Much Ado on the Crypto Front - September 11, 2022

There has been little news on crypto in a while, followed by a flourish of activity this week. Let me get you up to speed. 

Perhaps least significant is one of the largest seizures of stolen crypto was orchestrated by the FBI and others. Hackers linked to North Korea had stolen about half a billion dollars worth of ether and stablecoins from Sky Mavis, a game publisher, that used a blockchain ledger to run one of its games. The only reason that authorities were able to seize less than ten percent of the money stolen, about $30 million, was that the thieves tried to convert part of their loot to traditional cash. 

The authorities can track movements to some degree, but until those movements reach an institution for which investigators have some control, all they can do is sit and watch. In this case, the thieves tried to convert back to cash at Binance, a crypto security exchange, among others. If these exchanges are in nations where authorities have jurisdiction, they can then sweep in to seize funds. 

The issue of jurisdiction is also in the news this week. You may be wondering why the crypto industry invests so heavily into advertisements and article placements about all the wonderful things crypto. It is essential for them to subscribe millions to vest in crypto to form a chorus of support for the industry as well. It does not hurt that such interest also bolsters profits for crypto speculators as well. This industry does not produce a tangible product, and is not even the equivalent to other assets to which they often compare themselves, such as gold, with its myriad alternate uses beyond speculation. Crypto rises when more people buy it, and falls when they don’t.

That is not to say there may never be an intrinsic value in crypto. The second largest coin, ether, is completing its conversion to something called Proof of Stake mining this upcoming week, and, with that, they will be able to offer a vehicle that is amenable to all sorts of innovative financial products, and with a thousandth of the energy burden they imposed when using Proof of Work. 

These innovations could well add to a percent or two of economic efficiency some day. While such a facilitation of streamlining of micro loans, trading of securities, perhaps even purchases of tickets or titles to goods and services, will improve efficiency, and may lower transactions costs, especially once the costly Proof of Work authentication method is abandoned, will save the economy some money, these improvements are more evolutionary than revolutionary. They certainly do not justify the huge price runups and market valuation in the crypto world. 

What the lobbying efforts, political donations, and advertising is really designed to do is allow the crypto industry to pick its poison. Regulation of this fast-moving industry has been woefully slow and inadequate. The Securities and Exchange Commission had stated they believe crypto should be regulated by the SEC because the way crypto is hawked and shilled, it appears like an investment scheme, some might even say a Ponzi scheme, at times. SEC regulations are designed precisely to protect consumers and investors from such schemes. 

In fact, also this week, Joshua David Nicholas, the head trader of EmpiresX, a cryptocurrency platform based in Florida, pleaded guilty to conspiracy to commit securities fraud based on allegations that he raised $100 million in a Ponzi scheme.

An alternate regulator, called the Commodity Futures Trading Commission, oversees trading in gold, options, and the like. It regulates with a much lighter touch because the philosophy Phil Gramm had with dealing with companies such as Enron and its energy futures business was that these were experts and they know what they are doing, of course until they don’t. We all live with the aftermath of the Enron collapse to this day. 

This week, the SEC chair, Gary Gensler capitulated and said he would be willing to support CFTCs oversight of crypto. All the lobbying by the crypto industry of politicians to pass legislation mandating CFTC regulation of crypto has apparently paid off. 

The White House is also entering into the act. Its Science and Technology office this week produced a report that is highly critical of the vast energy consumption and environmental damage caused by Proof of Work mining, which, after ether’s conversion, essentially means Bitcoin mining at this point. 

The White House office noted that the United States has subscribed to carbon dioxide reduction goals that are frustrated by the incredible energy intensity of Proof of Work mining. The office was not critical of crypto, just Proof of Work mining, which, as mentioned before, applies essentially to one remaining coin that is unwilling to abandon its energy intensive technology in favor of other perfectly workable technologies that don’t have the carbon footprint. 

The office noted that crypto mining uses as much energy as nations such as Australia. The sector represents a similar amount of power that fuels all the world’s data centers, but without the benefits to society, nor the responsibility to recycle waste heat that data centers sometimes have because of their longer term outlook and their sense of social responsibility. 

The office also noted that, while energy usage in the sector approaches almost 1% of global electricity consumption, the intensity in the United States almost double that ratio, given the US has become the worldwide haven for miners tossed out of other nations. The industry also contributes about 140 million metric tonnes of carbon dioxide per year. 

They recommend that the EPA play a bigger role in promulgating industry emissions standards and in minimizing other forms of pollution, such as water and noise. They add that the crypto industry ought to be more transparent in their operations, locations, energy usage, and waste recycling. This transparency is difficult for an industry that often maintains a culture of suspicion and mistrust of government and knows local communities are often opposed to operations once they find out the true implications. 

This week has also been interesting in a surprising front. Texas and the West have been enduring a heat wave that has stressed their electric grids to the max and have even been forced to suffer blackouts and brownouts. Proof of Work miners have discovered a new revenue source. They have been earning millions of dollars for doing nothing. They are paid handsomely to turn off their mines. In turn, they are not only compensated lucratively for their participation in such voluntary programs, but they then claim that makes them generous environmental and social stewards. Of course, society would not need to pay them to turn of their machines had their machines not been installed in the first place. 

Of course, there is much work left to do to recover the tens of billions of dollars stolen or held ransom in crypto, the need to protect consumers and investors from an industry that has managed to now to avoid the rules that all others must live by, and figure out how to induce a novel and potentially useful long term industry to behave in ways that address our concerns for the environment and future generations, in a transparent and sincere way. It is clear, though, that the industry has the power to profoundly influence and direct our politicians. Perhaps they have been successful in the United States more than any other nation, given the dramatic transfer of mining from elsewhere to New York State, Texas, and elsewhere.