It has been more than a decade since Bitcoin set the stage for the popularization of new of cryptocurrencies and blockchain technologies. But as fortunes have been made and lost over and over again—Bitcoin just hit new record levels after Elon Musk announced that Tesla had invested $1.5 billion in the cryptocurrency and would soon accept it for payment—the slow grinding gears of bureaucracy are catching up with the promises of the blockchain technology. In January, only a week shy of the 12-year anniversary of the first Bitcoin transaction, both shareholders and the Securities and Exchange Commission sued Ripple, a blockchain-based remittance company and creator of the XRP (not an initialism) cryptocurrency. With a new administration that seems far more interested in investigating and being involved in the development of the cryptocurrency sphere, it seems as though bureaucracy will at last prove cryptocurrencies cannot live up to the starry-eyed promises.
The SEC’s filing alleges that the XRP is a security, rather than a currency—or whatever else cryptocurrencies claim to be. Thus, it must be subject to the regulations and rules that go with securities. The claim is that Ripple has been issuing XRP coins raise funds to operate its company.
But this is about much more than Ripple and XRP. The SEC’s investigation into Ripple will be the next major step in regulating cryptocurrencies. As with many new financial creations, the first regulations were around taxation, treating it largely as capital gains. It now appears there will not be any overarching regime for cryptocurrencies—rather, each will be examined based on its specific merits. This system will quickly buckle if there are more regular legal challenges, which seems likely. Tied to this are increasingly strict regulatory regimes that reject the claim that cryptocurrencies are currencies. This appears to be informed by the ease of creating a cryptocurrency: Almost anyone can do it with a few clicks.
Cryptocurrencies are reaching the same gangly teenage years as many other fixtures of the finance and tech spaces. There are plenty of individuals still selling the dream of striking gold through the blockchain, and plenty of people who are making significant money. Like most gold rushes, those who are making most of the money are the ones who are selling pickaxes and other ways to bilk the money from those caught up in the fever of striking it rich. Most companies that claim to be using the blockchain or cryptocurrencies are often trading on the promises made by the wonder of these new technologies.
For example, rapper Akon has announced an effort to create a $6 billion dollar cryptocurrency-powered city in Senegal, a project that may or may not end up as complete vaporware.
By contrast, Pitbull seems to have abandoned his vague efforts to save the music industry via blockchain, the last apparent update for which was 2018. With projects this large and countless ways that financial wizardry can take place with any cryptocurrency, it is an arena that unscrupulous actors could easily take advantage of. The SEC was created as a result of the financial disaster of the Great Depression and the wild west attitude to financial arrangements that epitomized it.
Despite these concerns, proponents of cryptocurrencies, particularly Bitcoin, tend to bill their particular interest as the currency of the future. The primary criticism of this is the high levels of volatility, with Bitcoin bouncing between $29,000 and $40,000 over the course of January alone. Tied to this are the relatively high technical barriers to entry for the average person.
Countless traders acting as though cryptocurrencies have an inherent worth, begging the question of where this value comes from. There is some inherent worth to any cryptocurrency, based on the anonymity provided, the relative technological security of exchange, and the other technology in it. But other than belief and amount in circulation, there is relatively little to differentiate Bitcoin from the joke cryptocurrency Dogecoin, trading for about a cent per coin at the start of 2021. As if to prove the point, Dogecoin experienced a recent surge in prices driven by retail investors inspired by the GameStop rally. After rising almost 1,000 percent, it crashed down to 2.5 cents—but seems at time of writing to be stabilizing at a higher price than it was at before. Critics have expressed concern that this was a coordinated effort to pump the price of the digital token before cashing out individual positions. This kind of manipulation is the exact kind of thing the SEC is currently investigating regarding the GameStop fiasco.
Elon Musk helped drive a rally in Bitcoin and Dogecoin by adding #bitcoin to his twitter profile, before alluding to Dogecoin as well. Against this backdrop, other cryptocurrencies, including XRP, have seen similar, albeit smaller, rallies. This is concerning because cryptocurrencies do not require the regular disclosure that, for example, stocks do. Any individual with enough clout may be able to trigger a rally in cryptocurrency, making themselves a hefty profit from their ability to move the market single-handedly. This is called scalping when a financial reporter does it with stocks, a practice that has long been disallowed if it is to make a profit off of it.
The SEC’s claim for XRP focuses on a different violation. It alleges that rather than being developed similarly to other cryptocurrencies, Ripple released XRP coins as a way to raise funds for their operation, circumventing the normal procedure of issuing debt, securing investors, and so on. This allowed them to avoid all the regulations that are tied to those processes. Further jurisprudence in this direction is likely to lead to further regulations that will probably bring more order to the wild west of cryptocurrencies. It’s noteworthy that President Biden’s appointments in relevant positions have tended to have positions skeptical of cryptocurrencies, such as Treasury Secretary Janet Yellen.
Despite the fervor about the promises of cryptocurrency, several systemic limitations and problems continue to plague this new technology. Academics are reporting that for each $1 of value created via a single Bitcoin, there was a $0.49 set of health and climate damage in the United States. Computing power requires electrical power and, with most still being based upon non-renewables, this is a point of concern for larger adoption of many blockchain technologies.
The decentralized nature of the technology means that instead of a single location able to reach economies of scale, decentralized efforts will lead to redundant expenditure of resources. This is good for decentralized verification, but less efficient in a value for energy calculation. Some estimate that a single Bitcoin transaction consumes more energy than 100,000 Visa transactions. In January, in fact, Iran blamed cryptocurrency mining for blackouts.
As with any new technology, most attempted applications are going to fall into the dustbin of history. That does not stop the apostles for blockchain and cryptocurrencies to continue to claim that the next great discovery, the great justification for all their efforts, is just the next breakthrough away.
Future Tense is a partnership of Slate, New America, and Arizona State University that examines emerging technologies, public policy, and society.
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