The same is true with cryptocurrencies. Outsiders don’t understand it and thus hate it. It’s evil witchcraft that can’t possibly be any good.
But just because they aren’t interests you understand, it doesn’t mean they aren’t legitimate.
There are refugees fleeing the war in Ukraine with nothing but the clothes on their back and a memorized 12 word passphrase. The Russian guards steal any valuables they take with them. It’s a real “real-economy” use case that those in privileged, peaceful countries don’t understand.
When capricious government leaders in Venezuela and Sri Lanka bankrupted their economies, Bitcoin and foreign dollars underneath their mattresses were the only wealth they had left. Those in privileged countries, whose main worry is a slight uptick in inflation, can’t relate.
People around the world have real needs for the value that cryptocurrencies provide — but they may not be anything that you particularly want. That doesn’t mean they are bad.
Crypto-assets have been the vehicle for unsound and highly volatile speculative investment schemes
True!
Not every criticism they have in their letter is false.
But it’s not a flaw in the technology, and not something that takes techy “experts” to point out. Crypto-assets are ponzi schemes where the only profits are to be had by finding a bigger fool to buy them, and any non-techy can see this.
Cryptocurrencies have a “use value”. There are reasons to use them, for payments or for storing value, where the goal isn’t to “make money” from them by hoping their value goes up. The make-money-fast people are certainly a pox on the market, but just because there are so many of them doesn’t mean the technology itself is bad.
Externalities like money laundering
The paper lists a number of externalities, like money laundering.
This is not what the word “externality” means. Facilitating money laundering may be bad, but it’s not an externality.
The term “externality” was coined by economists to mean a very specific thing, with pollution (including carbon emissions) being the best example. But it means only those specific things.
In the anti-Bitcoin orthodox rhetoric, though, “externality” has come to mean a long litany of politically things they don’t like.
The fact they misuse the word isn’t really worth fact checking, but this does go to disprove the claim that they are unbiased experts giving their expert judgements. This misuse of the term shows they don’t have expertise in economics. That “externalities” includes “money laundering” is frequently repeated in the body of anti-Bitcoin criticisms — it’s more of a meme they are repeating rather than some concept they came up with themselves based on their expetise.
Bitcoin’s catastrophic carbon emissions
The carbon emissions associated with Bitcoin certainly are an externality (using that word correctly this time) and worth looking at. Bitcoin mining consumes around 100-terawatt-hours per year.
How much energy is this? Some compare it to entire countries, like Denmark, to make it look really bad. But there are other measurements.
Bitcoin energy consumption roughly equals the worldwide energy consumptions of clothes dryers, which is around 70-terawatt-hours per year in the US alone.
One carbon emission is wicked, a catastrophe that will destroy the planet. The other is a virtuous use which is subsidized by the government, after all, poor people need help paying for their electric clothes dryers.
If carbon emissions are bad (and they are), then the logical government policy is to tax them, to discourage all use, regardless of politically favored emissions. Instead, government policy is to label some as virtuous and others wicked. This leads to Germany promoting “brown coal” (the worst polluting kind) and discouraging nuclear power. In America, it means imposing costly efficiency mandates on small cars, pushing buyers toward subsidized large truck.
I don’t know if you’ve noticed how freakin’ huge trucks have become in America, but it’s largely due to government policies that subsidize gasoline while simultaneously pushing expensive efficiency mandates on the smaller vehicles.
Yes, yes, Bitcoin’s carbon emissions are huge, but it’s just exploiting crazy government policies. Just start taxing carbon emissions and the problem will solve itself. They aren’t a reason to crack down on Bitcoin unless you are first willing to crack down on consumers destroying the environment by fast drying their clothes (which will dry slowly anyway without destroying the environment).
Conclusion
It’s a rather silly letter, with “experts” claiming to be making their “objective judgments”. It’s a political screed, the opposite of objective, with no expertise in evidence. I’m just as much an expert in the field as they and I see no “expert judgements” in the letter — except the one judgement they got wrong (reversibility).
There are problems worth criticism. You should listen to financial experts who point out that the only way to profit from NFTs and other “crypto-assets” is through the Ponzi effect of finding new investors. You should stop listening to big Wall Street companies dipping their toes into the market searching for ways they can make money off of innocent investors.
But there’s no real technical reason to suppress the technology itself. There are a lot of good people who want to get value from it, who aren’t trying to make-money-fast. Any techy who claims their object technical judgments say otherwise is lying.