Crypto

Stephen Diehl: Crypto is the ‘commodification of populist anger, gambling and crime’

“Cryptocurrency is a giant scam, albeit a complicated one. . . So begins Stephen Diehl’s rant against the crypto industry.

When he released it in June, Bitcoin and other crypto assets were shaking. Since then the FTX collapse, the second largest crypto exchange, has created a potentially existential crisis. Billions of dollars in client assets appear to have been incinerated, along with the selfless visionary status of FTX founder Sam Bankman-Fried. Is crypto just a mirage?

Like Bankman-Fried, Diehl is a 30-something American with nerdy manners and unbrushed hair. But as Bankman-Fried urged U.S. lawmakers to craft new crypto-friendly regulations, Diehl pulled the other end of the rope. He pushed for crypto to be regulated like other assets. In June, he coordinated a letter from 1,500 technologists to senior members of the US Congress, urging them to look beyond “the hype and bluster of the crypto industry” and understand its “inherent flaws”.

Diehl masters programming and economics to challenge cryptography from first principles. He tried to sell blockchain technology – the distributed databases on which crypto is built – and thinks he could have ridden the crypto wave: “Anyone who looks like a nerd like me can probably go down to the valley and collect 50 million dollars from very gullible [venture capitalists] to pump a token and win a life-changing sum of money.

Instead, he stayed on the sidelines, blogging about crypto failures. It earned him a following – but also harassment, including death threats. “The last three years have been hell,” he says, naturally shy. “It’s not easy to be a crypto-skeptic.”

The book of Godl, Burst the Crypto Bubble, traces Bitcoin’s emergence during the global financial crisis to the post-2016 crypto gold rush, which it calls the “Grifter era.” He argues that cryptography is slow (it relies on broadcasting transactions over decentralized networks) and unreliable (individuals are responsible for securing their assets; when they lose their passwords or die, there are many less recourse than with, say, a bank). It cannot be both a great investment, which rises and rises, and a viable currency, which offers stable value. He argues that the price of crypto assets is largely based on the fact that there is an even bigger fool who believes in the hype.

“After 14 years, it’s still a solution looking for a problem. It is not about building a new financial system. It’s not about building a new Internet. It is not an asset decorrelated from the market. It is not an inflation hedge. It is a vehicle of pure and naked speculation, detached from everything related to the economy. It’s a casino wrapped up in all these lies. When you tear these lies apart, what’s left looks like a net negative to the world.

You may not be into crypto, but you should be. “It reveals a lot of our dark tendencies,” Diehl says. “And it’s a mirror for much of the political struggle in society.”


Diehl, 34, grew up in Massachusetts. He studied physics and was an early employee of Quantopian, a now-defunct hedge fund that outsourced investment algorithms. He then moved to the UK with Adjoint, a software company applying blockchain technology. Large banks wondered if such distributed databases could, for example, consolidate mortgage approval steps.

“It’s an interesting idea. Except in practice, it doesn’t work very well. I’ve worked on a few of these projects, and in each circumstance there’s a much simpler solution, using software that’s been around for about 30 years.

The blockchain could connect actors who do not trust each other. But in a world where banks trust each other, “a so-called network without trust is redundant. . . If you have three big banks and they all have data they want to share with each other, having three databases automatically synchronized is a much more complex architecture than just having one database they all share.

“I won’t say we have a 100% answer on [whether blockchain is useful]. But the answer seems to be not really. Last week, the Australian Stock Exchange abandoned an attempt to move its clearing house system to a blockchain-based platform – setting aside 250 million Australian dollars ($168 million) and seven years of work.

In 2019 and 2020, when Diehl started blogging, bitcoin grew sevenfold. Crypto fans mocked non-believers with initials like “hfsp”: have fun staying poor. Wasn’t Diehl afraid of missing out? “I don’t have a high risk tolerance.” (He failed to outperform an index fund while trading his own money.)

His reservations were also ethical. “The floor price of sterling is that people have to acquire sterling to pay their taxes. The price floor of crypto, if there is one, is black money flows, money laundering, and crime.

Crypto exchanges have been hacked and went bankrupt before. How serious is FTX’s collapse? “It’s the equivalent of a JPMorgan or a Citi collapsing in 48 hours. Additionally, they were the biggest player pushing the regulatory agenda for the crypto industry.

If Diehl is right, should all crypto assets soon drop to zero? He is wary of predictions. “I think once the parabolic surge capability wears off, the institutional money is going to dry up. . . I fully suspect there will be a lot of retailer interest for a while because memes and the stories appeal to a certain type of investor – someone young, male, economically disenfranchised and with a high tolerance for risk.There are a lot of those people.

“[Crypto is the] commodification of populist anger, gambling and crime.

Crypto fans’ loss of faith in the financial system is, in some ways, strange. Even during the crash of 2008, bank deposits were insured. Stocks have been rising for much of the past decade. “In my most empathetic read of crypto investors, look at this country – how many young people think they have a shot at climbing the housing ladder? Many of them feel that they should invest in high-risk assets because they need higher returns. »

What sympathy does he have? “I don’t want to see so many people hurt. My generation has been affected by the financial crisis, by the Covid, we are going to have the climate crisis. These people do not need this additional suffering in their lives.

One response to FTX’s failure is that it was a centralized, offshore-based platform. A better form of crypto (decentralized or regulated) could replace it. “If you accept the thesis that assets are a ‘dumber’ ploy, it doesn’t matter where you trade them.”

What If The Crypto Crisis Was Like The Dot Bubble? Pets.com went bankrupt, but Google and Facebook quickly surged. But unlike FTX, Pets.com “would show up on your doorstep with dog food, they were trying to do something real,” Diehl says.

On the spot

What book do you most recommend to people? This time is different by Carmen Reinhart and Kenneth Rogoff

Your most irrational habit? Coffee addiction.

What are we going to use the metaverse for? It will have applications in games, things like computer-aided design, and pornography. Do I think it will change something in our society? Not really.

An argument, put forward by venture capital firm a16z, is that crypto could be used to pay creators online, breaking the grip of Facebook and Google. Does it stack? “No, because the end consumers of these products want dollars and pounds.” What if we lived more of our lives online, paying for digital goods in the metaverse? “Can I not pull out my phone and pay you pounds in 15 seconds? Money is already digital.

He argues that bitcoin, in particular, is too slow to scale: it processes around seven transactions per second – “about enough to run a small Tesco, but not a national economy”. (Diehl did not “fully form an opinion” on digital currencies that central banks plan to issue.)

Crypto was meant to democratize finance. Instead, because crypto assets are unregulated and “deeply manipulated,” hedge funds and the like have managed to pump and dump. “It looks like a giant transfer of wealth from a lot of really unsophisticated retail investors to a lot of sophisticated investors.”

Among those whom Diehl criticizes is Elon Musk, who stoked the Dogecoin meme coin, and whose automaker Tesla bought bitcoin (before selling most of it). “Elon is a clown. I think it’s a joke for him. He is only a facilitator for this. I’m not even sure he believes it.

Politicians have been wary of blocking crypto ‘innovation’. Regulators were overwhelmed. Diehl likens the ICO bubble — initial coin offerings, where crypto entrepreneurs raised money for projects that have mostly disappeared — to a cyberattack on the regulatory system. “Let’s create 10,000 securities violations, and the [Securities and Exchange] The Commission simply does not have the bandwidth to reach 1% of these.

One answer is to “go after trades”, the bigger players. But so far the US response has been “incoherent”. SEC Chairman Gary Gensler has suggested that most crypto tokens are unregistered securities, “but it looks like they’re not willing to pursue that.”

Sherrod Brown, chairman of the Senate Banking Committee, called FTX’s collapse a “sounding alarm bell.” But many people in Congress are happy to let crypto “go out like a wildfire,” Diehl says.

Rather, he wants crypto to be curtailed, as a blow to the post-truth world. “The average person should be able to tell you, in public knowledge, why investing in assets that have no intrinsic value is a bad idea.”

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