Is Crypto a Big Scam?

Last week, the White House released a proposed framework for the regulation of cryptocurrency. The document gives the green light to regulators to continue crafting rules around the industry, and even explores the creation of a “CBDC”: a central bank digital currency. Actor, writer, and crypto skeptic Ben McKenzie joins Ryan Grim to discuss the framework and the future (or lack thereof) of the crypto industry.

[Deconstructed theme music.]

Ryan Grim: The White House this week unveiled an expansive series of reports on the crypto industry which is made up of digital assets and servers and crypto mines that seemed kind of silly about a decade ago but have since mushroomed into a full-blown thing we all apparently have to start thinking about.

The reports were asked for by an executive order back in March of this year, and hinted at some form of future regulatory structure for crypto and also inched forward toward the creation of a dollar-backed digital currency. Now for me, I’ve always placed crypto somewhere between pointless and a scam — and that’s setting aside the energy and carbon side of it. But it really doesn’t seem like it’s going away and ignoring it doesn’t seem to be the best approach.

Ben McKenzie is a writer, and actor, and a director, and has been one of the leading voices among crypto skeptics out there. This summer, for The Intercept, along with Jacob Silverman, he found a deeply disturbing dispatch on the world of crypto in El Salvador headlined “Nayib Bukele’s Broken Bitcoin Promise: El Salvador’s Embrace of Bitcoin Didn’t Bring Prosperity — It Rode in With Waves of Repression ” He’s also writing a book about crypto and fraud with Jacob called “Easy Money,” which will be published by Abrams Press in 2023.

Ben is cursed — or perhaps blessed, depending on how you see it — to be known most places he goes as Ryan from “The O.C.,” but hopefully by now he’s at least equally appreciated for his crypto work.

And Ben, thanks so much for joining me and welcome to Deconstructed.

Ben Mackenzie: Thank you, Ryan. Thank you for having me. Great intro.

RG: [Laughs.] So before we get to the White House announcement, let’s talk first about your El Salvador piece. Most of it is pretty brutal, but there’s also this one funny moment I wanted to read from you.

So you and Jacob wrote: “Attempts to contact the president via his preferred medium — Twitter — were unsuccessful, except in causing a minor Salvadoran social media flurry that an actor from the TV show “Gotham” was in town.”

[Laughs.] So did you ever hear from anybody inside the Bukele circle, whether he saw that bat signal that you tried to put out?

BM: [Laughs.] We never heard anything, and it was quite funny. A lot of different contacts were given to us in his administration, we reached out to, I want to say, at least half a dozen. Nobody took us up on the offer.

And to make matters worse, I’m here, I played a young Commissioner Gordon on a TV show called “Gotham.” And now Bukele, the president of El Salvador, fancies himself as a Batman.

RG: Mmm. He’s a vigilante?

BM: He loves the comics — he’s the vigilante. He’s the tough guy. He’s rooting out crime. And so I tweeted at him from inside his country to no avail, even though we know — or we can certainly imagine that he was probably glued to Twitter actually at that very moment, because some pretty shocking allegations have come out from El Faro, the local opposition newspaper, had released some audio recordings of members of his administration, who had basically cut a deal with the gangs in order to stave off gang violence, which is a big problem in El Salvador. They had cut a deal and said: If you don’t mess with each other, then we’ll leave you be. That gang violence had re-erupted in the spring, which had caused Bukele to administer martial law, which is where we found the country when we visited there in the spring.

But anyway, the worst of it all was that Nayib is a lover of celebrities. He had just met with Daniel Baldwin.

RG: [Laughs.]

BM: There was a whole to-do. They called a press conference for him to meet with the Baldwin brother that you’d ever knew existed

RG: I’d never heard of him until you mentioned that.

BM: Yeah. I tried not to take it personally. But you know what? He probably didn’t want to talk to me because I’d have some tough questions for him.

RG: Oh yeah. I was just gonna say, a friend of mine at a party once that had a bunch of celebrities because it was like around Obama’s inauguration was asked if he was a celebrity. And he mentioned a Baldwin, he made up a Baldwin name.

BM: [Laughs.]

RG: [Laughs.] And they all took a picture with him, because nobody’s gonna question you if you just say a name and a Baldwin.

But so for those listeners that don’t know Bukele, he calls himself the “cool dictator,” and he officially adopted crypto in El Salvador, basically on the day, correct me if I’m wrong, that it completely blew up.

BM: [Laughs.] Yeah.

RG: What did you learn about the crypto uptake and how people in El Salvador are adopting it?

BM: Right. So — they’re not, is the short answer.

RG: [Laughs.]

BM: In June of 2021, Bukele, sort of out of nowhere, announced that El Salvador — this small, mountainous country lacking in natural resources, and quite poor, the average Salvadoran makes about $300 a month — was suddenly going to adopt Bitcoin as legal tender in September, so only three months later. This was quite a surprise to the world, but also to Salvadorans themselves.

And the marketing pitch was quite — it was an interesting marketing pitch, because on the face of it, maybe this could work, right? El Salvador’s economy is heavily dependent on remittances. About a quarter of the economy — 24 percent — is the 2-3 million Salvadorans who live in the United States who send money back home. And if you could use Bitcoin, rather than traditional means — Western Union MoneyGram — then theoretically, this could boost government coffers, it could theoretically reduce transaction costs for customers, could be a win-win, could be a game-changer, right? [Laughs.] But like everything in crypto, things did not go according to plan.

And effectively, as we find ourselves here, no one is using cryptocurrency — almost no one — in El Salvador. The government’s own figures have shown that less than 2 percent of remittances are using the Chivo Wallet system that they set up.

There’s a number of reasons for that, but one of them is that the system doesn’t work very well, they built a system on top of Bitcoin. And another is that the people don’t trust the government to make things work very well. Bukele himself is popular, but people would rather go with the things that they’ve relied upon — Western Union, MoneyGram, traditional services — even paying the larger fees, so that the thing works, first of all — you’re not ripped off — and you’re not exposed to the volatility of the underlying cryptocurrencies themselves.

And I think that’s really such a shining example of rubber hitting the road here. These cryptocurrencies are not actually currencies by any reasonable economic definition. They’re a poor medium of exchange, a unit of account, and store of value. Those are the three functions of money that economists look for when they look for a reasonable currency. They’re really much more similar to unregistered, unlicensed securities; they’re investments of money in a common enterprise with the expectation of profit to be derived from the efforts of others. That’s the definition of a security under American law, under what’s called the Howey Test.

And they’re being sold in these unregulated marketplaces. So the propensity towards fraud is just sort of undeniable. And it’s really kind of a sad thing that it got adopted by a country that could ill-afford to spend the hundreds of millions of dollars that they spent to roll out this disastrous program.

RG: Securities, though, in general, represent shares in a thing, like in a thing that produces something of value; you could debate the amount of the value, but usually, it’s a company that produces something. And so this feels more like these kind of mafia companies that don’t actually make anything, but then they have a stock that a bunch of stock brokers sell, that then drives the price up, then they all dump it on the market —

BM: Yep.

RG: And move on to the next thing. What’s the difference between a classic mafia pump-and-dump scheme and this?

BM: There’s not much. There really isn’t. I mean, you hit the nail right on the head. It’s air.

RG: Right.

BM: It’s securitized air. They securitize — I mean, in an unlicensed and unregistered way — some bits of computer code that people are sending back and forth to each other on these things called blockchains. And a blockchain, for all its supposedly innovative nature is not innovative, really. It’s 30 years old. Blockchains have been around since 1991, Stuart Haber and Scott’s vernetta at Bell Labs came up with a way of storing information in blocks that can be added to and never subtracted from. The reason that blockchain has not taken off outside of crypto is that it doesn’t really work very well. And the computer scientists that Jacob and I have spoken to in the book are extremely dismissive of this.

So, you’re absolutely right: What they’re really doing is they’re telling a story. Robert Shiller, the Nobel Prize-winning economist has spoken about this, I think, quite well. He’s talked about how economic narratives form. And the narratives come from somewhere. In the case of crypto, the genesis, I would say, is the subprime crisis, which created a lot of distrust of financial intermediaries and banks and the financial system — for good reason, you might say, they utterly failed us. And so that energy was directed — you could say, on the left, it was directed towards Occupy, and on the right, it was the Tea Party. But in terms of the cypherpunks, this was directed towards creating this quote-unquote trustless currency.

Well, it didn’t work as a currency. But eventually it sort of worked as this thing that you could gamble on.

RG: Mhmm.

BM: And you could create all these other currencies — quote-unquote currencies, that again, you don’t know who owns the majority of these quote-unquote coins, you don’t know what they’re doing to inflate the value of those coins. There’s a lot of what’s called wash trading going on in crypto, where you basically trade the coins back and forth amongst accounts you control, to inflate the value to make it look like there’s a market. And then once you’ve gotten real people in — regular, real money in — you dump and you cash out into real money. That’s happening an awful lot. And that’s why you’re seeing arrests almost by the day.

RG: And so when the crypto world blew up, around the time that Bukele was adopting it, there was a thing called a stablecoin that completely collapsed, which I found kind of amusing — well, not amusing for the people who lost their shirts.

BM: [Laughs.]

RG: But what is a stablecoin? If somebody told me that they were selling me a stablecoin, that would be my first kind of indication to go away? Like why are you calling this a stablecoin? What’s so stable about it that you need to put stable right in the name? So what’s the difference?

BM: Such a good point, Ryan. I mean, one of the rules of thumb I’ve discovered in crypto is everything is the opposite of what it purports to be, right? Currencies are not currencies; stablecoins are not stable; centralized means centralized.

RG: [Laughs.]

BM: You can even combine them together, these meaningless words, to create meaningless phrases like some absurdist attempt at German. There are things called DAOs, which are supposedly decentralized, autonomous organizations. Well, they’re neither decentralized, nor autonomous, nor particularly organized.

RG: [Laughs.] Right.

BM: [Laughs.] They’re, they’re a mess. And so there’s a joke in the skeptic community that basically crypto is speed-running the last half a millennia of financial mistakes, right? It’s all the stuff that we’ve tried that just hasn’t worked. And so your question is: Why does it keep going? And the answer is that it’s not working for the vast majority of people — the vast majority have lost money — but it’s working for somebody.

And so you have to ask: Well, who is it working for, right? The people that issue the coins, the people that run the exchanges, the marketing companies that get the marketing dollars in, and the celebrities who benefit. But the poor guys holding the bag here are the retail customers who have gone into the casino thinking they’re gonna get rich, and instead they lose all their money.

Sorry, I didn’t answer the stablecoin question. I would be happy to answer that!

RG: What do they even pretend to mean by stablecoin?

BM: Sure. So a stablecoin is theoretically, a coin tied to a regular currency, an actual currency. So in the case of El Salvador, the stablecoin that’s really in question there is a company called Tether. One Tether is theoretically worth $1.

And you ask yourself: Why is that necessary in crypto? Well, once you’ve entered the casino, and you’ve bought a bunch of crypto, you probably want to stay in the casino for as long as you can, as long as you’re winning, because to come out of the casino, and to transfer back into real money, you’re going to trigger a taxable event, you’re going to have to go through a bank account, and so you want something that you can go in and out of in between your speculative plays on the price of this or that crypto going up or down. But you don’t want to be exposed to the volatility of crypto itself.

RG: Mhmm.

BM: So, Secretary Gensler of the SEC calls them the poker chips at the casino. And I think that’s right, that’s the correct metaphor. The majority of the transaction volume in crypto is actually conducted in stablecoins. It’s people kind of gambling with these chips and using them to — also, I would argue, most likely manipulate the price of the other cryptocurrencies.

RG: Mhmm.

BM: And they’re run by, in the case of Tether — who, by the way, Tether and the people that are behind Tether, have allegedly been very involved in trying to reformulate El Salvador’s security laws.

RG: And Bukele said as much, right?

BM: That’s right. And so these guys, they’re gonna be featured in the book. They’re pretty — [laughs.] They’re an amusing group. You’re talking about a company that has 12 employees, according to LinkedIn, that was once worth $80 billion on paper. I think it’s now $60-something-[billion]. So they’ve got a dozen employees, they’re worth $60 billion; they have fewer employees than my neighborhood deli, and they’re running a $60 billion company.

RG: Hmm.

BM: And it’s awfully hard not to look at them and say: Well, they got a money printer, right? They got this thing that in the casinos, the crypto casinos, is supposedly worth $1. But how much real money is actually backing them?

RG: So they make the chips.

BM: They make the chips. But your question is: A chip is just a piece of plastic, right? In this case it’s a piece of code. What’s the real asset backing it, right?

And, if you want to go into detail here, one of the big tells of Tether, in my opinion, is the way they control the redemption process. When you’re running a Ponzi scheme, one of the things that you really need to do is make sure that people are not trying to all get their money out at the same time, because it’s not there. So when you try to get your money out, the whole thing falls apart. It’s what took down Madoff was the subprime crisis; when the markets crashed and everyone tried to get their money, only to discover that it wasn’t there.

RG: That’s when hedge funds run into trouble, too.

BM: That’s right.

RG: That’s when they start to pause redemptions. Everybody’s like: Oh, wait, why are you doing that?

BM: That’s right. And they’re using leverage. And leverage is used in all sorts of mainstream financial products and things like hedge funds. But when you’re actually running a Ponzi, when there really isn’t a product there to begin with, that’s when you get into real trouble.

What Tether does is — and this is on their website, you can look this up — you are not allowed to redeem Tethers for less than $100,000. They just won’t even engage with you. So Tethers are being traded on the casino floor amongst participants — and the casinos keep a certain amount of liquidity there so they can go in and out. But the real money, the people that have bought Tethers in the billions, a lot of them have exited their positions.

So the question is: What happens if and when Tether falls apart, which admittedly, has been the Boogeyman for a long time of crypto skeptics. Tether had to settle with the New York Attorney General in early 2021 and agree not to do business in New York, the financial center of the world, which would seem to be [laughing] a bad sign if you’re running a supposedly revolutionary technology, stablecoin company. They had to settle and they had to agree to quarterly attestations. But the company itself has never been audited. And I think that’s just a big red flag. They’ve got some guys who have sketchy pasts. And you know, you could make a plausible argument that they’re running a counterfeit dollar operation.

RG: What’s their response been to skeptics, like yourself, who’ve made this criticism of them? Because, typically, in the financial world, if you issue an analysis that’s this blunt about a firm, you’re gonna hear from lawyers, you’re gonna get threatened with lawsuits, how dare you make these claims about us? Do they ever do that? And what has generally been their response to the kind of suggestion that there’s not a whole lot of difference here between a Ponzi scheme and what’s going on? Or the chips in the casino or Gensler’s points?

BM: Yeah, I have to say, it’s been quite shocking to me. I’m the son of a lawyer. I would have thought that we — Jacob and I — would have been, if not sued, I would have assumed we would have been criticized and there would have been some threats made.

We wrote this article for The Washington Post on Binance, which is the largest crypto exchange in the world, and in there were some pretty startling facts about the massive conflicts of interest in Binance and the way that Binance had just shut down at several points in 2021, as the price of crypto collapsed; all of a sudden, you couldn’t get your money out, which again, goes back to redemptions, and tells of a Ponzi.

And there was no pushback. I mean, there were no clarifications; there was nothing. In fact, they’re trying to talk to us to explain their side of the case.

I think what’s happening — I mean, if you looked at it from a legal perspective, I’m not a lawyer — but these are companies that are not domiciled in the United States. The volume of crypto runs through offshore exchanges. In the case of Binance, they famously don’t have a headquarters.

RG: Mhmm. [Laughs.]

BM: There is no finance headquarters, which is pretty remarkable, right? They are run through these shell corporations in the Caribbean. And the same with Tether. I think they banked at Deltec in the Bahamas or somewhere.

So, my guess as to why we hadn’t been sued? I can’t speculate as to whether we’re right or wrong, but [laughs] I mean, if you sue us in American court, you’re gonna have a discovery process, right?

RG: Mhmm.

BM: So, I don’t know. It’s interesting. I’m surprised there hasn’t been more pushback. But yeah, I can’t speak to their motivations.

RG: Huh.

So in the White House reports that came out this week, a lot of it seems to be pretty vague. Gesturing in a variety of different directions. But one of the few things that was a little bit less vague was a suggestion that OK, maybe the U.S. ought to create a U.S. digital currency.

And I’m curious what that means, because to me, I don’t quite understand why, like what I have in my bank account app is not a digital currency. I can move it digitally from my checking account to my savings account, or from my checking account, I can use it to pay for things digitally. Obviously, though, there’s something different because they’re talking about creating it. And they’re getting all of these different agencies and smart people together to do it.

So what would be the difference between a U.S. digital currency and the currency that we currently have that we can move around digitally?

BM: On one level, there isn’t much difference. You’re right. One of the amusing things about cryptocurrency is that you needed to create digital dollars to begin with. I mean, the vast majority of our dollars are not physical, hard currency. Obviously, they’re just numbers in bank accounts, databases in bank accounts. And so on that level, there isn’t much difference.

There are, however, some potential gains to be had, arguably, by cutting out the middleman in terms of the banking system and allowing each of us to have our own account at the Fed that, for example, imagine there’s another pandemic and the Fed needs to issue stimulus checks. Well, if everybody has their own account, they can do that immediately, right, with a click of a button. And you save all this time, this effort, and you have an immediate economic impact. And I think economists and central bank people get all excited about the potential advantages there. Because we do have a problem with banking the unbanked in this country. A lot of people who don’t have access to bank accounts are getting screwed over by payday lenders and things like that. So there’s potential savings there.

What’s fascinating about the central bank, digital currency proposals — which are still, I would argue, in their nascent stages in America, I don’t think it’s really gotten that advanced that I’m aware of — is that they’re not based on blockchain.

RG: [Laughs.]

BM: [Laughs.] They have nothing to do with blockchain because blockchain doesn’t work. Right?

So it’s very funny, when crypto was in its heyday a year ago, you would have a lot of conflation, purposeful conflation of like: Look there’s this rumor that you know, the U.S. is going to go to a digital currency that’s going to be great for crypto. Well, no, obviously not! Because if the thing that you say you’re making — this supposed digital currency, which is in fact not a currency — if it’s replaced by the Fed issuing it, then your business model is destroyed. I mean, to be blunt. There’s no reason for you to exist.

But it’s all kind of a bit of smoke and mirrors. Because what the Fed is really doing right now, as far as I can tell — I’ve marked it, I’ll just read from the statement:

RG: Sure.

BM: “To make payments more efficient, the Federal Reserve has planned the 2023 launch of FedNow—an instantaneous, 24/7 interbank clearing system that will further advance nationwide infrastructure for instant payments alongside The Clearinghouse’s Real Time Payments system.”

So they’re working on the plumbing of our banking and clearinghouse system. That’s not sexy, it’s not interesting. It doesn’t really have much to do with retail, regular folks’ everyday experience. But I think that there are advances that are on the horizon there. Other countries are trying this kind of stuff; Brazil is trying it, India.

But ironically or amusingly enough, this has nothing to do with blockchain, and none of them are using blockchain. So, unfortunately, crypto is most likely going the way of the dodo bird.

RG: Does that mean that because they’re not using blockchain, it wouldn’t be as energy intensive?

BM: Yes.

RG: What is it about crypto that makes it — it is the blockchain that makes it so bizarrely energy intensive?

BM: It’s the proof of work concept that is tied to Bitcoin itself.

So proof of work is, you’re trying to run a quote-unquote trustless system, which is a whole other topic we can talk about. Because, from economists it’s very funny, because you can’t create a trustless money. Because money is trust.

RG: Right.

BM: We made up money! There’s a great book, “Money” by Jacob Goldstein, who is one of the hosts on Planet Money. And in, in his book, Jacob writes: The thing that makes money money is trust. We made it up. So replacing it with computer code is a story. It’s an interesting story. It’s not a true story.

So, what proof of work is, in order for us to run this system where we don’t trust each other, we’re all going to validate each other. We’re all going to run these computers that are going to constantly check each other and make sure that the blockchain is accurate, and in order to incentivize people to validate those transactions, if they guess correctly, these computers run 24/7, and they guess at random numbers and letters, if they guess correctly, they get bitcoin. They mine a new Bitcoin and they get the money associated with it.

It’s not a very smart system, to be blunt. I went to the largest crypto mine in America, just outside of my hometown of Austin in March of this year. It’s called the Whinstone Facility. And it’s a former Alcoa aluminum smelting plant that is now devoted to mining Bitcoin, where they just run these warehouses of computers —

RG: Just banks of servers?

BM: Yeah, it’s crazy man. So, in 2021, Bitcoin used the energy equivalent of Argentina. And the greenhouse gas, the estimated greenhouse gas used to consume that electricity, that energy, it more than offset the electric vehicle savings that we had done that we had accumulated globally for that year.

So it’s ridiculous, you’re running this tiny little program, which actually has quite few users — crypto is actually quite small in terms of people who are actually trying to transact in it — and the cost is massive, and you’re not getting anything out of it. Bitcoin can only process only five to seven transactions a second; Visa can do 24,000. So when you talk to computer scientists, they just tear their hair out. They just scream, almost almost literally scream in agony, like: This doesn’t work! Stop trying to make this work!

You can switch from proof of work to what’s called proof of stake, which is what Ethereum is doing, this thing called the Ethereum Merge. But that then makes it awfully clear that you’re running a security, because basically a proof of stake is basically like the people that have stake in it, that own a bunch of the Ethereum, they’re controlling what to do with the network. So that sounds like a share of a stock to me and to the government, by the way. I think the SEC has already sort of hinted that that’s going to be coming. So the whole thing kind of collapses in on itself. Because again, there’s nothing new under the sun. They’re just taking money from people and speculating on it, and unfortunately, in this case, the casinos are unregulated, so most folks are gonna lose.

[Musical interlude.]

RG: And one of the things that the governments don’t like about crypto is that it has been used on the black market, and there are cases where I think that’s actually a good thing. Like, in general, I kind of think that it’d be nice if people have some way of getting around government surveillance to a point.

BM: Yeah.

RG: Is there any way that people could create some type of asset that can get around government surveillance without it becoming one of these Ponzi schemes?

BM: Yeah, I mean, that’s a great question. And we do hear about that. We hear about people using it, basically, because they’ve run out of better options, right?

RG: Right.

BM: Folks using it in Afghanistan, there’s an article about folks using in Argentina, where there’s hyperinflation — or massive levels of inflation, I don’t know if it’s technically hyperinflation yet — but places where the currency, or the banking system, in the case of Afghanistan, is just not working, right?

And the trick there is that it’s difficult to come up with an alternate payment method that can’t be used by the bad guys just as much as it can be used by the good guys. And quite frankly, the bad guys often have more money [laughing] to try to launder and move around. So it’s one of those really difficult and perplexing questions.

I would say, if you’re not trying to send it overseas, the original way of doing this is cash, right? I mean, that’s, that’s the way you do it, you know, for all the folks that are here in America and trying to give folks that work for you a little tip, or do this or that, you give them some cash. And I don’t knock that! I actually think that’s like a good — well, I shouldn’t say it’s a good workaround — but it’s a time-honored workaround.

The problem is sending it internationally. I don’t know how you do it. The worry here that I have in terms of folks being being paid in crypto is the volatility of the price, but also that when it comes to a company like Tether, at some point, that company might fail, that company might might crash because it might not have the reserves that it says it has. If that happens, all hell breaks loose, and they can’t get any of their money out. And so there’s a real counterparty risk there that I think is significant and not to be discounted.

So I think folks use it when they have to, and I don’t begrudge people that pay others in crypto, we’ve heard from a lot of different people in a lot of different circumstances — that’s really their only way of doing it. But it’ll be painful if it crashes even further and wipes people out.

RG: And I started the show by saying we can’t really ignore this any longer. But is that true? It sounds like, on some level, that maybe this might just crash and burn and work itself out?

BM: Yeah, it’s the question that I keep going back to over and over again. I was talking to an economist yesterday. And we were arguing about it. I don’t know — of course, no one knows the future. I’m skeptical. But then again, [laughing] that’s my forte, I guess.

I think that you have to separate out, as we’ve been talking about, digital currencies and their future from blockchain. So when you talk about blockchain, I think blockchain will probably not be won’t disappear, but its uses will be confined to small systems, where you would want to create an immutable ledger that could track — the economists I was talking to were talking about memorabilia. Pokemon cards, you could create a blockchain for Pokemon cards, and people can trade them back and forth. OK. Sure. I got nothing against blockchain, by the way.

RG: Right.

BM: It’s just just a ledger. What I’m mad about is the potential fraud behind the markets these days. So blockchain will probably be around in some limited way is my guess. Digital currencies probably are the future. We’re probably a little bit away from really honing those and figuring those out. There’s some experimentation going on. But my guess is that yeah, there’s potentially large savings in intermediaries — actually, in a real way, sort of addressing the initial issue of crypto, trying to cut out the middleman.

The problem is that to cut out the middleman between the thing that they hate the most, the Fed, the central authority, and the actual consumer. So that’s my guess as to where it’s going. But once the fraud washes out, and these things are classified as securities, I’d be very curious to see what’s left in terms of the current quote-unquote cryptocurrencies.

RG: What happened to NFTs? Did they go away? Are they still around? They were everywhere for like, two weeks.

BM: Yeah. Yeah. So NFTs were these fascinating things that for economists are just total head scratchers. I mean, cryptocurrencies are bad enough. But you’re buying a non-fungible token, which as far as I can tell, it’s basically a receipt for a JPEG. It’s like: Hey, I bought this thing. Let me show you. It’s on a blockchain.

And you can right-click and save a JPEG, you don’t need to buy it for millions of dollars worth of cryptocurrency. So it was hard not to see that — it is still hard for me not to see that as just pure speculation. Somebody’s gone in, and they’ve accrued a bunch of crypto, and they want to make even more crypto. And so they gamble on it. And there’s some status games going on. It’s like: I paid a bunch of money to this NFT that this celebrity was hawking. But when you get into the plumbing of them, the wash-trading in the NFT marketplace was off the charts. I read something that said 99 percent. Some study had 99 percent wash trading.

RG: That means just people moving NFTs back and forth between accounts.

BM: Yeah, sorry. Yeah. So wash trading is just: You’re just selling it back and forth to accounts that you control, making it look like there’s a real marketplace, but there isn’t one. And so my suspicion is that sort of what happened, is that it was even more filled with air. And as soon as crypto itself started crashing, and people actually needed to get back out into real money, they’re no longer speculating on NFTs. And it’s the most bubblicious of all the bubbles, it pops the first — and NFT’s are really fascinating, because in my understanding, they’re not really even the digital art itself, which I think can be interesting. Sometimes it’s gauche; sometimes it’s interesting. But you’re buying this thing, which is sort of like a link to a URL. It’s a receipt. It’s a very weird thing. And I think folks are gonna realize pretty quickly that they may have lost all their money in that regard.

RG: The other selling point of this, people talk about the security of it all, yet I keep seeing people getting ripped off and robbed and somebody stole their frogs or whatever, somebody stole their NFTs, somebody stole their Bitcoin. How do they keep getting their pockets picked if this is the most secure system that they can develop?

BM: Exactly, exactly. I mean, for a supposedly decentralized system, there’s a hell of a lot of different protocols, and you’ve got to do this, and you’ve gotta go to this person, to this intermediary. And at every juncture, because it’s unregulated, there’s not only nothing stopping people from ripping you off. There’s also almost arguably very little even disincentivizing from ripping you off. Like why not rip you off? Right?

RG: Mhmm.

BM: And I think that goes back to just faulty philosophy here, that you could create this money that’s trustless, and a system where you didn’t need to trust anybody, you just had to trust the code, so to speak. Well, code doesn’t fall from the sky.

RG: [Laughs.]

BM: [Laughs.] Code is written by people who are running companies, right, that are trying to make money. How are they making money? Well they want to sell their coin and the coin to be valued, and this, that, and the other. But to your point from a while back, like what is separating what they’re doing from Penny stock fraud from the 80s or, or microcap from the 90s. I mean, people just inflating some security, and then cashing out. They look awfully similar.

And I think in crypto, you just have to question: Are we really going to keep doing this, where people are just going to get ripped off? If you talk to folks in crypto, and I did, walking around South by Southwest and the Bitcoin Conference in Miami, which is the biggest Bitcoin conference in the world. And I would ask folks about people who lost their money due to scams.

And one of the first people I asked, he goes: Oh, well, you know, I’ve been scammed.

And I was like: What?

And he’s like: Yeah. Yeah. Yeah. I had to learn. I had to do my own research. It was a learning experience.

And then I asked the next person, he got scammed as well. And I swear to God, almost everybody I talked to in crypto has been scammed at one point. And it’s sort of a badge of honor. It’s like: Yeah, I didn’t learn this, or that, or the other. And now I know, now I’m better. But you got to do your own research, you got to learn.

It’s fascinating to study the psychology of it, because it really smacks a lot of multilevel marketing schemes, where the system can’t fail, you can only fail the system, right? It’s not that the MLM that you work for isn’t a good MLM, it’s that you didn’t sell enough of it, you didn’t do it correctly. And it’s sort of similar to that, right? But when you go down underneath it, you go: Oh, wait a minute. If you got scammed and you worked in crypto, you’re a guy who devotes your entire life to it, seemingly, then what hope do the rest of us have? And isn’t money supposed to be easy? Isn’t the whole idea of money —

RG: Right.

BM: — that it’s supposed to be convenient, accessible, and usable? So yeah, I think it really does get to the heart of the matter.

RG: We wouldn’t really tolerate that with online banking. Like I opened up a SunTrust account, and they took my money, but then I realized that I had not checked the right box. And so the next time I opened up a SunTrust account, they didn’t steal my money. I’d be like —

BM: Exactly! Exactly!

RG: — [laughing] You can’t steal my money!

BM: Why do you know, when you put your money in licensed banking, why do you know your money is good? Because of regulation! Because of the FDIC program, right? The Federal Deposit Insurance Corporation, which has been around since the ’30s, since we created securities laws in this country, which it was all, in some sense, a reaction to the lack of securities laws and the lack of a thing like the FDIC in the ’20s — and the Roaring ’20s, the crash, and the Depression, and all that stuff. The FDIC guarantees your bank account up to a certain amount. And so you know your money is good, and no one has ever lost a penny of an FDIC-insured bank account since it came into being.

So how does it work? Well, the banks, in order to get that FDIC license have to follow a whole host of regulations, right? They have to comply with a whole bunch of stuff. Now, is the system perfect? Hell no! Right, I mean, you saw in the subprime crisis, you saw the Savings and Loan Crisis, you see these banks have all sorts of problems, but at least there’s regulations. And the government is saying: in exchange for following the regulations, we’re your backstop. We will make sure that everyone knows their money’s good. That is a way of creating trust, right? Trust through proven experience. Their track record. That’s how it works, right? You don’t just create trust out of thin air by saying: Oh, it’s code! It just doesn’t work that way.

RG: The White House report kind of waves at the possibility that the CFTC, the Commodity Futures Trading Commission, might end up being the place that regulates them. I think it already regulates some elements — futures tied to crypto or something. Does that seem right to you? Or do you think it ought to be the SEC since you’re talking about these things as securities, but if they’re securities are they illegal securities, because they don’t actually produce, they don’t actually make anything?

BM: Exactly. So what government agency is in charge of regulating Ponzi schemes?

RG: [Laughs.] Is it the FTC? Or they’re illegal.

BM: No, they’re illegal. So they’re securities that have no product, right? And our Ponzi schemes. Madoff didn’t actually make the trades or didn’t make a fraction of the trades. So what do you think it is? Who’s in charge of Ponzi schemes?

RG: Uh — I don’t know!

BM: Sorry, I’ll answer for you —

RG: Is it the SEC?

BM: The SEC. The SEC is in charge of Ponzi schemes. If you go to the SEC website, there is a page — the seven tells of a Ponzi scheme, seven warning flags of Ponzi schemes. If you look at crypto, I think it checks off like five or six of the seven. [Laughs.]

RG: Right off the bat.

BM: Right off the bat. So, look, as you can probably tell, I would like the SEC to be in charge. The CFTC would really like to be in charge. There’s a whole inner turmoil there as they’re battling over jurisdiction. And Bitcoin has been classified as a commodity. And it’s a very strange case, we’ll go into it in the book, but it’s super boring. I won’t bore you with it now. But the 20,000 other cryptocurrencies that currently exist sure as hell look like securities to me. And the other thing I’ll say here is the real risk of putting the CFTC in charge is that you’re looking at potentially a lot of regulatory capture. The CFTC has the budget, I think it’s like a fifth the budget of the SEC, or sixth, or something like that. We see crypto really cozying up to the CFTC. One of the commissioners of the CFTC took a selfie with one of the big crypto players. Actually, she just did another one — maybe it’s not a selfie, but a picture, with the guys that she’s supposed to be regulating. She deleted the first one, the last one’s up.

[Laughs.] The SEC has always had trouble being taken seriously. It’s often mocked and ridiculed for being ineffective. But if you want a really ineffective regulatory body, the CFTC with a fraction of the budget might be an even better choice. So all I really care about is the average Joe not getting swindled here. The thing with the SEC, they’re not the DOJ, they’re not going to charge people with crimes they go to jail for. They can fine people, they can refer cases to the DOJ. But at some point — and the DOJ has got his hands full at the moment, of course — at some point, I’d hope for some folks to actually go to jail who committed crimes, be charged with those crimes, because that’s where I think you’ll really see the sort of house of cards collapse.

In the last bubble of crypto, during what’s called the ICO craze, the initial coin offering craze,that I think was really what helped bring down the house was the DOJ getting involved and actually saying: Alright, you guys have committed wire fraud, tax fraud, bank fraud, whatever it is, and you’re actually gonna go to jail, and that spooks everybody, and they kind of cut it out. So, hopefully, something like that is coming.

RG: Mhmm. And you said 20,000 currencies?

BM: Yeah, if you think of them as securities — here’s a fun little fact for you — that’s more than all the securities in the major U.S. stock markets. Like that’s all the securities listed on NASDAQ and New York Stock Exchange combined. Isn’t that fascinating?

RG: So they’re just popping up new securities constantly?

BM: Yeah, yeah, yeah.

Yeah. And so why do we have securities laws? We have securities laws because of disclosure, right? And primarily, when you’re giving your money, when you’re investing in something, giving your money over to someone, you need to know who the hell is taking your money? And what the hell they’re doing with it. Right? And so the SEC has all these rules, all these forms you have to fill out. Are they perfect? Hell, no. There’s so much fraud going on, it’s crazy! I’m writing a book about it, so I’m paying a lot of attention. But if you think the regulated markets are bad, I mean, imagine the unregulated ones, right? Where there’s no disclosure, where you have no idea.

You can look at some websites, and you’ll see who actually owns the majority of these coins.

RG: Mhmm.

BM: They could be like 10 wallet addresses that control 90 percent of the supply. I mean, what are we talking about? That’s such a tell. That’s obviously gonna give over to wash trading and market manipulation, things like that. And regular people are not aware. They’re hearing from social media, from their friends: Hey, I made a bunch of money in crypto and you should buy it too. And then they buy and they lose their money or they can’t get the money out. It’s a recipe for fraud.

RG: So it sounds like this is pretty straightforward. Just have the SEC regulate these crypto-securities, and then have the Fed create a digital currency for anybody who actually wants an actual digital currency, which I can see a lot of benefits to, aside from that. If you could actually kind of cut credit card processors out of it — stop making 7/11 —

BM: Yep.

RG: — pay so much money to Visa and MasterCard and just let them use the Fed. If you would let regular people just set up accounts at the Fed and the Fed would also then have a lot more control over money supply, because they could monkey around a little bit with individual rates that they either charged on credit or, or gave to savings accounts.

BM: Yeah.

RG: Instead of having to take a gigantic hammer, like they keep doing, this week with another 75 basis point interest rate hike that’s such a blunt weapon.

BM: Yeah.

RG: This would give them a lot more nuance. So it sounds like if you do those two things, crypto would have nowhere to run, really.

BM: Yeah. I mean, that sounds plausible to me. And I think not only that, but you’d actually have like, as you’re pointing out quite a lot of upside, potentially. You could fine-tune a lot of the stimulus measures. If you went back to March of 2020, and you imagine the Fed had a system like a CVC, or something with more direct access for regular people, then the Fed could get the money to the people that really need it much quicker, and could also potentially cut out a lot of fraud.

You’ve seen that actually the DOJ has set up fraud task forces, fraud task forces in exciting cities like Sacramento, to deal with the fraud that came out of the pandemic stimulus measures. Because the fraud there is potentially one of the biggest frauds other than crypto in history, because you turn on the spigot of trillions of dollars, and you only need a small percentage of that to be fraud for it to be a lot of money.

And you could potentially cut that down significantly with issuing some sort of CBDC. So yeah, I think the future is actually potentially very bright in this area. But ironically enough, not only will it not involve blockchain most likely, but it also spelled the death of crypto.

RG: And then we could go back to making aluminum outside of Austin.

BM: [Laughs.] Yes, exactly. Well, you know, at least it’s a thing that you can use.

RG: Yeah! And we need aluminum.

BM: Yeah! I know.

RG: A lot of craft beer getting bought.

BM: [Laughs.] That’s right. Well, Ben, thanks so much for joining me. This has all been really helpful.

RG: Thanks, Ryan. I really appreciate it. Quite an honor to speak to you, and I really love the podcast, and thanks very much.

BM: A reminder for people. The book is called “Easy Money” and it’ll be out next year, published by Abrams Press, written with Jacob Silverman. And also check out their great dispatch from El Salvador from July of this past year.

[Deconstructed theme music.]

Zach Young: Producer Zach here — quick note before the credits. We reached out to Tether and Binance for comment regarding this show. As a publication we hadn’t heard back from them.

RG: That was Ben McKenzie. And that’s our show.

Deconstructed is a production of First Look Media and The Intercept. Our producer is Zach Young. Laura Flynn is our supervising producer. The show was mixed by William Stanton. Our theme music was composed by Bart Warshaw. And I’m Ryan Grim, D.C. bureau chief of The Intercept.

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