One could not envision a more unusual political cycle, indeed anywhere around the world. This is the year of divisiveness, with few policies meant to unite us. 

Autocratic leaders have appealed to a small majority of voters in many European countries and in the largest democracy of them all, India. Self-professed right wing candidates are also garnering greater followings in places such as France, and in the United States. Canada too will soon face an election, and that nation may well go right as well, 

Two characteristics aptly describe profound shifts in democracies globally. 

The first is that the policies motivating voters are not those usually proffered in general elections. Until recently, those on the extreme left and right were moderated by the vast moderates in the middle. Now there seems to be no middle. We see scant attention and discussion over issues that affect us all - the economy, security, promotion of families, and attraction of migrants with the skills a nation needs or the willingness to work at jobs that few would tolerate. These have always been the bread-and-butter issues that caused the pundit James Carville to once utter “it’s the economy, stupid.”

Now, people argue not about what could be but about what may be taken away from them. We are retrenching to preserve the status quo in the face of change. Many wish to roll the clock back to the post-WWII era of a chicken in every pot, and an assurance that the people in your community mostly look and think like you. Politicians have seized that fear of loss to advance or consolidate political power. Ideology has been replaced by political opportunism. They have cultivated and amplified a fear among voters of a new economy they don’t understand - an economy that is global, high tech, and constantly changing. The new mantra is “you can’t take that away from me” instead of “what can we do together?”

Such fear-induced fault lines have divided us into two camps - pro life or pro choice, pro rule-of-life or suspicion of the legal system, pro-migration or fearful of immigrants, and, the subject of this week’s blog, pro-crypto freedom or pro-rational regulation of crypto. 

The crypto industry is an excellent example of the divisiveness that arise when profits are preserved through disinformation and division.

Crypto is actually a bit of a misnomer. The first popularized cryptocurrency, bitcoin, was designed to indelibly but transparently record transactions of the coin by recording the evolving ledger of transactions with a lock that is incredibly difficult to pick. But, unlike a password-protected zipped file that may make it almost impossible for someone to see your digital documents without access to its key, the ledger of bitcoin transactions is free for all to see. What we can’t see is who owns the accounts associated with the ledger that is updated about six times every hour with the most recent transactions. 

The crypto part is that only one of millions of “miners” churning away gets to indelibly record these transactions every ten minutes. The lucky machine inserts a random code and ledger into a file and runs the file through an algorithm called a hash routine that generates a unique code based on the contents of the file. If the unique hash code is sufficiently close to the random code the machine inserted, that machine wins a reward that is currently equal to 3.125 bitcoin. 

These miners compete for the prize which is currently worth about $200,000 and becomes more valuable if the price of bitcoin rises. This is a digital hunger games which only one machine can win every ten minutes. Just like people buy lottery tickets so they can hit the jackpot, and buy many more tickets when the jackpot grows, bitcoin miners ante up purchased electricity to fuel their machines that compete for the prize. 

The number of possible random codes and outputs from these hash functions is large, equal to 2 to the 256th power, a number rivaling the number of atoms in the universe. So, solving this little crypto puzzle is never perfect. Unlike a lottery when the prize is rolled over to the next drawing if there are no perfectly matching tickets, in cryptocurrencies the match must only be close enough so that there is, in the case of bitcoin, but one winner every ten minutes. 

Electricity is then the price of a chip to compete at the crypto casino. But, with so many miners competing for a $200,000 prize every ten minutes, with each consuming a few pennies of power, the chances of any one machine succeeding at the bitcoin mining roulette wheel is miniscule. Instead, miners pool many machines together so all share in the prize should any member of the pool win. 

Of course, if a miner claims they hit the jackpot by producing a hash code sufficiently close to the random code they invented, all the other losing miners will want to verify its claim. They will all run the ledger and code through their hash algorithm and, if at least half of the machines agree it is a match, the reward is paid out. Trust but verify. 

Such a verification takes less than a nanosecond to perform. This voting process ensures that no one can cheat, unless, of course, they happen to own or control more than half of the machines and can replace a true match with one of their own making to create fictitious transfers in their favor. Cheating would be very costly since a number of subsequent ledgers will audit a false result. One would have to own millions of miners and consume millions of dollars of electricity to try to perpetuate a fraud. 

The inventor of bitcoin, the iconic and ephemeral Satoshi Nakamoto (not his or her real name), recognized that this technique to record bitcoin transactions was democratic and hence safe but also inherently wasteful of electricity. However, in the early days of bitcoin, the reward to a successful miner was perhaps a few dollars. When this lottery prize rose to $50 every ten minutes, Satoshi and a collaborator named Hal Finney lamented that a constantly rising bitcoin price, and hence reward, would consume ever-more electricity and become environmentally unsustainable. 

This is the dividing line between pro-crypto and anti-crypto camps. One group is concerned that upwards of 2% to 3% of electricity in many countries now fuels machines that convert electricity to crypto codes and heat. That is inherently wasteful because exchanges between secretive accounts could just as easily be recorded in perpetuity by one highly secure server, just as transactions between bank accounts are recorded. Members of society appreciate the convenience of digital transactions and trust the institutions that have been the backbone of our financial system for centuries. 

Another camp is skeptical of existing financial institutions and is willing to divert huge amounts of electricity to such crypto casinos if they could bypass existing institutions and, in essence, support a shadow banking system free of possible government oversight. To bolster their case, they argue that such a shadow transaction system is safer and more innovative than traditional digital banking. 

The frauds and colossal losses in the crypto industry debunks the claim of financial safety. And, innovations have not materialized. There may come a day that we can record stock transactions, purchase airline tickets, and record property deeds in a crypto-protected digital ledger someday, but such innovations haven’t materialized. However, crypto is a great way to move money to defy global sanctions, launder cash, purchase illicit goods and services, and speculate on whether a coin will rise or fall. 

The dividing line is thus not one of safety or innovation. Ultimately, it is whether we trust a group such as the Federal Reserve or central banks to produce central bank digital currencies (CBDCs) and allow us the benefits of cheap and fast digital transactions that could replace conventional paper money or whether we harbor an inherent mistrust of current institutions and want to create an avenue for a private currency to replace our traditional dollar. 

Crypto is big money. Speculators make (and lose) large sums. Billions are transacted to evade international sanctions or purchase arms, illicit goods, or other items for which they’d prefer anonymity. The real big money can be found in these new exchanges that store digital wallets, manage transactions, or invent new crypto coins. These large and essentially unregulated financial institutions are the casinos of crypto. You participate at the crypto casino by purchasing their chips, and they will, in subtle ways, take a cut of all transactions. 

The difference is that gambling is almost a zero sum game. Beyond the house take of a few percent, winnings roughly equal losses. But, in the crypto casino, at least for bitcoin, these casinos that oversee and record the transactions use immense amounts of electricity as the cost of doing business. Crypto bros pass those costs off to those who buy their crypto and the rest of us forced to pay higher electricity costs as ratcheting up electricity demand exceeds supply. 

Most all cryptocurrencies recognized this inherent inefficiency and have abandoned the proof-of-work crypto lottery Satoshi designed. Bitcoin has refused to adopt another protocol called “proof-of-stake” that requires only a few highly redundant and monitored machines to record all the transactions. Only if a supermajority of bitcoin mining machine owners agreed to move to an electric-efficient protocol would such a transition to the superior protocol be possible. But, since these machine owners who operate the tables at the crypto casino would make redundant all but a handful of the tens of millions of miners running 24/7, such a vote to dismantle their industry is implausible. 

These crypto casino profits earn the crypto bros who mine bitcoin more than ten billion every year, even as they force ratepayers to dole out hundreds of millions for more expensive energy. The crypto industry have doled out a tiny fraction of their earnings to bend the ear of lawmakers willing to tolerate and protect their industry and ensure they need not endure the same sort of oversight regularly faced by other securities and investment opportunities. All the lobbying these profits can purchase makes incredibly difficult any reasonable discussion about whether our society can tolerate the crypto casino model but instead with crypto roulette wheels that are less wasteful than the myriad bitcoin miners churning out heat and coin 24/7. 

Common sense might suggest a compromise somewhere between the institution-skeptical and privacy-prizing crypto bros and those concerned about the high cost to the electric grid and environment from bitcoin mining when there exist efficient alternative mining technologies. Just as we tolerate gambling, with all its negative social aspects, in the interest of personal freedom, a middle ground might be to tolerate yet another social vice but only if it employs efficient machines without all the environmental baggage. 

But, in this divisive world, compromise is in short supply. Instead, we live in a winner-take-all world where those who can command a 51% majority can uncompromisingly impose their will on the 49%. Then, when the percentages change slightly, the pendulum shifts violently to the other winner-take-all extreme. Lobbyists and their political pawns expend and receive billions each year perpetuating the crypto status quo by fanning the divisiveness and disinformation we see in national debates. Given all the uncertainty surrounding U.S. elections this fall, the crypto industry is ratcheting up their lobbying and showering millions on those who will advocate for little or no crypto regulation or defeat candidates who call for the same sort of regulation that applies to all other industries and financial sectors.

Just as President Eisenhower lamented the military-industrial complex might fuel conflict to sell arms, lobbyists representing myriad profitable private interests are fomenting other arms races, in crypto, the guns industry, preservation of monopolies among doctors, sports leagues, and many other venues. Hundreds of political action committees are determined to vaunt the extremes at the expense of the vast common sense middle. The threat to democracy is the risk it is captured for the personal gain of the deepest pockets. And the stakes are highest when politicians and lobbyists can generate maximal fear, confusion, and disinformation among the electorate in an effort to preserve profound prosperity for a few. Fear and disinformation makes for a docile, confused, and controllable population.