Many large financial institutions have performed an about-turn in cryptocurrency during the last few years, moving from a position of outright hostility to one of acceptance and even enthusiasm.
But there are still a few outspoken sceptics of the now-booming sector.
One is Stephen Diehl, a software engineer, chief technical officer of a London-based fintech company called Adjoint and our guest on the latest New Money Review podcast.
According to Diehl, cryptocurrency is an internet-based lottery that serves mainly to enrich insiders at the many digital token projects.
“A cryptocurrency is a speculative financial product that has an embedded wealth redistribution function: it takes external capital and shifts it around to other people,” he says in the podcast.
“By comparison with traditional financial instruments, there are no external cash flows. The pay-out structure is contingent on new investors coming in. You can compare it to a lottery, but with a very unclear pay-out structure. It generally looks Ponzi-like,” says Diehl.
According to Diehl, there are rising risks from the assimilation of cryptocurrency into the broader financial system.
“A cryptocurrency is a speculative financial product that has an embedded wealth redistribution function”
“These things are working their way into the larger economy. We’re seeing publicly traded equities holding large amounts of cryptocurrency. If things are left unchecked, they’ll be finding their way into things like pension funds and ETFs,” he says.
Uninformed consumers, says Diehl, particularly millennials, are highly exposed to losses when buying the many new tokens on offer.
“I’m particularly concerned about retail investors being exposed to products that come with a fair amount of counterparty, systemic and market risks. The education people are getting about these things is often from social media or online sources that have a vested interest in promoting them,” says Diehl.
“Bitcoin has hijacked the populist rage narrative”
“A lot of millennials don’t have the assets, savings or participation in the economy that previous generations had,” he goes on, explaining the popularity of crypto with the younger generation.
“For them, it makes sense to buy riskier things—products that have a more asymmetric upside. And there’s a lot of disenchantment with the financial system. So the narrative about creating an alternative financial system resonates with a lot of younger people—the story of bitcoin and alternative financial services is a very compelling one.”
But those investing in crypto as a way of expressing dissatisfaction with the status quo risk being sorely disappointed, Diehl says in the podcast.
“Whether that system is actually being built is a separate question,” says Diehl.
“I’d argue that it’s not. These things—cryptocurrencies—don’t provide anything other than [a means for] gambling. Bitcoin has hijacked the populist rage narrative to propose a story that tenuously makes sense. But if you dig into the details it doesn’t really feel solid.”
“Where the fraud occurs [in cryptocurrencies] is in the governance structure around the projects”
In the podcast, Diehl also talks about the distorting effect he believes cryptocurrencies are having on scientific research, as well as on the prices for computing services.
“Cryptocurrency has had an impact on the hardware market: it’s basically impossible to buy a graphics processing unit as these things all get snatched up by miners. That’s having an outsized impact on machine learning and artificial intelligence,” says Diehl.
“People working in these domains require specialised hardware and can’t actually purchase the devices they need. Ultimately, these price increases will be passed down to anyone using cloud computing services. Even if you’re not touching cryptocurrency, you’re going to see inflation propagate for anything it touches.”
And while the open-source nature of most cryptocurrency projects means their codebase can be audited, the same principle of openness doesn’t extend to many of the service providers in the sector, says Diehl. Here, he argues, there’s a major problem.
“Where the fraud occurs [in cryptocurrencies] is not in the code per se, but in the governance structure around the projects, the auditing of the alleged reserves and of the bank accounts that hold the actual money,” says Diehl.
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