There’s a lot to be gained by taking a balanced view of the opportunities and risks of blockchain technology, writes Simon Mackenzie. Here he explains how it’s much more than just gambling on Bitcoin’s price volatility.
Opinion: Hang on a minute, I think I’ve just been called a charlatan and a climate criminal.
The Government’s Finance and Expenditure Committee is holding an inquiry into the “current and future nature, impact and risk of cryptocurrencies”. A lot of the submissions are supportive of crypto, but some of them lay into the whole scene, saying it serves no legitimate purpose, burns fossil fuels, and is basically just a money highway for criminals.
I have been following developments in cryptocurrency since 2018, initially just out of interest as a hobby and latterly as part of a research project for my job.
I spend many enjoyable hours discovering the latest technological developments and marvelling at the astonishing intellects of the world-leading mathematicians and techno-scientists who are developing leading blockchain projects. I also find that the social and philosophical implications of this worldwide movement make it about much more than just dull economics.
Cryptocurrency raises big issues. Energy consumption is one. Many of the projects are proactively working to reduce that with new technological arrangements.
Economic questions are raised about the democratisation of banking. Some people find this an attractive prospect, insofar as it suggests a dilution in the power of the oligopoly of banks to make billions from services that cost them so much less to provide than what they eventually charge us.
Other key issues include decentralisation and trustlessness. Cryptocurrencies aim to be decentralised networks, where no one person is really running things. This can add a resilience to financial and other networks that make them close to indestructible: there is no single point of failure.
And trustlessness is the idea that the architecture of a financial network doesn’t require you to trust anyone involved: another resilient property of the best-designed blockchain networks. The trust is taken care of by the technology, which aims to make it impossible for anyone to cheat, lie, or generally steal your money in the sorts of ways that your fraudulent accountant or other dubious financial agent might.
It’s not all wine and roses of course. My research area is white-collar crime and, as I explained in my recent public lecture at Te Herenga Waka–Victoria University of Wellington, there is certainly a lot of that in crypto. It’s a developing field, and regulation is playing catch-up.
So predictably there are fraudsters, and we find many of the same old scams that have long plagued the conventional world of finance: pump and dumps, rug pulls (exit scams), Ponzi schemes and more.
The trustlessness part of crypto doesn’t always seem to work so well right now. This is not usually a tech failure. Mostly it’s because there are still humans involved.
Some fraudsters programme crypto-tokens so that you can buy them but you can’t sell them. You can kiss goodbye to your investment if you are unfortunate enough to fall into that trap.
Exit scammers can design a new project, keep the majority of the tokens for themselves, and then sell these off in bulk shortly after launch. This is a hugely profitable exercise for them that also dumps the price and kills the project, ripping off the early investors whose tokens are then worth nothing.
Many people have rhetorically accused Bitcoin of being a Ponzi scheme over the years, but some cryptocurrencies are actually set up using the logic of the Ponzi scheme.
These take a ‘tax’ from new purchasers by way of a cut of the tokens they buy and ‘reflect’ them back to existing token holders. There is often no project behind these token schemes besides an ambition to recruit new members to the ‘community’ of holders. It’s enough to make Bernie Madoff proud.
Importantly, most of these scams are pretty old routines and they aren’t created by a nefarious technology. It’s not the cryptocurrency that’s criminal, it’s the con artists who aim to use it as a platform to clip your ticket, and the money launderers who use whatever means they can to wash their dirty cash. The technology itself is visionary, and it’s here to stay.
So I’m happy that the Government is up for investigating further, and I’m sure that the process will help further identify and define the benefits of a new, exciting economic and cultural scene, as well as the many risks involved.
We need to have a good sensible national conversation about what is actually happening in crypto, and how Kiwis can safely explore the space if they want to. Blockchain is much more than just gambling on Bitcoin’s price volatility.
New Zealand entrepreneurs have already built a number of very cool and interesting community-minded projects involving blockchain technology. There’s a lot to be gained by taking a balanced view of the landscape of opportunity and risk here.
Professor Simon Mackenzie’s research is funded by the European Research Council under the Horizon 2020 research and innovation programme.