Crypto

A sceptic’s guide to crypto: the crypto Wild West

This is an audio transcript of the Tech Tonic podcast episode: A sceptic’s guide to crypto — the crypto Wild West

Jemima Kelly
OK. We’re gonna start this episode somewhere a bit different . . . 

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The West. In the lusty days when the surge of civilisation pushed onward to broader horizon . . . 

Jemima Kelly
In cowboy country . . . 

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. . . of man wrested new life from the wilderness . . . 

Jemima Kelly
The great US state of Wyoming.

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. . . on the pioneer trail came the renegade horde, land sharks, highwaymen, cattle thieves, [sound of gun shot] terrorising settler and tribesmen alike.

Jemima Kelly
Wyoming is famous for its vast prairies, its stunning wildlife, and its Wild West history.

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Antelope bleat peacefully on blessed slopes. Woof! Woof! A black bear. But don’t worry, he is friendly. He won’t bother you . . . 

Jemima Kelly
It’s a state of cattle ranches and cowboy hats, small government and frontier spirit.

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Mr. Gannon! [sound of multiple gun shots]

Jemima Kelly
But in recent years, Wyoming has been fighting at the frontier of another type of Wild West: the lawless world of crypto.

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We’re here in Cheyenne, Wyoming. This is the state’s capital. It’s also looking to become the crypto capital of the United States . . . 

Jemima Kelly
The state has enacted dozens of laws to attract crypto businesses from all over the world.

Rob Jennings
They were out — what I would call — regulatory shopping. I mean, they were in Malta, they were Puerto Rico, they were in Switzerland. You know, they were bouncing around all over the world to find a safe haven who was gonna allow them to maybe cash out or not be accused of securities fraud.

Jemima Kelly
But the question is: why Wyoming?

Rob Jennings
You had a lot of people in the legislature who are ranchers and businesspeople who don’t know anything about it. I think some of them are gonna start saying, hey, wait a minute: why are we passing so many blockchain laws?

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Jemima Kelly
This is Tech Tonic from the Financial Times, a podcast about how technology is changing the world for the better and for the worse. I’m Jemima Kelly, and this is, I’m afraid, the last episode in this series: A Sceptic’s Guide to Crypto. Crypto is almost completely unregulated. It’s less regulated than the gambling industry, and critics don’t always agree on quite what’s needed. But one thing is clear: we need more consumer protection and regulatory oversight than we have now. Instead, in many places, something quite different is happening. A huge lobbying effort by the crypto industry and regulators in turn, who seem to be in a race to the bottom. This is episode five: the crypto Wild West.

Rob Jennings
Wyoming is a wonderful state, and I actually just got married in Cheyenne a couple of weeks ago.

Jemima Kelly
Congratulations.

Rob Jennings
Thank you.

Jemima Kelly
Rob Jennings is a businessman, born and raised in Wyoming.

Rob Jennings
It’s a, it’s a different state. I mean, obviously, natural resources are a big part of the economy there. Oil, gas, coal. Cattles obviously a big part of not only Wyoming’s economy, but Wyoming’s sort of identity or heritage, you know.

Jemima Kelly
And as unlikely as this is gonna sound, cattle is what led Rob to blockchain. A few years ago, he started to explore how this exciting sounding technology, the technology that Satoshi Nakamoto invented with his creation of Bitcoin, might have useful applications in the cattle industry.

Rob Jennings
My thought was, “well, how do we apply this technology to something that actually adds value to something that is going on here in Wyoming?” And one of the issues or problems is that Wyoming beef ends up in commodity markets. So you know the attributes that are utilised in raising those cattle: humane treatment and grass fed. Or organic or, you know, all the different things, all natural, non-hormone treated, all those things that Wyoming ranchers put into their cattle and other places gets lost in the supply chain.

Jemima Kelly
So Rob started a blockchain company for the beef industry, and he called it BeefChain. [Moo sound] A perfect name. Using the blockchain to record the details of each cow as it moved through the beef supply chain from field to abattoir.

Rob Jennings
If you’re using a blockchain or a decentralised database, you’re just creating a digital notary. That’s really what we’re trying to do, is create a trustworthy, a mutable starting point for the origin and source and age of the cattle.

Jemima Kelly
Rob thought the idea was promising and he later set up another company on similar lines to BeefChain, called CattleProof. Whether or not you think blockchain technology is a good solution to these kind of logistical supply chain issues, the point is that Rob was interested in finding ways that it could help the local economy and local businesses in Wyoming. And to explore that further, in 2017, he decided to start a sort of lobby group called the Wyoming Blockchain Coalition in the state capital.

Rob Jennings
I said, Hey, let’s, let’s set up a meeting in Cheyenne and let’s just invite a group of people and learn what blockchain is. So we invited the mayor and, you know, city council people, different leaders. Had about 15 or 20 people show up.

Jemima Kelly
And at first he was encouraged by the apparent enthusiasm shown by lawmakers. Wyoming is, after all, an old Wild West state. It has some of the lowest taxes in the US and so the libertarian values of the crypto Wild West seemed like a perfect match. But very quickly, Rob realised that Wyoming’s politicians were less interested in the applications blockchain could have in local industries like cattle ranching, and more interested in getting a piece of the then booming crypto industry.

Rob Jennings
The first mission was sort of not something I ever intended for us to be a part of, but we had learned that Wyoming had a money transmitter law that prevented people in Wyoming from using apps like Coinbase and others to trade cryptocurrency. And so consequently Coinbase locked out anybody that was from Wyoming. So one of the first things that we were a part of working on was changing the law to allow Wyoming people to trade cryptocurrency on different platforms.

Jemima Kelly
And was that successful?

Rob Jennings
Yeah. I mean, they’re able to lose money along with the rest of everybody. So, yeah, I guess it has been successful. (laughter)

Jemima Kelly
The so-called Coinbase Law was just the beginning. Wyoming started enacting dozens of new laws around crypto. There was a law that made sure cryptocurrencies didn’t get taxed. There were changes to securities regulations, especially for crypto. There was even a law recognising DAOs — decentralised autonomous organisations — as real companies. And what troubled Rob was that it didn’t appear to be Wyoming’s own legislators that were coming up with these laws. They understandably didn’t know much about crypto. Instead, it was the crypto companies and their lobbyists who were effectively writing the new laws for them.

Rob Jennings
They were working extremely closely, phone to phone, person to person, not just some emails and things of that nature. They, you had the crypto guys who’re writing the laws. Let’s be honest about it. You think they’re gonna find one Wyoming legislator that was writing any complex financial securities or blockchain laws.

Jemima Kelly
One example Rob cites is of a prominent investor in a crypto exchange called Kraken, working with a member of the Wyoming Blockchain Coalition and a Wyoming banking regulator, to write an important new state law that would allow crypto banks to operate in Wyoming.

Rob Jennings
You know, one Christmas Day, they all got on the phone and wrote this special depository institution law that created these banks. And most of the laws were very complex banking and financial regulatory type laws. And then you had a lot of people in the legislature who are ranchers and businesspeople who don’t know anything about it — 95 per cent of, they don’t know what’s going on. And they were sold on this idea that Wyoming was losing out on coal money. And we had the, you know, the blockchain was gonna save us. It just seemed to me that the whole thing became less about how we’re helping Wyoming and more about how we can sort of game this regulatory sandbox to benefit people who have no intention of ever moving to Wyoming, other than maybe setting up an LLC.

Jemima Kelly
Companies that have set themselves up there include Kraken, the team behind the cryptocurrency Cardano and the banker-friendly crypto company Ripple, whose tokens Hollywood actor Ashton Kutcher once promoted on the Ellen DeGeneres talk show. Wyoming’s crypto promoters say it’s been a huge success.

Caitlin Long
Wyoming was very interested in being early and grabbing the opportunity to be the first state and looking to bootstrap what we think is going to be and is playing out a truly important niche of the financial services industry.

Jemima Kelly
Caitlin Long worked with Rob Jennings on the Wyoming Blockchain Coalition. After a 22-year stint on Wall Street, she came back to her home state and helped to write many of the new crypto laws. And she says the idea all along was to make Wyoming the US capital for crypto finance.

Caitlin Long
They saw that there was a way to attract this industry and not have a lot of costs to the state. It really didn’t cost the state anything other than just the cost of the legislative time. And I think all but the most ardent crypto opponents and the traditional bankers who didn’t want any new competition coming in would say, Yeah, actually, if you look at the cost benefit to the state of Wyoming, given that it spent virtually no money on this, it’s been a pretty big success. There are hundreds of companies here now and hundreds of jobs. And from an economic development perspective, that’s pretty good.

Jemima Kelly
It is worth noting that Caitlin was an investor in Kraken, the crypto exchange at the time she was involved in creating these new laws. And since the crypto banking law was passed, Caitlin has also established her own crypto bank in Wyoming. But Rob Jennings says there has been no benefit to Wyoming at all from all this. At best, he says the state has simply become a place for crypto companies to have an address so as to benefit from the new legal protections.

Rob Jennings
There’s people setting up limited liability companies, hiring lawyers, probably some accountants. If you go to Walmart and ask anybody in Cheyenne, you know, whether or not the blockchain is paying their bills, I think you’d be hard pressed to find that yes. You know, the reality of it is these people just sort of abandoned this larger, how is this gonna help Wyoming people or what is this gonna do for Wyoming folks. What CattleProof is doing or BeefChain or whatever, we didn’t need any law to pass that. I don’t need a law to use a decentralised database, you know what I mean? You get pretty far from “hey, let’s use blockchain and let’s learn how to code blockchain.” And all of a sudden, down this path of writing these complex financial regulations, creating safe havens for people to do whatever they wannna do.

Jemima Kelly
Wyoming might be hoping to steal a march on the rest of the United States in terms of cornering the market for crypto banking. But the involvement of the crypto industry in writing its laws is just part of a broader trend of crypto lobbying. Crypto is still relatively new, and governments around the world are still trying to work out exactly how to control it. Making sure it pays taxes, doesn’t harm consumers, doesn’t harm the broader financial system. And in that environment, the crypto industry has launched a concerted effort to make sure the new laws and regulations favour them.

Dennis Kelleher
These new industries, when they come in to Washington, they bring pixie dust with them, covered by the claim of innovation and new technology and new ideas.

Jemima Kelly
Dennis Kelleher is the co-founder of Better Markets, a Washington DC-based non-profit, and he’s been tracking the onslaught of crypto lobbying.

Dennis Kelleher
Because the industry is, as is often the case, says, “Gee, you know, if you allow us to do whatever we want, we will put our headquarters there, we will incorporate them, we will hire people there, and it will be great, great, great.”

Jemima Kelly
Dennis says that when it comes to crypto, politicians often don’t understand the technology they’re asked to regulate, which puts them at the mercy of the crypto industry. And crypto companies are spending the fortunes they made from the crypto boom to make their case.

Dennis Kelleher
I mean, it’s shocking, but often very intelligent people don’t stop and say, “Well, boy, that really sounds like a bunch of baloney”. When that baloney is delivered wrapped in literally tens and tens of millions of dollars and lobbying expenses, it has an overwhelming impact.

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Jemima Kelly
Lobbying government is nothing new of course. In DC especially, any industry worth its salt has a whole army of lobbyists whose job it is to influence lawmakers in ways that benefit them. But Dennis says he’s been amazed by the sheer speed and scale of the lobbying effort launched by crypto.

Dennis Kelleher
And the crypto industry has gone on a hiring spree.

Jemima Kelly
Sometimes these lobbyists are actually former politicians themselves.

Dennis Kelleher
The very pernicious revolving door. Many of those lobbyists, both in-house and outside, are hiring former congressmen and staff, which give them a much greater advantage because it gives them direct access to their Rolodex, which is the way you influence policy.

Jemima Kelly
And then there’s more subtle forms of lobbying.

Dennis Kelleher
One is through lawyers practising law who take the position that they’re not lobbying. And the crypto industry has hired an army of lawyers. The other part has been referred to as shadow lobbying, where they hire influencers that are highly paid, but they claim they aren’t really lobbying and they don’t register. And there’s an army of them too.

Jemima Kelly
Then there’s the campaign contributions.

Dennis Kelleher
And this part is really quite active right now with the midterms coming.

Jemima Kelly
Not to mention the dark money.

Dennis Kelleher
And that’s where people set up groups with names like, you know, Americans for Financial Freedom and things like that. The problem with those groups is they don’t have to disclose who’s making the contributions and what they’re really spending the money on.

Jemima Kelly
Companies like Coinbase, Ripple and FTX are some of the biggest players when it comes to crypto lobbying, along with industry groups like the Blockchain Association and the Crypto Council for Innovation, whose backers include the VC firm and friends of the show, Andreessen Horowitz. And crypto exchange FTX’s billionaire CEO Sam Bankman-Fried is now one of the biggest donors to the Democratic Party. He said he plans to donate anything between $100mn and $1bn in the 2024 election campaign.

Dennis Kelleher
On the one hand it is normal practice. On the other hand, it is unusual that an industry like crypto bursts on to the scene in such a short period of time, inflicts massive, massive damage and investor losses, and then floods Washington with this vast amount of money to basically try and buy a weak regulator and try and get away with as much as humanly possible.

Jemima Kelly
What worries Dennis is that he’s seen these kind of regulatory problems before.

Dennis Kelleher
The last time this much money flooded into Washington was the 1990s, when the mainstream financial industry, represented by the biggest banks on Wall Street, actually purchased the repeal of two key laws. One prohibited banks from merging into giant too-big-to-fail banks, and the other one prohibited the regulation of derivatives. It then took those banks and others only about seven or eight years where they made unbelievable profits. The biggest profits in the history of the financial industry were made, but at the same time they undermined financial stability and they ripped off financial consumers and investors. And it ultimately led to the 2008 financial crash.

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Lehman Brothers, a 158-year old firm, filed for bankruptcy.

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Traders here working the phones say a lot of their customers are freaked out, waiting to see how low the Dow will go.

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The opening bell is going to ring in 5 seconds. And to be honest with you, we wish it wouldn’t.

Dennis Kelleher
So the question we really have now is whether or not history is gonna repeat itself.

Jemima Kelly
Dennis says that what’s at stake in the battle over how to regulate crypto is the stability of the whole financial system.

Dennis Kelleher
Millions and millions of crypto investors have lost fortunes over the last six to nine months, and that’s bad. But it isn’t as bad as if there was a financial crash. And the reason there wasn’t a crash is because so far regulators and policymakers have kept crypto out of the core financial and banking systems and out of the core of our equity and our capital and commodity markets. And what crypto is trying to do is get special treatment and special access under special conditions for their special interest to maximise their profits. But what that means is they want entrée into the core of our banking and financial system. And that’s really what’s at stake here. People are really playing with fire because if they get it wrong, they’re gonna burn down the economy and the financial markets in a way they won’t recover for decades.

Jemima Kelly
Dennis is talking about the risks that could come if crypto were allowed to have a real place in the global financial system. But in order to understand why crypto needs regulating right now, you don’t even need to think about what might happen in the future because crypto is already harming people.

Tony Marini
I had a woman that lost €240,000 of her pension because she invested in this crypto site and two months later that platform disappeared and she could do nothing about it because it’s not regulated. You know, this is only gonna get worse. This is you know, this is the start of it.

Jemima Kelly
Tony Marini is a senior therapist at Castle Craig, a rehab centre nestled away in an old country house in southern Scotland. They treat all kinds of addictions, but in recent years they’ve seen increasing numbers of people coming in with a new kind of addiction: you guessed it, trading crypto.

Tony Marini
The most important part I saw being a compulsive gambler myself — I’ve been in recovery 17 years — I was really interested in the fluctuation of the prices, the volatility. Even researching, I was getting, you know, my endorphins, my dopamine, my adrenaline was going. And I thought, wow, this is very similar to gambling.

Jemima Kelly
Back in 2016, Tony started to come across patients he was treating for other addictions who were also struggling with crypto. And he started to dig into crypto to try and understand exactly what was making it so addictive.

Tony Marini
You know, it was 24/7 and it’s on your computer, on your phone. It’s anywhere you are. And you know, all of these people coming on and talking about, you know, yeah, of course you’re feeling part of something on these chats as people, you know, I’m making this, I’m making that. The people that are losing and taking risky use of this, we’re not hearing from them.

Jemima Kelly
The patients that Tony treats aren’t reaping the benefits of innovation or economic empowerment, the kind of things the crypto industry promises. They’re dealing with the brutal realities of addiction.

Tony Marini
It’s frantic behaviour, problematic social anxiety. We get constant anger, you know, the self-confidence, self-esteem, self-worth is destroyed. Problems with the law, work, family, friends, the inability to identify what’s real and what’s fake. What I’m seeing is people lose themselves in this. They lose identity, they lose purpose. They’re lost.

Jemima Kelly
There are very few consumer protections in the world of crypto and very little in terms of checks and balances on crypto companies. Not everyone, of course, becomes addicted to crypto, but the fact is many people are suffering because the industry is being allowed to do whatever the hell it likes. This is the reason people like me have become crypto sceptics. Over the course of this series, I’ve tried to understand why people still, after the huge market collapse of the past half year or so, believe in crypto. The crypto crowd tells stories about how cryptocurrencies will revolutionise the financial system, speed up economic development, and create a fairer and happier Internet. But often what’s missing from these narratives are the stories of loss, the failures, the unfulfilled promises, the scams and the harm all this causes to people’s lives. Earlier in this series, I talked to Stephen Diehl, a prominent critic of the crypto industry.

Stephen Diehl
These are mums and dads that are putting their money just trying to get ahead in life into a product, which is probably one of the most risky financial assets you can possibly buy. And it’s being sold directly to the retail public with no consumer protections.

Jemima Kelly
So earlier this year, he decided to try and do something about it.

Stephen Diehl
Two months back I organised a letter campaign where I recruited initially 26 other technologists and computer scientists to write a letter to Congress to address what we thought was a pressing need for action on this issue, and particularly to advance regulation. And the purpose of the letter was to address the concern that many of us in the industry have is that our views as computer scientists and technologists are not being reflected in policy.

Jemima Kelly
The letter was eventually signed by 1,500 computer scientists. Not all innovation is unqualifiedly good, the letter said. Not everything that we can build should be built. The history of technology is full of dead ends, false starts and wrong turns.

Stephen Diehl
Policymakers are listening to the lobbyists on the Hill, and they don’t want to be on the wrong side of what some people are telling them is the new Internet.

Jemima Kelly
But it’s not the new Internet. It’s a speculative bubble propped up, as we’ve heard throughout the series and in particular in the last episode, by some very strongly held beliefs that are quite cult-like and almost religious in nature. I think it’s crucial to counter the narratives you’ll hear from crypto shills, bitcoin evangelists and Web3 grifters who’ll tell you that this technology is the future. Because in reality it’s just the latest way of parting people from their money.

Stephen Diehl
Market manias are not a new phenomenon. They’ve been occurring ever since we had public markets in the 1600s. Every single aspect of cryptocurrency is not new. The technology is new. It’s kind of rubbish piece of technology. But the kind of speculative manias that occur around these kind of assets are not new. And in many ways, if you look at the South Sea bubble, you look at the tulip mania. You look at, you know, the wildcat banking era. You can see exactly what’s gonna happen. Attempts to build private money and attempts to financialise nothingness always end in ruin because they’re just bad ideas. And crypto pretends to be the money of the future. But it’s actually the money of the past.

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Jemima Kelly
You’ve been listening to Tech Tonic from the Financial Times with me, Jemima Kelly. This is the last episode in this series. Thank you for staying with us through this wild ride through crypto land. You can listen back to the other episodes wherever you get your podcasts or on FT.com. And if you’re not already an FT subscriber, you can get a special Tech Tonic listener discount over at FT.com/techtonicsale. We’ve also put the link to that in the show notes. Tech Tonic’s senior producer is Edwin Lane. Our producer is Josh Gabert-Doyon, and Manuela Saragosa is executive producer. Our sound engineer is Breen Turner with original scoring by Metaphor Music. The FT’s head of audio is Cheryl Brumley.

This transcript has been automatically generated. If by any chance there is an error please send the details for a correction to: typo@ft.com. We will do our best to make the amendment as soon as possible.

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