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The Bitcoin Scam

Despite the utopian claims of its proponents, Bitcoin is a right-wing nightmare which facilitates tax evasion, money laundering and environmental degradation.

Neoliberalism is often held up these days as the primary ideological opponent of socialism. Similarly, the new fascist and nationalist movements arising in Europe, Asia, and the Americas are recognisable foes. But often forgotten in these discussions are another tendency of right-wingers whose politics have come to prominence in the internet age: libertarians or anarcho-capitalists who believe that the state should be abolished and replaced with a world of pure property rights.

For much of its existence this ideology was relegated to subcultures and the political fringe. But, in 2009, it had a major breakthrough: bitcoin, the original cryptocurrency. Bitcoin is a digital cash or commodity system whose adherents promise an escape from banking surveillance, fiat currency, inflationary monetary policy, and taxation. It is exchanged peer-to-peer without traditional intermediaries, like banks and governments, that process and guarantee transactions.

Like all cryptocurrencies, bitcoin is rooted in a database technology known as ‘blockchain’. A blockchain is a digital ledger, or list, with participants in the network all maintaining their own copy — a shared or distributed ledger. To make a transaction, everyone with a copy of the ledger must agree to the legitimacy of the transfer. This is known as ‘distributed consensus’ and it replaces the role of the bank by making everyone, collectively, the bank.

Cryptocurrency and blockchain advocates will talk enthusiastically about the political impact of these technologies, and the problems they aim to solve. Central banks are actively reducing the value of savings and income through the pursuit of inflationary monetary policy, some will say. Cryptocurrencies, meanwhile, offer ordinary people a chance to escape into monetary sovereignty — into a ‘stateless’ world where their wealth is managed not by venal banks or governments, but by mathematics. For others, they represent the rebirth of the gold standard and will serve as a reliable store of value and a future currency system when the inevitable collapse of the global financial system occurs.

Bitcoin launched in 2009 when the despair of the last global crash provided the perfect context for the growth of subversive financial technology that aimed to upturn the old order. But, while this might be the narrative, bitcoin in reality does no such thing. What began as a utopian project of monetary secessionism has, for the last few years, been shifting ever closer to the worlds of politics and finance — the realms its early adopters argued they were escaping.

Shady Dealings

Fast forward to 2019, and you’ll find a maturing crypto lobby seeking legitimation through parliament. Instead of issuing calls to close the Bank of England, they’re sending MPs emails explaining that the ‘volatility of digital currencies has fallen considerably over time’ and that ‘appropriate regulation’ is welcomed. Digital currencies are faster, safer, and more inclusive than traditional currencies, we’re frequently told. Blockchain technology will harmonise and secure NHS records, facilitate EU-UK trade after Brexit, and eliminate tax fraud.

How did this happen? Quite simply, people realised that cryptocurrencies are particularly good for facilitating illicit capital flows across and within borders. Look to the last five years of cryptocurrency trading and you’ll uncover a smorgasbord of grifting, scamming, and grey-market trading. Regulators and accountants across the world are constantly reminding people that digital assets are taxable assets. Unregulated cryptocurrency exchanges are frequently exposed as audacious scams. Offshore tax havens, like the British Virgin Islands, are widely reported to have scurried away massive quantities of crypto assets.

As well as all this, the energy use for processing cryptocurrency transactions surpasses the electricity consumption of medium-sized nations. Unable to withstand the extraordinary hype, large institutional players jumped on the bandwagon and, ultimately, a futures market emerged allowing investors to hedge against price fluctuations. By this point, any suggestion that cryptocurrencies are anything other than instruments of dark finance capital becomes frankly laughable.

Bitcoin has become an asset bubble and, like all asset bubbles, it inevitably burst, reaching a peak of $20,000 for a single bitcoin before a spectacular plunge in value in December 2017 from which it has never really recovered (it is trading at $3,800 at the time of writing). In fact, 2017 wasn’t even the first bubble. It had peaked and plunged for the first time in 2011.

In 2014 Mt. Gox, an unregulated cryptocurrency exchange which at one time was handling over 70 per cent of bitcoin trades worldwide, collapsed as it didn’t have the bitcoins to cover its trades. It took millions of dollars with it. Meanwhile, high yield investment programmes offer unbelievable returns, but also have a tendency to be Ponzi schemes — with one, Bitcoin Savings & Trust, spectacularly going bankrupt in 2012 after offering interest rates of 7 per cent per week.

Broader Impact

But financial irregularities are not the only reason why bitcoin is a social disaster. ‘Mining’ is probably even worse. This is the process by which new transaction records are added to bitcoin’s distributed ledger, and happens once every ten minutes. When a bitcoin is spent, the details of the transaction are compiled with other trades into a ‘block’ which is then subject to a competitive computational process undertaken between rival miners. The first miner that succeeds in completing a demanding mathematical puzzle is rewarded in newly minted bitcoin, thus incentivising others to lend computational bandwidth to the network.

Years ago, a bitcoin miner armed with a personal laptop stood a chance of completing a block and collecting a reward akin to the plucky gold prospector of years gone by. However, as the exchange value of bitcoin skyrocketed from 2017, the prize for completing a block reached tens of thousands and then hundreds of thousands of dollars. By this point, investors had configured specialised server farms devoted solely to the task of mining bitcoin.

Further compounding the folly of bitcoin mining, is that the difficulty of the process required to complete each new block grows over time. This feature of bitcoin was intended both as an anti-inflationary measure and to guard against certain technical exploits that threatened to undermine the security of the network. However, the reality is that this makes the cryptocurrency anti-efficient.

You may find it helpful to think of the process of bitcoin mining as akin to millions of computers expending ever-increasing amounts of energy buying quintillions of lottery tickets with one winner every ten minutes. The amount of power wasted on useless duplication of effort is staggering. At times, power demand for bitcoin alone has surpassed that of nations the size of Ireland or the Netherlands. You don’t have to be an environmentalist for this to strike you as less than ideal.

Myths and Legends

But, their advocates would argue, while cryptocurrencies might be flawed and wasteful, the underlying technology — blockchain — is a world-changing innovation. This, sadly, is also untrue. Blockchain is a solution in search of a problem. Google ‘blockchain uses’ and you’ll discover a huge list of test cases. Upon closer inspection, few will have moved beyond trial phase and those that have often do not make use of distributed consensus at all.

One frequently-championed blockchain project involved organising aid for a Jordanian refugee camp. The claim was that the company, Building Blocks, was surpassing the inefficiency of food aid distribution by creating a system that allowed refugees to easily purchase food. Instead of issuing tokens or pre-paid cards to track family purchases, the scheme tracked individual spending by uploading biometric data to their blockchain. To purchase goods, residents of the camps had their iris scanned. But, despite the hype, it was later revealed that the system ran on a ‘permissioned blockchain’ with a central authority who controlled use of the network — and who could rewrite the database.

There was one problem with that: a blockchain is a database with no central administrator. Every user in the network retains a copy of the database — a public ledger. To update or alter the database requires consensus across the network. Once data is added to the blockchain, it cannot be modified or changed without mutual consent of all parties — it becomes, in the jargon, ‘immutable’. There is no single point of control. No single point of failure. The refugees in the Jordanian camp were not ‘on the blockchain’; they were merely listed in a centralised database.

Blockchain databases come with real downsides. The requirement for full network consensus to modify the data slows things down as the network grows. Having all the data stored forever, in countless duplicates, across the entire network, is wholly unnecessary for most purposes. Data stored on a distributed ledger is necessarily public to the network, which, from a privacy perspective, is not always desirable. Ultimately, should there be an input error, or malfeasance between users, there’s no authority to appeal for redress.

The accidental (and often intentional) effect of all this earnest blockchain noise is to sustain interest and hype in the adjacent technology of cryptocurrencies. From the perspective of the grifters, charlatans, and scammers, it adds a much-needed veneer of respectability that functions to disguise more nefarious activities.

The libertarians may cry freedom and equality, but their world is the opposite. A Citigroup analysis of bitcoin from 2014 found that ‘47 individuals held about 30%, another 900 held a further 20%, the next 10,000 about 25% and another million about 20%.’ No country on earth has such an unequal distribution of assets and wealth.

So, when the crypto lobbyists show up in parliament with a PR budget, the Labour Party should be paying attention. What they’re selling is an expression of political reaction, thoroughly intertwined with offshore tax avoidance, indelibly linked to black market activity, and implicated in environmental degradation. As for blockchain, in every proposed implementation, the merits of the technology are invariably oversold — with cheaper, more robust, database solutions readily available.

In recent decades, the Left has continuously failed to engage with questions of finance, technology, and business. Getting wise to the con-artistry and grift of the crypto movement, and countering its ideological appeal, is necessary if we are to confront the dark forces looming in our future. A Labour government needs to apply and create new laws around money-laundering and online fraud to deal with the inevitable crypto crisis that is lurking around the corner.