In “Easy Money,” crypto’s central premise is put to the test

Cryptocurrency has had a rough time in the past year or so. The value of bitcoin has fallen to less than half its peak of $65,000 back in the fall of 2021, and former FTX CEO Sam Bankman-Fried is facing criminal charges over his role in the meltdown of the prominent crypto exchange. Yet as the crypto industry tries to move past what some are calling a crypto winter, skeptics are questioning its very premise: Is it even possible to realize the promise of a “decentralized” currency? Is crypto, as an idea, flawed?

“These cryptocurrencies are not currencies, economically speaking, because they don’t do what money does,” actor and writer Ben McKenzie said in an interview with “Marketplace” host Kai Ryssdal. “Money, ultimately is trust. Cryptocurrency famously says, ‘Oh, we can replace that. Crypto can be a trustless form of money where all you have to do is trust the code.’ But code does not fall from the sky.”

McKenzie, along with his collaborator, Jacob Silverman, investigated the crypto industry writ large in their new book, “Easy Money: Cryptocurrency, Casino Capitalism, and the Golden Age of Fraud.” What they found was a sector prone to both speculation and fraud.

In the following excerpt, McKenzie (who possesses a 20-something-year-old economics degree) takes a closer look at the “currency” bit of “cryptocurrency.”

The first problem I had with cryptocurrency was the word. They were using the wrong one.

In economics, currencies do things: They are a medium of exchange, a unit of account, and a store of value. Medium of exchange means you use it to buy and sell stuff. Most people, if pressed, will define money this way: You buy shit with it. If we didn’t have money, we’d have to rely on bartering for the things we need. As an actor/performer, I’d literally be singing for my supper, which, if you have ever heard me sing, would be a terrible idea. Money simplifies things, creating a quantifiable system of IOUs we Americans call dollars. Unit of account is a way of measuring the market value of goods, services, and other transactions against each other. A stable currency allows an economy to function efficiently; businesses can run their books and monitor their performance over time. The last function of money—store of value—is exactly that: something that holds its value over time. A strong currency has a relatively steady value over time. What good is a dollar if one day my deli bagel costs $1.50, the next $10, and the next $5? I’d rather skip breakfast. The more a currency fluctuates in value, the less useful it is to the public, to businesses, and to the government that issues it.

Cryptocurrencies didn’t do any of these things well. You couldn’t buy stuff with them—the guys at my deli would look at me like I was nuts if I tried to pay for my bagel and coffee in Bitcoin. Advocates say this is a temporary problem; if more people would just buy Bitcoin, eventually it will become a currency you can actually use. That’s wrong for many reasons, but I’ll focus on the simplest one for now: The technology behind Bitcoin sucks. It doesn’t scale. Satoshi’s solution to the double spend problem was innovative, but also clunky. The more miners who entered the competition the more energy was used, but the blocks were the same. Bitcoin is able to handle only five to seven transactions a second; it can never go above that. Visa can process 24,000. To operate, Bitcoin uses an enormous amount of energy, the equivalent in 2021 of Argentina—the entire country. Visa and Mastercard use comparatively minuscule amounts of electricity to serve a customer base orders of magnitude greater. Bitcoin’s energy consumption is enormously wasteful, and poses a massive environmental problem for the supposedly cutting-edge technology (and really, for all of us).

When it came to the other two functions of money—store of value and unit of account—Bitcoin also fails miserably. The price jumps up and down like a rabbit on amphetamines, making it impossible to run a business using Bitcoin (or any other crypto) or hold on to it for any period of time with reasonable confidence it would retain its value. Could you use a cryptocurrency as a rudimentary form of money? I mean, sure. You could call a brick a soccer ball, but I wouldn’t recommend using it that way.

So if cryptocurrencies weren’t currencies, then what were they? How do they actually work in the real world? Well, you put real money into them and hope to make real money off of them through no work of your own. Under American law, that’s an investment contract. More precisely, it’s a security.

Thanks to a 1946 Supreme Court decision, securities are often defined by what’s called the Howey Test. The test has four prongs: (1) an investment of money, (2) in a common enterprise, (3) with the expectation of profit, (4) to be derived from the efforts of others. Check, check, check, and check. Although Bitcoin had somehow come to be classified as a commodity, it was blindingly clear to me that the 20,000 or so other cryptos ought to be classified as securities under American law, and yet they had not been, or at least not clearly enough to stop them from spreading like wildfire.

Prior to the 1930s we did not have federal securities laws in the United States. Securities were regulated at the state level under what were called blue-sky laws. They did not work very well. Fraud was commonplace; the stock markets in particular reflected a capitalistic free-for-all with little to no outside oversight. (Recall [John Maynard] Keynes and the origin of the term casino capitalism.) While everything was going up in price, no one seemed to mind. During the roaring twenties, millions of Americans were lured into booming markets with faulty foundations. It was a bubble, and like all bubbles it eventually burst. The stock market crash of 1929 destroyed the finances of multitudes and ultimately led to the Great Depression. In response to this devastation, and the manipulation and fraud in the markets that contributed to it, Congress passed federal securities laws in 1933 and 1934. In terms of protecting investors, the primary purpose of those laws was to require disclosure on behalf of the issuer; if you were investing money in a particular security, you needed to know what you were investing in (i.e., who you were giving your money to) and what they were doing with that money. Cryptocurrencies have no disclosure requirements, effectively by design; the pseudonymity of the blockchain conceals who owns what. Much like the 1920s, this left the door wide open for deception and scams.

Staring in disbelief at the crypto markets in the spring of 2021, I came to a terrifying conclusion: Slightly less than a century after the crash of 1929, we had come full circle. There were now potentially 20,000 unregistered, unlicensed securities—more than all the publicly listed securities in the major US stock markets—for sale to the general public. Worse, these unregistered, unlicensed securities were primarily traded on crypto exchanges, which often served multiple market functions and, therefore, had massive conflicts of interest. And perhaps most disturbing, most of the volume in crypto ran through overseas exchanges. Rather than being registered in the United States, they were often run through shell corporations in the Caribbean, apparently to avoid falling under any particular regulatory jurisdiction. Private entities were essentially printing their own money and circulating it through offshore markets. In terms of propensity for fraud, what could be more appealing? Stepping back even further, what did these cryptocurrencies do? From where did their value derive? They were bizarre. Imagine a conventional security, such as a share of stock in the company Apple. Where does that stock get its value? Well, Apple makes stuff. (The iPhone is one year older than the Bitcoin white paper.) Apple sells that stuff—phones, computers, watches—as well as services, such as streaming music and video subscriptions. These sales produce a revenue stream—earnings over time that can be projected forward. When you buy a share of Apple, you are effectively buying a portion of the revenue stream, as well as the brand equity, market share, intellectual property—all of that. But cryptos don’t make stuff or do stuff. There are no goods or services produced. It’s air, pure securitized air.

Excerpted from the new book “Easy Money: Cryptocurrency, Casino Capitalism, and the Golden Age of Fraud” by Ben McKenzie with Jacob Silverman, published by Abrams Press. Text copyright © 2023 Benjamin Schenkkan.