Dec 5, 2021 Tags: cryptography, rant
Financial disclosures: I have no direct or derivative positions in any cryptocurrencies, or any investments at all in any distributed ledger companies.
Professional disclosures: My professional work is not tied to cryptocurrencies, and I am not paid to work on cryptocurrencies. I am also not paid to work on any competing financial instruments or products. My opinions are also not necessarily the opinions of my employer.
This post has been a long time coming: for the past 5+ years, I’ve been asked questions that vary across these templates:
I’ve had friends, family, professional acquaintances, and random strangers ask me these questions.
The blogosphere is already saturated with excellent technical and rhetorical summaries of why the cryptocurrency space is, to save a whole bunch of words, just plain bad1. So I’m going to take a different tack: I’m going to start with the financial issues that I personally want and wish to be solved, and walk backwards to demonstrate why I don’t think blockchains adequately solve them.
This is really three problems rolled into one:
As far as I can tell, no cryptocurrency solves any of these problems for me. The closest might be (1), which companies like Brave purport to solve by offering “attention tokens”. Except not really: instead of allowing me to pay a newspaper for an article, Brave wants pays me in company scrip for the privilege of watching ads that they’ve placed on participating websites2.
Similarly, as far as I can tell, nobody in the cryptocurrency space has dedicated any substantial amount of effort to (2) or (3). (2) is mostly being handled by payment apps like Venmo and Cash, which give you either standard (2-3 day) settlement for free or “instant”3 settlement for a percentage-plus fee.
But even these apps don’t give me what I think would be really cool, which is a way to create an ephemeral debit pool between my friends and I, one that we could all charge (up to a limit) and then automatically itemize and/or evenly split at the end of the meal or event. Everything else being equal4, this seems like the kind of thing that a smart contract would excel at! But it doesn’t exist.
I don’t think (3) will ever exist in the cryptocurrency space. Nobody I’ve talked to in the space seems particularly interested in anyone who doesn’t use the Internet regularly5, much less the unbanked or underbanked6. There’s just no (obscene) profit in it.
I try to donate money every year, both because there are things I’d like to support and because I’m fortunate enough to work for a company with a generous matching policy. I try to use a debit card for donations, so that the places I donate to aren’t hit with credit card fees on top of the normal overhead associated with soliciting donations.
This, on face value, seems like a reasonable use for a cryptocurrency! And I’ve had people
tell me that, when
$POPULAR_BLOCKCHAIN7, transaction fees will
crater and that both I and the recipient will be able to enter and exit the blockchain with
virtually all of the intended donation unscathed. This never seems to materialize.
I’ve had a few people respond to this by pointing me to niche cryptocurrencies that boast low
transaction fees. It’s not clear to me whether these low fees are a function of the environment
(nobody using the coin, so miners/verifiers/whoever will take what they can get), or a function of
a novel technical improvement that genuinely solves the problem. But at the end of the day, the
distinction does not matter: just about every nonprofit that I care about donating to is not
going to waste their time chasing down a few hundred dollars in
$RANDOM_COIN for me.
Even if they’re using volunteers to handle their finances, it costs them money in the form of
time to leave the world of actual money and cater to yet another middleman.
This is not a problem that affects me directly, but it’s one that I see raised frequently as an example of something that can be legitimately solved with cryptocurrencies.
On face value, this again seems reasonable to me: I’ve had friends explain that companies like Western Union are effectively a racket and a regressive tax on those who send and receive remittances. Cutting out a middleman whose business model dates back to the time of settlement-by-telegraph seems like a good thing.
From here, a few things lack explanations:
Where does the money exit8? Are we going to litter bitcoin ATMs across Central America? Cryptocurrency advocates point out that Western Unions are an obvious place to rob people of their remittances9; it’s not clear how replacing the brick-and-mortar structure with a freestanding ATM improves the state of things.
Again, the transaction fees. Western Union is expensive; is Bitcoin or Ethereum doing any better at the volumes of money that people are regularly remitting? I genuinely don’t know, but the recent ConstitutionDAO fracas suggests that people are paying close to 50% of their transaction in gas and wallet transfer fees. Maybe people are remitting more with the niche cryptocurrencies I mentioned above, and so are “flying under the radar”? But that doesn’t feel especially sustainable.
Novel criminal potential. When someone robs a Western Union, it’s Western Union’s problem — they still have to make their customers whole. Similarly for a bank. Nobody is responsible for the contents of a bitcoin wallet (or bearing account on a service) except the credential holder(s), and recourse after some rubber hole cryptanalysis is significantly limited.
I, like every other fallible being, occasionally make mistakes, have mistakes made upon me, or just do plain old stupid things with my money or money-bearing instruments. In the past couple of years, I’ve:
In each of these cases, I was saved by human systems: I was able to call a phone number, get a human being on the other end, walk them through my situation, and receive a satisfactory outcome (refunds, replacements, service credits, new payment cards, &c). When my initial contact at the merchant was unable or unwilling to help me, I was able to escalate until I reached an person who (1) was authorized to resolve my problem, and (2) could see engage further systems to convert the problem into an internal one that got resolved without my involvement.
All human systems are subject to fraud and abuse. But removing humans from the system does not remove the fraud — it just incentivizes novel forms of fraud automation, and promotes reversible accidents into irreversible ones. I dread to think of a world where a cosmic bitflip sends my paycheck to the wrong blockchain address, either flushing my money into the void or sending it to someone who has no formal reason to help me get it back10.
All told, the things I want fall into a few very simple categories:
0.0001%transaction fee can be sustainable, even profitable, with enough transactions)
To point out the obvious: cryptocurrencies don’t have to solve all, or even most, or even a small minority of these problems and economic frictions. But these, not others, are the things that are present in my life (or that I care about, because I think they’re net benefits to society).
It’s also not a claim that cryptocurrencies can’t, in a formal sense, solve some of these problems. But I’ve yet to see an application that made unique sense for a cryptocurrency, one that justifies burning coal11 or formally enforcing an oligopoly of stakeholders12.
It’s easy to be negative. So, what would I actually like to see?
I would like to see the reintroduction of a public banking option in the United States. Public banking, more than anything else, stands the best chance at materially improving access to the financial system for the most needy.
I would like to see the completion of FedNow, the Fed’s nascent ACH replacement. FedNow promises to deliver 24/7 instant settlement at even lower costs than ACH13, and will put pressure on payment apps to kill their fees.
I would like to see countries cooperate on a formal remittance framework: the only things stopping direct international bank-to-bank transfers are inertia and greed. Maybe that’s awfully idealistic of me, but it feels no more delusional (and a whole lot nicer) than some of the things I’ve seen the cryptocurrency predict and propose.
Better, faster, more just, and more equitable financial systems are within our reach, without cryptocurrency. I hope that we get there.
Substitute in, as applies: a solution in search of problems, an enterprise aimed primarily at facilitating criminal economies and financial fraud, a perverse waste of energy and material resources, a tower of greater fools, &c. ↩
“Instant” is in scare-quotes here because, as far as I know, it all gets settled in 2-3 days via ACH anyways. The only difference is that the “instant” payment appears to settle earlier because the payment app hits some custom endpoint signaling the transaction. ↩
Hint: everything else is not equal. Not everybody is technical, and even my technical friends don’t want to install some cryptocurrency app just for splitting a bill. And that’s to say nothing of the inevitable middleman charges. ↩
I’m not one of them. But it’s hard enough to get my nonagenarian grandfather to let me pay for dinner with my own payment card; I am not going to try to get him to accept Ethereum. ↩
I’ve heard plenty of claims that cryptocurrency will “solve” the the unbanked/underbanked problem by democratizing transactions. I’ve yet to see this happen in a way that doesn’t involve (1) onerous transaction fees, (2) unrealistic technological commitments (teaching the homeless good secret key management?), or (3) yet another company scrip that serves as a pointless hurdle between “X dollars in my account” and “I can afford a warm meal.” ↩
Always six months away, it seems. ↩
Is the money not supposed to exit? People who exhort this position seem to fall mostly in the “bitcoin will inevitably become the world currency” camp, which is a position that’s amply mocked in other posts and articles on the Internet. It also can’t be great to be paying a handful of dollars (at minimum) in fees for every transaction, if people are holding the cryptocurrencies and not exchanging them. ↩
Western Union advertises direct deposit services for remittances on their website, so I’m guessing the actual number of robberies depends heavily on the country and access to banking services therein. ↩
Code is law, and all that. ↩
Read: Proof-of-Work schemes. ↩
Read: Proof-of-Stake schemes. ↩
Banks don’t typically pass ACH fees onto consumers directly. But lower fees are a net good anyways. ↩