Op-Ed: How America's mistrust of institutions birthed the false promises of the crypto craze

Two technicians inspect inspect rows of bitcoin mining

By Rebecca Ackermann and Poppy Alexander

Feb. 28, 2022 3:03 AM PT

During the 2008 financial crisis, with banks collapsing, life savings disappearing and the government swooping in to bail out those responsible, Americans lost faith in the institutions we relied on for our future.

Against this backdrop of disappointment and anger, an engineer (or possibly multiple engineers) going by a pseudonym proposed a distributed system to allow individuals to trade directly without needing to trust a third party as middleman — or even needing to trust the other people involved in the transaction. Instead, the blockchain, an unchangeable digital ledger, would provide accountability by publicly recording transactions. Exchange on this system would use cryptocurrency, the first entirely digital money.

Then in 2014, tech-forward entrepreneurs tapped the blockchain to be the foundation of a new vision for the whole internet: Web3, a fully decentralized online ecosystem that could replace governments, banks and Big Tech gatekeepers like Facebook and Google with a digital-only economy. In the future they promoted, no one would have to trust anyone again.

Today the Web3 concept has taken root in tech and in pop culture, spawning endless memes and making the tech-agnostic wonder whether they should buy digital animals or invest in something called Dogecoin. News stories now routinely declare crypto “mainstream.”

It’s no surprise that the crypto vision has resonated strongly with Americans. Trust in government has hit record lows, and financial independence feels beyond the reach of most. While millennials earn more than previous generations, they own only 5% of the wealth in the U.S., and Gen Z owns less. Home prices are still far outpacing the rise in wages, and the pandemic has only stratified wealth further. Efforts at wealth-building in this environment are becoming more scattershot and proudly anti-establishment. Companies whose stock goes viral become meme-stocks, their prices soaring with social media popularity rather than the underlying financials.

And unlike in the tech-optimistic 1990s, no one believes Big Tech will save the day. With wider recognition of Facebook’s role in spreading misinformation, Google’s research ethics scandals, Amazon’s abysmal warehouse conditions and multiple data breaches across platforms, people have lost faith in tech companies they interact with daily.

Many crypto companies — well-funded by $30 billion in investment last year alone — are smartly capitalizing on anti-institutional sentiment by using language of empowerment and collective action to pitch cryptocurrency as a panacea. Celebrity endorsers such as Matt Damon and Gwyneth Paltrow implore us to bravely seize our opportunity and democratize economic participation. Crypto, the narrative goes, lets you take your finances into your own hands.

Yet what crypto has actually offered so far is instability. The blockchain ledger — the public record of transactions meant to guarantee cryptocurrency’s transparency — could not identify the perpetrators of the 2016 $4.5-billion theft of the cryptocurrency Bitfinex. The alleged scammers were finally arrested this month, but they weren’t caught until they attempted to turn their crypto back into dollars, suggesting that regulated financial institutions still protect money better than the blockchain.

Meanwhile, no one knows who should or how to handle claims from those who did business with the alleged fraudsters within the crypto space. In this accountability void, the trading platform OpenSea claimed the role of arbitrator and simply froze associated assets without any stated next steps (and not long before it became the target of a separate massive hacker attack).

To combat volatility, cryptocurrencies have found themselves relying on the very institutions the industry claims to eschew. Crypto businesses are increasingly using stablecoins, cryptocurrencies backed by non-digital assets — dollars in many cases. Anyone who invests in stablecoins (or uses platforms that employ them to bridge traditional money and crypto, as is common) would have to trust that the exchanges hold the dollars they claim.

In reality, the crypto industry has the worst of both worlds: dependence on institutions without any of their protections. Traditional investments are constrained by regulations and the threat of enforcement for those who break the rules: Bank accounts are insured by a federal agency, investment advisors are registered with the Securities and Exchange Commission, futures markets are tightly regulated by the Commodity Futures Trading Commission. Those same guardrails do not exist in crypto markets. No wonder terrorists increasingly rely on crypto for financing, criminals seek to hide their funds with it, and fraudsters take advantage of the gullible, with crypto “love scams” particularly on the rise.

But regulators are starting to catch up. Both the SEC and CFTC have brought aggressive enforcement actions against crypto exchanges for offering what they identify as investment products outside of the government approval process. And the Department of Justice has formed a task force to stem the tide of money laundering, terrorist financing and other criminal activities facilitated by crypto markets. These actions have the added enforcement bonus of bringing crypto fraud within the confines of existing whistleblower programs that incentivize individuals to come forward with information about wrongdoing behind the crypto curtain.

Web3 emerged from understandable anger at institutional failures. But ultimately, any claim that trade between humans can exist without trust in one another is an illusion. And with venture capital firms that funded (and got rich from) the “old” internet jumping feet first into Web3, those who wish for a revolution free of institutional money and power are sure to be disappointed.

Beyond the temporary rewards of a high-tech get-rich-quick scheme that works for a lucky few, any advantages of a cryptocurrency-based financial system have yet to be proved. The potential danger is far more urgent.

Federal agencies need to continue to force daylight onto crypto and bring its customers under regulatory protection — staying firm even as the industry pours more money into lobbying. And potential investors need to realize that at least for now, betting on crypto means trusting a new set of financial entities that are even more likely to fail them than the old ones.

Rebecca Ackermann is a writer and designer who has worked at Google and NerdWallet, among other tech companies. Poppy Alexander is a lawyer.