Why the crypto crash is fueling calls for regulation

IMTFI Director Bill Maurer in GRID, June 27, 2022

“It’s going to lead to more regulation, especially because you have this awful mix of whatever is going to happen with this very uncertain economy, coupled with all of the marketing of crypto that’s happening right now to vulnerable and minority communities, all the celebrity endorsements,” said Bill Maurer, director of the Institute for Money, Technology and Financial Inclusion at the University of California, Irvine. “The thing is, if regulation is going to happen, it better happen fast.” … “One of the foundational mythologies of crypto is that you’re going to have this private money and finance that is unregulated and yet still secure, because of the technological workaround,” Mehrsa Baradaran, a professor at the University of California, Irvine, School of Law and author of “The Color of Money” and “How the Other Half Banks.”

For the full story, "Why the crypto crash is fueling calls for regulation: Existing bills and the human toll is creating a perfect storm" by Benjamin Powers, please visit https://www.grid.news/story/technology/2022/06/27/why-the-crypto-crash-is-fueling-calls-for-regulation/.

It’s all about cash in the end...for now.

by Andrew Crawford, Doctoral Researcher (GIGA, Universität Hamburg) and IMTFI Fellow

News about a political upheaval often includes a story about frantic citizens desperately trying to get cash. Recent cases in point are events in Afghanistan and Myanmar. In Afghanistan, the departure of US forces and subsequent Taliban takeover led to a banking crisis with long lines for the limited number of functioning ATMs. Traditional informal money transfer agents, known as hawaladars, faced similar shortages with excess demand for cash that they could not satisfy.  Behind the scenes, the Taliban pushed central bank and finance ministry officials to get to work on solutions, a difficult task considering the brain drain caused by the hundreds of thousands that have already fled the country.   

People line up outside a bank to withdraw cash in Yangon, 5/15/2021 (Photo: Reuters)

Meanwhile, Myanmar faces similar skills shortages as state employees refuse to assist the military junta that deposed their democratically elected government in February and has since killed more than 1000 civilians. Government limits on branch and ATM withdrawals were implemented and in late August the government closed numerous bank branches, under the pretence of COVID-19 safety.  To enter open branches customers had to line up for tokens that later emerged for sale on Facebook. Informal bank account markets also evolved online where people could sell their bank account access data in exchange for physical cash at commission rates of 7-15%.  Even retailers sitting on cash revenue began offering money exchange services rather than try to bank their company takings.

The Taliban inherits a central bank with depleted USD and local currency reserves
(Photo: Elmer Laahne/johan10/Adobe Stock)

Considering the scramble for cash you may be surprised to learn that both Myanmar and Afghanistan had, until recently, digital payment systems. Their provision of mobile money led financial inclusion proponents to suggest that both countries could ‘leap-frog’ traditional banking infrastructure. But the unrest immediately ended this dream and demonstrated the fragility of fintech when government institutions fail. Mobile money agents continued to operate but needed to increase fees to 10 - 12% to compensate for the difficulty of obtaining cash for withdrawals. Myanmar mobile money companies, such as Wave Money, were left desperately trying to provide cash to their agents to stop them charging egregious fees to their 1.3 million clients.

Why not print more cash? The Myanmar junta tried to until the German company supplying their ink and materials for printing, Giesecke & Devrient, suspended their deliveries citing it as “a reaction to the ongoing violent clashes between the military and the civilian population”. This further compounded the sense of panic and desperation for cash and left the junta pleading with other foreign banknote companies, so far to no end.

Myanmar has smartphone penetration of over 80%, a rate comparable to many European countries (Photo: Sasin/Adobe Stock)

So, what happens when people give up on cash? Well cryptocurrency has always been viewed by its proponents as the game changer for such crisis situations. Cuba, for instance, has recently seen the growth and legalisation of crypto currency to facilitate remittances, overcome US sanctions, and prevent inflation.  But the recent legalisation of cryptocurrency in Cuba may not mainstream its use due to unreliable internet access and geo-blocking by crypto exchanges.  

The recent adoption by El Salvador of bitcoin as legal tender may provide one way by which cash shortages may later be avoided. If many Salvadorans keep their funds in bitcoin, they could continue to trade and will not lose their life savings in the case of political upheaval. Whether this happens may depend on how much Salvadorans are willing to put into the volatile cryptocurrency. Additionally, if the Salvadoran government felt threatened, they could still hit the internet kill switch preventing users from trading bitcoin. The security of the government backed Chivo cryptowallet also remains untested. 

Overcoming the internet kill switch is tough and would require satellite internet technology like that offered by Elon Musk’s Starlink (although Starlink is currently not available in countries such as Cuba, Myanmar or Afghanistan). Does this mean the combination of satellite internet, solar generated electricity, and cryptocurrency (along with the knowledge of citizens on how to use all of them) will free people from relying on cash? Well, the missing ingredient that no technology can provide is trust. With such complex technology it may be difficult to have citizens willing to depend on cryptocurrency to protect their life savings. Another barrier may be an innate behavioural instinct to grab something physical and dependable during a crisis (like the hoarding of toilet paper in many countries during COVID-19 lockdowns). Until citizens in an institutional vacuum are willing to trust complex, intangible, hi-tech solutions to both transact and protect their wealth, it will remain all about cash in the end.

Libra's biggest problem? Facebook

Bill Maurer, IMTFI Director, anthropology and law professor and social sciences dean in Wired, Dec. 5, 2019

Credit: Mike McQuade

Digital currency Libra needs Facebook's global reach to succeed, but the social network is also the biggest driver of its backlash. As regulators gather, controversy reigns.

…As the controversy rages on, Bill Maurer, the dean of social sciences at the University of California, Irvine, sees a missed opportunity to have necessary discussions about important issues with the world’s financial systems and the impacts on democracy. “In a way, I think, unfortunately, because it is Facebook, it's just, ‘get them in front of us on the TV cameras, and let's yell and scream at them about privacy and security’,” he says.

For the full story, please visit https://www.wired.co.uk/article/libra-cryptocurrency-facebook.

The Faketoshi Circus: Even Bitcoin Can’t Escape the Politics of Money

by Michael J Casey, chairman of CoinDesk’s advisory board and a senior advisor for blockchain research at MIT’s Digital Currency Initiative

In case you missed it, a new self-proclaimed Satoshi Nakamoto came out of the woodwork last week, this one brandishing a “proof” based on numerology and an obsession with BCCI, the scandal-ridden bank that collapsed in 1991.

The widely debunked “reveal” from Bilal Khalid, aka James Caan – Khalid officially changed his name to that of the American actor – followed a host of equally absurd developments in a Florida court case against the other “Faketoshi,” Craig S. Wright. These included a hand-written note to the judge in which yet another person, one Debo Jurgen Etienne Guido, also laid claim to being bitcoin’s secret progenitor.

Sensible minds in the crypto community remind us that this is all a sideshow, that these competing claims to bitcoin’s creation ultimately mean nothing to its value proposition.

Still, it begs the question: why does it keep happening? Why do the scammers emerge so readily? What is about the crypto community that attracts a parade of false prophets?

Let’s take the question further: why does crypto generate so much drama generally? Bitter feuds over software forks; relentless conspiracy theories; disputes between maximalists, altcoiners, nocoiners and shitcoiners; competing social media memes; token “armies;” Twitter trolls; fraudsters of all kinds – it’s the crypto circus, and many of us secretly love it, at least in doses.

But why? How did a technology spawned by the most math-driven, nerdy and precision-obsessed fields of computer science give rise to Mexican telenovela-like stream of plot twists?

Other open-source tech communities generate their fair share of drama too, of course. (Type in “Linux community” into a Google search and it auto-completes to “Linux community toxic.”) The leaderless structure of open-source projects means there’s no central authority or pooled profit interest policing behavior or managing the external messaging.

Still, the crypto soap opera takes things to another level of madness. Why?

Learning from ancient history
My attempt at an explanation begins with the fact that, unlike other technologies, this is one is fundamentally about money.

“Money has historically been a political process, a process through which people or states or some kind of entity consolidates authority over others,” says Bill Maurer, Dean of Social Sciences at the University of California, Irvine, an anthropologist who has studied the culture and history of money, adding:

“So, you have this big paradox with something like bitcoin, where its very idea is that there shouldn’t be any one person or authority in control…But because of that, you get this cacophony of voices, each claiming to have some kind of truth and striving to be the one in control.”

For the full story, please visit https://www.coindesk.com/the-faketoshi-circus-why-even-bitcoin-cant-escape-the-politics-of-money

Facebook’s Libra: it’s not the ‘crypto’ that’s the issue, it’s the organisation behind it

by Bill Maurer, UCI dean of social sciences and professor of anthropology and Law, and Daniel Tischer, University of Bristol, on regulatory warning signs to watch for with Facebook's new cryptocurrency, courtesy of The Conversation

The founding partners of the Libra Association. Ascannio / Shutterstock.com

In all the hype that has surrounded its Libra currency, Facebook has been able to distract attention away from an important issue. Libra is being hyped as Facebook’s bitcoin but it’s really a proposal for a global payments system. And that system will be controlled by a small and exclusive club of private firms.

Since it was announced in June, politicians and regulators have attacked Libra, citing concerns about its being a cryptocurrency. Libra is not a cryptocurrency – at least, not as they have been put into practice so far, where a distributed, decentralised community participates in transaction verification via a competitive process.

Libra is essentially a prepaid digital token, backed one-to-one with a basket of reserve currencies. It is “minted” when people put up state-issued currencies to buy it.

What’s important here is not the technological innovation. Facebook is proposing, in Libra, a new form of organisation. We already have payment systems controlled by private companies – Visa, MasterCard, Venmo or PayPal, which provide the infrastructure or “rails” for transferring value – and Libra might turn into another such rail. But its promoters have greater ambitions for it.

Based on our research on the history and technology of payment infrastructures, we see similarities between Libra and Visa. But it’s the differences with the Visa network that raise the biggest warning flags.

Learning from Visa
Libra will be controlled and maintained by the Libra Association, a membership-based group. Libra's developers have voiced a commitment to letting anyone become a member of the association, including users like you and me. The Libra white paper trumpets the importance of decentralisation. But it also admits that, "as of today we do not believe that there is a proven solution that can deliver the scale, stability, and security needed to support billions of people and transactions across the globe" through a truly open, decentralized system.

We believe Libra's founders got the idea from the work of Visa's founder, Dee Hock. Hock was heralded as a visionary in his day, like Steve Jobs or Mark Zuckerberg today. He realised that the problem facing payments between banks was not technological, but organizational.

When setting up Visa, it was important for Hock that Visa would not be owned by self-interested shareholders. Instead, it was the users, banks and credit unions, who "owned" Visa as a cooperative membership organisation. Ownership here did not entail the right to sell shares, but an irrevocable right of participation – to jointly decide on the rules of the game and Visa's future.

The incentive was to create a malleable but durable payment infrastructure from which all members would benefit in the long term. To work, everyone had to give something up - including their own branding on credit cards, subordinating their marks to Visa. This was a really big deal. But Hock convinced the network's initial members that the payoff would come from the new market in payment services they would create. He was right.

For most of its existence, until it went public in 2016, Visa was an anomalous creature: a for-profit, non-stock corporation based on the principle of self-organization, embodying both chaos and order. Hock even coined a term for it: "chaordic".

Libra envisions a similar collaborative organisation among the founding members of its Libra Association. But it turns Hock's principles upside down. The Libra Association is all about ownership and control by its members as a club.

Big barriers to entry
And the Libra Association is a club with very high barriers to entry. An entity has to invest at least US$10m in Libra or have more than US$1 billion in market value, among other criteria. The initial list of founding members tilts toward groups that have shown strong opposition to government interference and oversight. Tellingly, there are no regulated financial entities - like banks and fund managers - in the mix. The membership represents a self-selecting crème de la crème of global tech and vulture capitalism.

Association membership guarantees a share of future profits proportionate to a member's stake in the system. Unlike Visa, members do not compete with one another for market share. Instead, they will passively collect rent from interest made on investing in the Libra reserve basket. Plus, profits are not shared with users, and no interest is paid on the balance held by individuals.

Being a club member also affords the right to vote - again, a lot like Visa. But, unlike Visa, Libra gives voting right power based on investment level, not participation. This is not democratic; it is a plutocracy, where the wealthiest rule. And, as profits are linked solely to interest on the association's reserve funds, those managing it may well become riskier and more speculative over time.

Libra's white paper outlines an organiszation that could become a decentralized, participatory system like Hock envisioned Visa would become. But Libra, if it is successful, will likely become an undemocratic behemoth. Alarm bells ring about a global currency's de facto governance by a private, exclusive club serving the purposes of its investor-owners, not the public good.

Governments have long been suspicious of private currencies for good reasons, and Libra is no exception. We must not be distracted by its proposed technical complexity, and instead, focus on how this technology is organised, put to work, and how its rewards are distributed. The good news is that Facebook's play for money may at last prompt politicians to regulate tech giants to curb their impact on and influence over society.

Bill Maurer, Professor of Anthropology and Law, University of California, Irvine and Daniel Tischer, Lecturer in Management, University of Bristol

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Marching into Hong Kong: Maurer Plays Marco Polo (Part 2)

By IMTFI Director and UC Irvine School of Social Sciences Dean Bill Maurer

The first thing I noticed when coming into Hong Kong from China was that the cab drivers wanted cash. No cab driver was using an app to receive payment. The second thing I noticed was the cash: the HK$100 note is the same size and color as the Chinese 100 RMB note. Instead of a portrait of Mao, it has an image of Chinese soldiers marching into Hong Kong to commemorate the 20^th anniversary of the establishment of the Hong Kong Special Administrative Region (HKSAR). Oh, wait, it’s not exactly soldiers. It’s a military marching band, holding musical instruments. Soooo much nicer.

With cash as an everyday reminder of Chinese rule, cash and cards dominate the payment landscape in Hong Kong. Overlooking the harbor we saw a giant lit-up ad for Samsung Pay during the nighttime lightshow, but I never saw anyone use it, and no one I met had ever used it (and several had never even heard of it). Lots of cash, a fair bit of bargaining, and some credit card use. Union Pay ads adorn walkways and public areas, as well as the airport, celebrating your ability to “make your choice” and touting Union Pay’s “global payment network.”

Union Pay ad in Hong Kong.

This seems to be a selling point, at least for now. WeChat Pay can’t be used outside of China by non-Chinese citizens (and I haven’t yet seen any merchant in the US who accepts WeChat Pay – but I’ll be looking, and Rutgers graduate student Jing Wang shared with me this photo of a vendor who accepts WeChat Pay outside of the NYU Stern School of Business!). My Chinese students at UC Irvine are all using WeChat for social networking, chat, news and more. It may only be a matter of time and regulation before WeChat Pay also goes global. When that happens, I have to wonder how much more data might be available to WeChat—and the Chinese government—about residents and citizens of the United States.

Food truck vendor in front of NYU Stern School of Business.
Photograph by Jing Wang, used  with permission

This may be why there is so much interest in Hong Kong—and in China, among those I spoke with—in blockchain technology. While I was in China, the government banned bitcoin and shut down some bitcoin exchanges. Nevertheless, several of my interlocutors in China wanted to know more about the cryptocurrency and blockchain. They were ready to disparage the (ridiculous) monetary theory behind bitcoin, but were deeply interested in the potential use of blockchain for “accountability.”

I was surprised to see a whole display of books (see left) in a non-academic, non-tech, general readership Hong Kong bookstore on blockchain and fintech. I actually bought a copy of a blockchain book—in Chinese, just to have as an artifact of this moment in the history of payment and accounting—at the airport bookstore in Hong Kong (thank you, National Science Foundation).

What are the bigger lessons then? I’m tempted to make some big claims but they’re really too flimsy to stand on right now. Still: maybe the US’s messy, noninteroperable, non-seamless, kludgey payments infrastructures are not such a bad thing after all? Google’s got a lot of my data and the NSA can snoop around in it just as easily as the Chinese government can use machine learning to catch phrases in WeChat conversations or shut down entire groups or circles of payment or make it impossible for you to rent an Ofo bike, limiting your mobility. But if I can’t keep track of my various accounts for the different payment services I use, is my fragmentation across payment platforms a good thing for my liberty?

Mobile payment in its WeChat/Alipay app-based form, so different from the SMS-based world of M-Pesa, crucially depends on government-mandated identity as the base layer on which everything else is built. So maybe there’s something to be said about the line from authoritarianism to app-based mobile payment? And maybe, whenever I’m feeling like a blockchain skeptic, I should look at that HK$100 note to remind myself why a noncentralized, non-government controlled means of accountability might be a good thing.

I can’t thank by name but also can’t thank enough my various interlocutors and guides in China and Hong Kong. Xiè xiè!


All photo credits are by author unless otherwise noted.

Read first post: "Paying behind the Great Firewall: Maurer Plays Marco Polo (Part 1)"

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