The grown-ups have entered the chat.
On Monday, the US Securities and Exchange Commission (SEC) announced it had reached a settlement agreement with Kim Kardashian for unlawfully touting crypto asset security ethereummax without disclosing she had been paid $250,000 to promote it. Kardashian agreed to disgorge her promotion fee, and pay a $1 million penalty for violating federal securities laws. She is also barred from promoting any crypto security for three years.
For billionaire Kardashian, one of the world’s leading “influencers”, the penalties are pocket change. However, her public profile means people will notice the SEC’s action. The crypto industry has been a wild west since bitcoin first appeared in 2008, with vast fortunes conjured out of thin air based on little more than herd mentality and hype.
The assets have little to no intrinsic value. Most often, their notional value relies on collective user agreement underwritten by market trading. Critics allege that the “greater fool theory” is what keeps crypto asset markets afloat.
Crypto enthusiasts claim their digital “currencies” will democratise finance by disintermediating banks, brokers and governments from the means of exchange. They laud decentralised finance as an inclusive system, empowering individuals everywhere to bypass these gatekeepers who get rich by ticket-clipping as monetary transfers flow through their pipelines. They assert that the developing world in particular stands to benefit, as billions of unbanked people are excluded from secure repositories to grow their wealth and charged extortionate fees for basic transactions. They point to the array of bank and credit card charges that disproportionately affect the poor in developed countries, hampering their ability to get ahead.
This Robin Hood image makes for good marketing. But it masks a trail of fraud, theft, price manipulation, money laundering, tax evasion, ransoms and corporate collapses that belie the rosy proclamations.
Scammers have stolen billions by hacking accounts or phishing users to access their holdings. Other bandits have spruiked phantom tokens, only to make off with the very real money used to purchase them. Such schemes puncture a key assertion of the crypto industry: that the blockchain technology used to validate ownership guarantees the security of crypto assets and transparency for all transfers.
Blockchains have many potential applications aside from the crypto assets that have
garnered so much attention. A blockchain is a distributed ledger invented by Satoshi Nakamoto,
the unknown pseudonymous creator of bitcoin. It requires multiple participants in a network to
audit and verify transactions and generates a time stamp that provides a permanent record
that cannot be manipulated.
The idea is to eliminate the duplication of digital goods so that clear titles can be allocated to virtual assets. Given the ubiquity of the digital world in every facet of modern life, this could become essential in the same way the internet has.
But when it comes to crypto assets, clearly there are kinks in the process. Aside from the myriad methods to part people from their money, crypto assets consume enormous volumes of electricity.
Each token is “mined” via complex algorithms that require tremendous computing power. This has given rise to giant warehouses that stack computer servers in remote regions, where energy is cheap and scrutiny is minimal. Electricity keeps the servers running around the clock, as well as blasts them with air conditioning to stop them from overheating. Global electricity demand by crypto assets ranges from 120 to 240 billion kilowatt hours a year, equivalent to Australia’s annual consumption.
Perhaps the biggest hole in the crypto assets mythology is the currency illusion. Any currency requires three key features for efficacy. It must be a stable store of value. It must be widely accepted. And it must be readily transferable. Bitcoin, the industry gorilla, fails all three tests. Its price relative to the US dollar, the world’s reserve currency, fluctuates wildly. This makes it more akin to a derivative security than a currency.
Goods and services are rarely denominated in bitcoin, meaning prices must be gauged by reference to an established currency. Meanwhile, transactions average a glacial pace of three a second. This compares with 76,000 transactions per second on the Visa network. As a dependable means of exchange, bitcoin is sadly wanting.
In response to these issues, on March 9 US President Joe Biden issued Executive Order 14067 to ensure the responsible development of digital assets. In short, regulation is coming.
Treasury secretary Janet Yellen, SEC chair Gary Gensler, and Federal Reserve chairman Jerome Powell have all spoken in favour of bringing order and oversight to the crypto assets industry. They want to squeeze the scammers and mitigate contagion risks to the broader economy should the crypto assets bubble burst.
To this end, Kim Kardashian’s legal settlement provides both a cautionary tale and invaluable publicity that the free-for-all is over. The players are on notice, and new rules are on the way. The referees will be watching.
