What’s Crypto Good For? Corruption, Exploitation, and Billions for Insiders

Cryptofinance advocates brandish a long list of ways cryptocurrencies can benefit everyone. The supposed cure-all capabilities of cryptocurrencies include: providing an effective and efficient currency for everyday transactions; creating a decentralized system that is fully automated and doesn't rely on banks or the government; reducing corruption and the manipulation of financial markets; enhancing financial inclusion; and even depoliticizing money itself.

These claims are pretty much hogwash. (For an overview of cryptocurrencies and cryptofinance, see part one of this series.)

To understand where these claims come from, consider two early motivations for creating cryptocurrencies them: First: a desire to engage in anonymous transactions to hide nefarious activities like drug trading, gun running, tax evasion, theft, and so on. Second: a libertarian dream of creating a monetary system independent of a two-horned evil—the government and the banking system—one that would work  “automatically” without the intervention of humans able manipulate the system for their own ends. For many libertarian fans the end goal was a system that was decentralized, automated, and yes, anonymous. 

A third motivation now trumps all others: make as much money as quickly as possible and run. When all is said and done, this last goal is the only one that holds water. But first, let’s address the “libertarian pipe dream” claims, which many supporters use to justify crypto, whether they believe them or not.

Crypto fails to provide an effective and efficient currency for use in common everyday transactions.

First, to be used effectively, money needs to have a stable value in terms of the value of the goods and services it can purchase. A key problem with using cryptocurrencies like Bitcoin for everyday transactions is that their values go up and down significantly, which makes their purchasing power for goods and services fluctuate wildly. Second, money must be liquid. People must be able to use money quickly, cheaply, and easily in order to buy goods, services, and assets. But cryptocurrencies like Bitcoin are not very liquid: Users incur substantial fees when they exchange Bitcoin for goods and services. These fees and other costs are due to the inefficient and expensive mechanisms of creating these cryptocurrencies, including the Rube-Goldberg acrobatics of crypto mining and using the clunky “blockchain” ledger for recordkeeping (see part one of this series for an explanation of mining and blockchains). 

As a result, the crypto industry has made three major changes to the initial cryptocurrency system, which launched with the creation of Bitcoin in 2009. First, they have created online platforms or “exchanges,” like the New York Stock Exchange, where cryptocurrency owners can sell their cryptocurrencies for more useable assets, like U.S. dollars. These platforms are connected to digital “wallets” —which are akin to bank accounts with electronic access—where buyers and sellers can store their crypto assets. Second, the industry has created so-called “stable coins,” which are assets that are stored electronically on the platform and can be held in “digital wallets.” These so-called “stable coins” are pledged by their issuers to peg their value to a “real asset,” like, for example, to the U.S. dollar. And third, they have offered other types of crypto-related financial assets such as “tokens.” Tokens are like “poker chips” that can be traded for other crypto assets on these trading exchanges, such as stable coins, cryptocurrencies, and other assets. 

Despite these innovations, cryptocurrencies are, nonetheless, seldom used to buy normal, legal goods and services like hot dogs, beer, or counseling services. They are still almost entirely used to buy and sell other crypto assets, or illegal goods and services, like illegal drugs, tax evasion, and bazookas.

Crypto is not fully decentralized and continues to depend on the trust of any intermediaries such as banks or the government to carry out exchanges or validate the value and ownership of assets.

Hundreds of years and periodic crises, episodes of rampant fraud, and disruptions helped develop the modern banking systems and its legal frameworks. These days, the record keeping, legal frameworks, and financial rights that keep the banking system going are pretty straightforward and even taken for granted by customers. When you deposit money in your checking account you get a receipt (paper or electronic) stating that this is your asset. Banking laws state that you have a right to withdraw it and, because of deposit insurance, if the bank goes bankrupt, you can recover your funds. Again, the bank has a record that stipulates that these funds are your asset. When you write a check to buy a haircut or an Audi, your bank transfers your funds to the barber or auto dealer. Yet again, they keep a record of the transaction. In other words, there is a set of identifiable institutions and mechanisms, embedded in the financial and legal systems, that keeps track of and enforces these transactions.

Crypto advocates claim that their system is completely decentralized, with all transactions happening on a set of anonymous computers placed anywhere in the world. But in fact, the crypto system is anything but decentralized. The mining processes and the crypto networks themselves have become highly centralized, owned by a handful of big companies. Take mining, for example: It takes a lot of financing and a lot of powerful computers to win the mining contests and collect the crypto prizes (see part one for an explanation of mining). A small number of mining firms control most of the computers that do the mining. Moreover, even though there are hundreds of cryptocurrencies, most of the crypto activity takes place on crypto exchanges. These exchanges are owned by individuals or small groups of investors. 

Crypto does not reduce or avoid the corruption, theft, and manipulation of financial markets by destructive financial actors.

The crypto asset world has been riddled with theft, manipulation, and corruption. Even before the massive failure of Sam Bankman-Fried’s cryptocurrency exchange FTX in 2022, millions of dollars from investors large and small disappeared as unscrupulous crypto promoters promised the moon and then took the money from small-time investors and ran. The FTX failure is instructive about the corruption and theft mechanisms that are used with crypto. Among them are all the classic old-school methods: Ponzi schemes, where crypto promoters promised very high rates of return with low risks, but can only pay previous investors to the extent that they could get new customers; pump-and-dump schemes, where through various forms of advertising, promotion, and manipulation, insiders were able to drive up the prices of their crypto assets, and then sell them off for good, hard cash before the bottom fell out. And then, as the FTX scandal shows, there is also plain old-fashioned theft. 

Is crypto corruption and theft greater than or worse than Wall Street corruption and theft? Good question. Probably not, because the crypto system is not nearly as large yet. But is there more corruption per dollar of assets or transactions? Almost certainly yes. So, as the crypto system grows, it is likely that the levels of corruption will grow very fast indeed.

Crypto does not enhance financial inclusion by allowing those who have been marginalized by the government and financial industry to access financial services.

Here, too, we have heard this story before. In the run-up to the great financial crisis, the promoters of mortgage securitization argued that it would allow poor and marginalized households to get mortgages and buy houses. We now know that “roaring banking” pushed predatory lending on misled, poor households. As with the subprime lending crisis, crypto appears to be more of an example of predatory inclusion than enhancing financial access. As economists at the Brookings Institution and others have shown, members of marginalized groups are among those who have been especially harmed by the corruption and Ponzi scheme activities often associated with cryptocurrencies.

Crypto has not sidestepped the politicization of money and finance endemic to our current financial structure and fails to lead to a more democratic financial system.

What little crypto has done to decentralize and automate finance and bypass the Federal Reserve and other government financial institutions has not depoliticized the financial system. As the massive entry of President Donald Trump and his family into the crypto business shows, the crypto industry has hardly succeeded in depoliticizing money and finance. (Trump has already increased his family’s wealth by nearly $3 billion through the release of $TRUMP and $MELANIA meme coins and a large stake in World Liberty Financial.) Crypto interests were among the biggest campaign contributors in the 2024 election, spending more than $225 million supporting pro-crypto Republicans and Democrats in Congressional races, and helping to defeat crypto-skeptic politicians like Sherrod Brown of Ohio and Katie Porter of California.

This money has been repaid in spades in Congressional votes. In the past several couple months, extreme pro-crypto bills have passed the Senate and the House, including radical pro-Stablecoin legislation (the so-called GENIUS Act) that will allow billionaire tech companies (such as Amazon) and politicians (like Trump) to create cryptocurrencies out of thin air. (See the next installment of this explainer series for more). This concentration of power in the hands of massive corporations and politicians is a massive perversion of the libertarian utopian vision that motivated many early crypto advocates. Sensing this distortion, one libertarian economist reported to Atlantic journalist Annie Lowrey: “For us libertarians it feels like we are being punched in the face with our own fists.”

This article is based on Gerald Epstein’s Busting the Bankers’ Club: Finance for the Rest of Us, (University of California Press, 2024).