The cryptocurrency world sure has a lot of scams, doesn’t it? Sometimes people get to wondering why.
It’s an especially galling question when blockchains are touted as transparent. How can a technology be effective, real and scam-prone at the same time?
A hint that crypto-scamming is an iceberg-like issue comes from the Federal Reserve of Atlanta, which commented in summer of 2016 that people effectively need to lower their expectations for the power of “smart contracts in a complex world.”
- … [P]aper contracts may be replaced someday by electronic code, but they are unlikely to be replaced by smart contracts that rely on “immutable, unstoppable, and irrefutable computer code.” The first step in designing smart contracts is to have a good understanding of the set of problems being solved by paper contracts. — Larry D. Wall*
What are paper contracts for? For buying and selling stuff and services, obviously. But in a more practical sense, contracts enable the buying and selling of things at certain points in the future and under certain conditions. Contracts are the lubricant of all sorts of lucrative financial speculation. Sometimes they are themselves financial instruments. What is colloquially known as an “option” (as in “stock option”) is…
Engraving of a diving bell by P. Broux, circa 1870
… a financial derivative that represents a contract sold by one party (the option writer) to another party (the option holder). The contract offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security or other financial asset at an agreed-upon price (the strike price) during a certain period of time or on a specific date (exercise date). [Investopedia]
The fact that the logic of contracts can be conditional won't be surprising developers. In software programming, there is the concept of control flow: creating conditional statements that execute under certain conditions, but don’t execute under others. So what’s the BFD? Why does the Fed need to warn us about smart contracts?
Scams in history
Most dictionaries define “scam” as a fraudulent act meant to bilk people of their money. For the purposes of this definition, we can assume that the people being bilked don’t know it. But what if their blindness to the scam is the result of their own, voluntarily-embraced ideology?
Indeed, both mainstream media narratives (manipulated by central banks, politicians, commercial entities, and financial market-makers) and the “black market” economies (ie., AlphaBay, drug cartels, ISIS, Al Qaeda, North Korea) could each be said to perpetrate their own set of scams by selling things to people that promise to fulfill psychological needs or dependencies of one kind or another, sometimes needs engendered by propaganda.
In the United States, nowhere was this more evident than in Washington DC, during the early 1860s. “Throughout the Civil War, Washington swarmed with war contractors trying to make a fast buck,” says Edward Chancellor in his history of financial speculation. The industrialists of the day sold the Union army crappy wagons, threadbare uniforms, and misfiring weapons. When Lincoln printed unbacked currency (the greenback) to pay for more goods, prices nationwide began to inflate, and Wall Street speculators made out like bandits.
Eventually, some of this equipment was made to function and the Union won the war. Lincoln was said to be disgusted by this speculative behavior, but the country was broke, and printing money was his only choice if he wanted to win the war. On August 5, 1861, he enacted the first Federal income tax to pay war expenses, thus creating the cycle we’re in today with the military-industrial complex.
“Along with ordinary happenings, we fellows in Wall Street had the fortunes of war to speculate about, and that takes great doings on a stock exchange,” said the famous stock operator Daniel Drew at the time. He had other comments on the markets of the 1860s, too: “It’s good fishing in troubled waters,” was one; “Anybody who plays the stock market not as an insider is like a man buying cows in the moonlight,” was another.
Who’s a scammer?
By putting ideology before the practical matter of budgeting, we unknowingly subject ourselves to enormous exploitation. When that happens, it’s hard to say exactly who the “scammer” is. Did someone outfox you and take your money, or did you throw down cash because you believed it would change something?
The intentions of the buyer and the seller are, presumably, always to get the best outcome for themselves. Information asymmetry is the crux of any scam. Rather than argue about “who’s running a cryptocurrency scam,” the thing to do is continue to collect information until you feel you can tell who the scammers are.
As Sun Tzu wrote:
Now the general who wins a battle makes many calculations in his temple ere the battle is fought. The general who loses a battle makes but few calculations beforehand. Thus do many calculations lead to victory, and few calculations to defeat: how much more no calculation at all! It is by attention to this point that I can foresee who is likely to win or lose.
America as a recursive scam
While financial speculation and lotteries began in 17th-century Amsterdam and rose to their apogee in London, the United States itself was borne of speculation, like many other colonial prospects. Nearly a hundred years before the American revolution, Exchange Alley in London saw shares of the New Jersey and Pennsylvania companies trading right along side diving bell ventures and alchemy start-ups.
“Among other things, John Law’s Mississippi Company comprised a speculation in half the territory of the modern United States,” Chancellor writes. The diving bell companies were some of the first speculative ventures involving real technology, thus established its link with speculation and “stockjobbing” both legitimate and fraudulent.
Some of these diving bells (ie., early submersible vehicles, pictured) actually worked; a variation of this technology was famously used to create the riverbed foundations for the Brooklyn Bridge, and contributed to medical understanding of “the bends” when workers on the floor of the East River started getting sick.
A couple of hundred years later, the Otis safety elevator, the lightbulb, and the telegraph were similarly fruitful trial-and-error innovations which benefitted from funding by speculators. Other contraptions (perpetual motion machines and the like) were fatuous, unscientific flights of fancy.
But to declare that any of these inventions is a scam before you understand the technology (heck, even before the inventor fully understands the technology) is to reveal yourself as someone who is generally incapable of evaluating such technology, or is genuinely fuzzy on what exactly a “scam” is. (This is not a good signal to be sending if you fear depredation from con men.)
Ideology, the speculation enhancer
The present-day activity of entrepreneurship and fundraising (which Defoe called “the projecting humour”) can be traced back to the venture of William Phipps, a New England sea captain, in 1687. He had taken a small amount of money from investors to find and raise a sunken Spanish galleon, and the trip went unusually well.
Chancellor describes this period as “the age of adventuring, a tradition going back to the Elizabethan privateers.” So it was an enormously dramatic moment when Phipps actually found the boat and its gold, and he was able to return 10,000 percent to his investors — setting off a wave of copycat shipwreck expeditions, and later, technological inventions that might give treasure-hunters an edge. He was the Zuckerberg of his day.
The British crown began giving out “patents” for certain innovations, and other patents for treasure-hunting in certain geographical areas. “Public demonstrations of diving engines were given on the Thames, and free shares were given to [people of note],” such as politicians, Chancellor says. All of England was caught up in primordial venture capitalism.
This mode of thinking — project a venture, raise money, repeat — was embraced and perfected 300 years later in post-WWII America by Georges Doriot of American Research and Development, one of the first modern venture capital funds. Doriot’s approach to speculative investing was pioneered in his work as the Quartermaster General for the US Army during World War II, where he helped the Army procure weapons, clothing, and equipment in accordance with soldiers’ actual reported needs. (Some historians credit America’s success in the war to his affinity for proper equipment.)
After the war, Doriot refined his approach to venture investment by asking what major industries needed, and funding companies to meet those needs. Doriot’s early venture activity (along with other early funds such as Venrock, the Rockefeller family’s pioneering venture arm) has yielded an entire generation of incredible technology companies and management methodologies. Ultimately Doriot’s work enshrined him as one of Harvard Business School’s wisest and most brilliant professors.
Fraud requires volunteers
In contrast to the work of guys like Doriot, some stock projection schemes purposely use ideological blind spots to cheat people from their money. The closest modern example might be the various DAOs, which appeal ideologically to certain Libertarian or cypherpunk thinkers, and whose marketing rhetoric is designed to blind these people to the obvious impracticality (impossibility?) of such a venture being a success.
Gold mining in the mid 19th-century took on this quality, too. Investing in speculative mining ventures in South America in 1822–25 would become “only the first in a long succession of ‘emerging market’ booms meant to manipulate everyday people,” says Chancellor. “For the English, investment in for-off colonies ‘had a romantic and political’ quality. They were purchasing the freedom of a continent that, in English eyes, had suffered long enough from Spanish exploitation, intolerance, and backwardness.”
Mark Twain, a bit later, warned readers about contemporary scammers through stories like Pudd’nhead Wilson. In the 1840s, with the California gold rush in full swing, he told people that “a mine is a hole in the ground with a liar standing next to it.”
Adam Smith’s The Wealth of Nations, published in 1776, and the essays of the American founding fathers like Thomas Jefferson, Thomas Payne, and Benjamin Franklin, are widely considered a response to the bubble and crash that had just happened in England at the end of the 17th century. A popular, pseudonymous book published in 1721 stated:
There must be certainly a vast Fund of Stupidity in Human Nature, else Men would not be caught as they are, a thousand times over, by the same Snare; and while they yet remember their past Misfortunes, go on to court and encourage the Causes to which they were owing, and which will again produce them.” Cato’s letters
Writers of the time were acutely aware of history repeating itself. Petronius Arbiter had written during the fall of the Roman Empire that “filthy usury and the handling of money had caught the common people in a double whirlpool, and destroyed them… the madness spread through their limbs, and trouble bayed and hounded them down like some disease sown in the dumb flesh.”
Look in the mirror
The idea that a few assholes are ruining the fun for everyone is characteristic of speculative periods. Chancellor writes: “The city council of Mylasa in Caria,” which existed in modern-day Turkey from 11th-6th centuries BC, “complained that as a result of the speculative hoarding of specie, ‘the very security of the city is shaken by the malice and villainy of a few people, who assail and rob the community.’”
Bitcoin is bad money. Ether is slightly less bad money, because it’s consumable (ie., you can convert it to gas and rent time on the EVM). But people continue to hold (or hodl) them anyway, in the hopes that the entire mainstream financial system will collapse and sent trillions of dollars into the crypto-economy. This is a speculative bet; it’s not actually “holding” at all. You can’t save or hold something that has no intrinsic value — well, you can, but you’re only fooling yourself into thinking it’s any more than a lottery ticket.
Bad money, but very good technology
Needless to say, someone will solve the crypto-money problem. And others will find ingenious ways to build services that use blockchain’s three elements. This is why Max Weber saw purpose behind the mess of speculation, scams and all. He described it as meaningful to human progress, and a trailblazing activity for rational human thought. In Social Action and Protestant Ethic, Weber wrote:
The impulse to acquisition, pursuit of gain, of money, of the greatest possible amount of money, has in itself nothing to do with capitalism. This impulse exists and has existed among waiters, physicians, coachmen, artists, prostitutes, dishonest officials, soldiers, nobles, crusaders, gamblers, and beggars… Capitalism may be identical with the restraint, or at least a rational tempering, of this irrational impulse.
Let’s stay vigilant about cryptocurrency scams by learning more about them and investigating how they work (or don’t work) openly. And in the mean time, let’s hope Weber was right.
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