Is crypto already too big to fail?

February 7, 2022

Diana Ejaita

By Tressie McMillan Cottom

This week, we continue our discussion about speculative financial technologies, specifically those that run on the blockchain: cryptocurrency and non-fungible tokens. Since I started writing about such technologies last month, it feels that my crypto marketing has picked up significantly.

Every app that I use for banking has invited me to invest in cryptocurrency or to attend an investment seminar on the blockchain. The question guiding the newsletter remains, “What problem does this solve?” Last week, I offered up an answer: For a small group of very wealthy people, blockchain and crypto solve the problem of where to put a lot of money. And, for some aspirational people, the culture of crypto makes them feel part of the action.

But why are politicians and other institutions so drawn to the promise of crypto?

One reader suggested that these technologies will ultimately solve the problem of the unbanked, those several million or so American households that the F.D.I.C. says do not, as of 2019, have a checking or savings account. People are untethered from banks for different reasons. Some are pushed away by retail banks’ high fees, minimum balance requirements and inflexible terms of use.

Others live in bank deserts, places where there aren’t many retail banking options. (I support postal banking for this very reason. After years of various people putting proposals before Congress, the U.S. Postal Service finally started a pilot program offering routine financial services.) If part of crypto’s pitch is that it can bring people much-needed financial services, then that would be a good reason to figure out how it does that and on what terms. That raises the question, who is in charge of figuring that out?

In last week's newsletter, I talked to Anil Dash, a tech executive who helped invent NFTs almost a decade ago and is ambivalent about how they have been used today. I asked him what regulatory or institutional body is responsible for making sure that all of these new blockchain tools do what they promise. The answer is no one.

“Part of the reason that entity does not exist is because there’s a really deliberate tactic of shifting between when the domain’s code and when the domain is policy or culture,” Dash told me. He added: “They say, ‘You can’t regulate what code we can write. That’s innovation,’ right? Then whenever it’s convenient, they say, “Well, you can’t regulate what people can sell to each other in the free market. That’s innovation. So you have this unassailable thing where it’s a dessert topping and a floor wax, and which regulatory regime prevails is whichever one is more hands-off.”

What Dash is describing is a prime breeding ground for predatory schemes. In a recent newsletter, Paul Krugman likened crypto to subprime mortgages: low-information borrowers with narrow margins for losing money taking on risky financial products that extract profit for elite asset holders at the top. One might say, the risk and reward structure is shaped like a pyramid.

Despite the clear disadvantages for small investors, the idea that blockchain is the wave of the future has taken hold. I am fascinated by that. It reminds me of American folk economics.

Folk economics refers to the very human impulse to describe complex economic processes in lay terms. The most popular example is talking about the national budget like a household budget. Politicians encourage that kind of folk knowledge every election year when they allude to the “average” American family balancing a metaphorical checkbook at the dinner table. (Someone asked me to pay using a check recently and I panicked. I have no idea where my checkbooks are. I have them somewhere safe, so safe that I have not seen them in years. I do not need to. Paper checks are strange enough to me that the idea of balancing a physical checkbook over takeout at my kitchen counter is basically science fiction. I doubt that I am the only one.)

Despite checkbooks being an outdated metaphor, you can see why we like thinking about a system as complex as the budget in simple terms. Doing so makes us feel informed and in control. Knowing just enough to use a system is more than sufficient for everyday life. But oversimplifying complex financial instruments and the obscure rules of markets makes us vulnerable. We start to believe that these things are as intuitive as our folk models, and do not need oversight or even a clear-use case.

I asked Daniel Hirschman, a sociologist at Brown, about the power of folk economics. One of the things Hirschman studies is how we make sense of statistics and how they become powerful. I do not want to overstate the popularity of blockchain and crypto and NFTs. They are still niche investment vehicles. But their centrality in media discourse is increasing rapidly.

Crypto’s future popularity rests on what social scientists call a stylized fact. A stylized fact is an observable phenomenon that can be counted but cannot be easily explained, or as Hirschman says, “empirical irregularities that need an explanation.” One stylized fact about crypto is that it has high market value. The exact value changes — crypto is volatile — but the particular number matters less than that it is a large number and is repeated ad nauseam. It gives you the sense that crypto is important without explaining why. And when people have a big number and no way of knowing what the number means, they fall back on a folk understanding of economics.

What holds the ecosystem together is a belief about tech: that its innovations are unquestionable and inevitable. Anil Dash hit on something that put that into clear focus for me. Fintech culture is very agnostic about expertise, to put it mildly. A reader emailed me after my first crypto newsletter to say that I am skeptical about it because I have a Ph.D. The implication is that formally credentialed people are suspicious of anything that might undermine their authority.

Dash has called this phenomenon the non-credential of tech culture. It stems from the internet’s early days as devoutly libertarian and anti-institutional, and thrives in online spaces like Reddit and Discord. The idea that tech cannot “trust those outsiders” poses a problem for tech’s ability to solve real problems. As Dash put it, “The challenge is that a maturing industry has to have the continuity of expertise.” I offered a counterpoint: a maturing industry could also have regulation. So far, that is a pipe dream.

Hirschman’s latest paper examines the power of folk economics using the gender wage gap as an example. He recommended two books by Finn Brunton to better understand the cultural connections between scams and fintech: “Spam: A Shadow History of the Internet,” and “Digital Cash: The Unknown History of the Anarchists, Utopians, and Technologists Who Created Cryptocurrency.”

I also found Joseph Laycock’s essay discussing whether crypto is a religion very interesting. Laycock says the question is not nearly as helpful as thinking about the characteristics of people’s irrational faith in technologies to solve all of humanity’s problems. That sounds about right.