Article

• Jurisdiction: United States,Federal
• Citation: Vol. 36 No. 1 Pg. 18
• Pages: 18
• Publication year: 2023

Article Vol. 36 No. 1 Pg. 18 Utah Bar Journal January, 2023

January, 2023

Cryptocurrency - Cryptoscam - Why Regulation, Deposit Insurance, and Stability Matter

by George Sutton

Cryptocurrency has stirred more than its fair share of controversy and confusion. It starts with calling it "cryptocurrency," which really means "crypto money." Both terms are misleading because it isn't money except as used by some criminals to conceal their identity and prevent tracking their money. Some advisors have stopped using the term "crypto" and "currency" and now call these things a "digital asset." But cryptomoney isn't an asset as that term is commonly understood. It is bits of otherwise worthless software called "tokens" that generate no income of their own and have no real purpose other than being traded by investors in the hope that they become a fad.

The lack of regulation allows promoters to attract investors with a lot of ridiculous hype and misinformation. Trading has thus far produced some big short-term profits for promoters and early investors, but it is usually followed by big losses that lately have increased into what is called "crypto winter." Some losses resulted from the failure of several poorly or dishonestly run exchanges and businesses that held the tokens or served the market in other ways. Selling these tokens is often called a Ponzi or pyramid scheme because new investors are the only source of new money to bid up prices and earn profits for the promoters. How this can be happening baffles most traditional investors.

The Rhetoric

Many prominent financial experts haven't held back in their criticisms. Warren Buffett, Berkshire Hathaway chairman, recently called Bitcoin, the leading cryptomoney token, "rat poison squared."^[1] Charlie Munger, Berkshire Hathaway's vice chairman, said Bitcoin is "stupid and evil" and has compared it to a venereal disease.^[2] Bill Gates describes cryptomoney as "an asset class that's 100% based on some sort of Greater Fool Theory."^[3] While testifying before Congress in September, Jamie Dimon, the CEO of JPMorgan Chase, called cryptomoney "decentralized Ponzi schemes, and the notion that it's good for anybody is unbelievable."^[4] In July 2022, Paul Krugman, a New York Times columnist and Nobel Prize winning economist, said Bitcoin is "a postmodern pyramid scheme" and "[t]he [crypto investment] industry lure[s] investors in with a combination of technobabble and libertarian derp."^[5]

On June 3, 2022, the Federal Trade Commission reported a crime wave infesting cryptomoney markets, stating:

Since the start of 2021, more than 46,000 people have reported losing over $1 billion in crypto to scams - that's about one out of every four dollars reported lost, more than any other payment method ... . $575 million of all crypto fraud losses reported to the FTC were about bogus investment opportunities, far more than any other fraud type.^[6]

Additional fraud losses have been reported in several crypto companies with recent reports finding total worldwide crypto fraud losses during the first half of 2022 are nearly $1.9 billion.^[7] Krugman points out that the fraud losses only cover criminal acts and don't include the many investments in worthless tokens and companies.^[8] An example is the crypto "bank," Celsius Networks, which recently filed for bankruptcy owing 1.7 million customers $4.7 billion.^[9] In August, the Treasury Department sanctioned Tornado Cash - a system that conceals the identity of parties in cryptomoney transactions -for laundering $7 billion, including money stolen by North Korean hackers to help fund North Korea's nuclear program.^[10]

GEORGE SUTTON recently retired after a forty-five year career that included being Utah Commissioner of Financial Institutions and a shareholder at Jones Waldo.

Promoters insist tokens are not securities, but Gary Gensler, the chairman of the U.S. Securities and Exchange Commission (SEC), stated:

most crypto tokens involve a group of entrepreneurs raising money from the public in anticipation of profits - the hallmark of an investment contract or a security under our jurisdiction. Some, probably only a few, are like digital gold; they may not be securities. Even fewer, if any, are actually operating like money.^[11]

If a court ever agreed that tokens are securities, the current markets could be largely wiped out overnight for failing to register and provide required disclosures.

The U.S. Labor Department, which oversees management of retirement accounts, said it has "grave concerns" about investing retirement funds in anything crypto and warned administrators about the risk of breach of fiduciary duty if they do.^[12]

A surprisingly large number of investors disagree or ignore these warnings.

Libertarian ideologues and anarchists are among cryptomoney's biggest promoters. They say it is created only by those who use it, and only they control it, which to them is freedom. Peter Thiel, PayPal co-founder, billionaire fintech investor, and self-described libertarian, has promoted cryptomoney since the 1990s. Thiel predicts cryptomoney will inevitably replace government issued money, which is commonly referred to as "fiat" money. Thiel also describes Bitcoin as "like bars of gold in a vault that never move, and it's a sort of hedge .. against the whole world .. falling apart."^[13] Thiel sees Bitcoin's rise in value as an indication that the central banks such as the Federal Reserve are bankrupt, and "we're at the end of the fiat money regime."^[14] Thiel has stated that cryptomoney will become "something where you have a choice between different currencies, and the choice is not left to the sovereign but to the individual, and in a sense, the individual becomes sovereign and is able to make choices regarding which currency they want to take."^[15]

Nick Black, an alternative asset specialist blogging at Money Morning, is another cryptomoney evangelist who is part of the movement to privatize all finance. Black responded to critics like Krugman by saying they don't understand that:

a good chunk of the population is completely mistrustful of the system of fat cats and plutocrats who, since forever, have been telling us where, how, and in what form we get to hold value ... . I certainly don't trust unelected government "economists" to manage the value of the "currency units" in my bank account. ... The big, central proposition - the bet - with Bitcoin and cryptocurrency as a whole is [that] the algorithmic integrity it provides us with is worth more than the lack of integrity of government policymakers. That's a bet I'll take all day, every day.^[16]

These libertarian fiscal ideologues are a fringe group. If it was just them, crypto tokens would barely exist. The broader crypto market, which is surprisingly large, mostly consists of investors hoping to profit as the price of tokens are bid up by new investors. Many hear the hype that Bitcoin and other coins are the money of the future, and some may believe it, but most don't much care. They invest for fun and profit and the geeks among them get to do lots of computer stuff like mining for Bitcoins. A virtual world, metaverse, video game vibe is unmistakable in this part of the market.

The Reality - Cryptomoney is Not Money

Bitcoin was first introduced in 2009, but it has not even started to catch on as money anywhere except in ransomware extortion. There is a growing realization it is all hype and no currency. Black acknowledged:

Bitcoin isn't the money of the future because Bitcoin isn't money . ... If you look at the structure of Bitcoin, it becomes pretty clear that it's just not cut out to be a currency. "But Nick," I...