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In response to “The Devil in Nerd’s Clothes”

Forbes magazine technology writer David Jeans released a piece last weekend titled “The Devil in Nerd’s Clothes”. The article depicts the rise and fall of the cryptocurrency exchange FTX, an abbreviation of “Futures Exchange.” More importantly, the article explains the personality and destructive decisions taken by FTX founder Sam Bankman–Fried. The nerd in this situation is Bankman-Fried and the devil stands to be his destructive decisions that have led FTX to bankruptcy. Jeans’ piece is an excellent read, and I highly encourage checking it out. But for now, hear me out, because I have some thoughts on the matter.

For people like myself who have been bearish on cryptocurrency since its rise to popularity, the collapse of FTX comes as no surprise. Bankman-Fried’s net worth has depleted, and investors and regulators alike are calling for SBF’s (his self-proclaimed nickname) head on a platter. Think King Herod and St. John the Baptist, it’s that bad. It’s certainly worth taking a deeper look at how a Silicon Valley raised, MIT educated billionaire let it all go to waste. 

FTX’s collapse is not a strange one, as the economics are simple, but boy it was a quick collapse. FTX’s business model was supposed to be simple. The world’s first cryptocurrency exchange, the company promoted the liquidity and transacting of coins and tokens (Minecraft anyone?). FTX allows users to connect their wallets, place trades, exchange digital commodities, enter derivative contracts or buy/sell NFT’s. Founded in 2019, SBF and his constituents gathered massive investor interest, as funds and individuals joined seed rounds in order to not miss out. The rise of meme stocks and amateur day traders (looking at you Dave Portnoy) helped FTX to gain billions in liquidity, and that money was quickly spent. Advertising and endorsements took center stage, as athletes Tom Brady and Lewis Hamilton inked deals, and the Miami Heat’s arena was renamed “FTX arena”. All these endorsements would’ve been great, if FTX actually had the money. 

FTX created their own make-believe token called FTT and encouraged investors to buy it for two years. These tokens served as airline miles for loyal customers and allowed Bankman-Fried to invest new cash into a company run hedge fund. The problem with this was the lack of insured value, as the worth of FTT soared to $80 a token. When financial reporters began to investigate the solvency of FTX, the company Binance, another cryptocurrency exchange, sold all of their FTT holdings. This terrified investors, and the value of FTT plummeted like the Hindenburg. Investors could not recover their holdings in cash because, well, FTX didn’t have any cash.

There is a quote from HBO’s finance show “Industry” that probably best describes SBF’s mindset in this whole debacle. “The thing people forget about this Icarus dude, is that before he fell, he flew. And I bet the sun gave off a lovely light.”

Bankman-Fried probably felt euphoric when raising his company to unprecedented new heights in a completely uncharted and unregulated space. Seeing the “FTX” logo on jerseys, Twitter, and on TVs across the world must’ve been quite the rush, especially if your personal net worth inched closer each day to $10 billion. And sure, I have no way of knowing anything about SBF’s character and morality, but the dude certainly took care of his friends. He even bought a five story penthouse in Nassau, Bahamas, for them all to live in. He also was active in politics, donating close to $40 million in contributions to campaigns in 2020. But, as in the tragic story of Daedalus and Icarus, they both knew that if they flew to close to the sun with their makeshift wings, the heat of the sun would melt the wax holding their wings, sending you to certain death in the ocean below. Regardless, Icarus flew to close to the sun, and died. SBF is Icarus, and I believe he knew a crash was unavoidable. 

As detailed in Jeans’ piece, FTX is a venture that allowed SBF full autocratic control. I don’t know whose idea that was, but SBF singularly ran FTX because he got investors and employees to buy into his vision. And as former staffers point out, Sam was not only aware of the company’s Ponzi scheme strategy, but also aware of the mirage he put on to inform and persuade. So why didn’t anyone say anything? I mean, for crying out loud, the company is incorporated and headquartered in the Bahamas, which is a tax haven. Was that not enough of a red flag for investors? For a company without proven cash flows, firms were unusually eager to throw millions at SBF’s now severely flawed vision. And now, as firms like Sequoia Capital are writing off nine-figure losses on their balance sheets, the world for the story to further develop. 

Now, so what? Why does it matter to us that large hedge funds and average investors have lost billions thanks to this collapse? Are we supposed to feel sympathy? Remorse? I don’t. And I won’t. Now I am not insensitive to the fact that people lost money. Rather, my negativity is based on who they lost it with. Some of the best investors in history have used simple philosophies to generate returns. One such philosophy — to invest in companies that offer product and services that directly increase the quality of life for customers and employees — can be foolproof when done correctly. Investment in FTX is not this. Creating value and owning “value” are two very different concepts. The value owned by FTX token holders does not create. In fact, it has done the opposite. It has destroyed. 

But we shouldn’t be surprised. Technology focused “Nerds” and entrepreneurs like SBF have become increasingly commonplace in the 21st century. Hustlers and salespeople such as Adam Neumann and Elizabeth Holmes have been at the forefront of schemes pulled off for personal gain. Bankman-Fried and other nerds have used their educational expertise to generate investor buy in. Even worse, this has extended to generational buy in. I cannot begin to comprehend how many conversations I’ve had with peers who’ve been obsessed with crypto, Dogecoin, FTX and so many other means of superficial commerce. One conversation with a graduating peer last May left me dumbfounded. “What are you planning to do after graduation?” I asked. This classmate responded, “Oh I am going to move to Silicon Valley and make my own NFT”. Dude. What the hell does that even mean? I don’t have a lot of suggestions this week, but I don’t expect this trend to change anytime soon. I am not usually one to eagerly drink the Fighting Irish Kool-Aid, but I am certainly glad we have the chance to learn under minds who would certainly agree with me. 

Stephen Viz is a one-year MBA candidate and graduate of Holy Cross College. Hailing from Orland Park, Illinois, his columns are all trains of thoughts, and he can be found at either Decio Cafe or in Mendoza. He can be reached at sviz@nd.edu or on Twitter at @StephenViz. 

The views expressed in this column are those of the author and not necessarily those of The Observer.

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Fight for economic, civil and environmental justice. Regulate cryptocurrency, now.

It’d be incorrect to say that we don’t know much about cryptocurrency. It’d be a blatant lie to claim that what we do know about cryptocurrency is good. Realistically, our knowledge of the innovation’s impact is disheartening.

The first form of cryptocurrency, Bitcoin, was circulated in 2009. Initially, Bitcoin, and other digital coinage, appeared promising, intended to limit government power, eliminate middlemen and provide equal opportunity for profit.

However, it’s proven to be quite different. Over the past decade, we have watched cryptocurrency’s volatility disrupt the flow of economy, its anonymity enable criminal activity and the extortionate energy requirements of its “mining” process take a toll on the environment. It’s time to regulate cryptocurrency.

Demand for cryptocurrencies has skyrocketed, reaching a market cap of over $3 trillion. This is a striking value — roughly equal to the GDP of Britain or India. What is most striking, however, is that it was reached without having any traditional monetary backing.

Cryptocurrencies are “decentralized autonomous organizations,” or DAOs, meaning that one-on-one transactions are unrestricted and effectively anonymous. The creation and exchange of cryptocurrencies are wholly unregulated and unbacked by financial institutions or governments.

Decentralization triggers damaging economic effects. In September 2019, the Bank of Canada estimated that the overproduction and underuse of Bitcoin in 2015 produced a welfare loss about 500 times as large as a cash economy with two percent inflation. This massive loss signals a clear market inefficiency. Moreover, the nature of the cryptocurrency market is such that double-spending, or stealing cryptocurrencies, is not only possible, but present. Double-spending puts honest individuals in competition with criminals, threatening the average users’ investments and generating market volatility. The lack of centralized regulation over cryptocurrency allows for market inefficiencies and volatility that may soon have dire economic consequences.

Further, the anonymity of cryptocurrencies as DAOs enables untraceable crime. Many of the advantages provided by cryptocurrencies — efficient payment, low transaction costs, simple exchange — are commonly used to conduct illegal business. Cryptocurrency critics recognize that this creates a prime environment to purchase drugs, launder money, avoid capital controls and engage in various criminal activities. In 2019, the FBI seized over $4 million worth of Bitcoin from the first darknet market called the “Silk Road,” which sold everything from stolen credit card information to murders-for-hire. Studies of Bitcoin exchange patterns uncovered that nearly half of all transactions are associated with illegal activity… and that’s just Bitcoin.

The most damaging impact of cryptocurrencies results from its mining process and extortionate energy requirements. Cryptocurrencies were crafted so anyone with a computer could own, trade and “mine” them. “Mining” is the process of winning cryptocurrency by solving mathematical puzzles. During mining, thousands of individuals race to solve these problems. Those who solve them first are granted cryptocurrency. However, the system was designed such that, as competition grows, so does the puzzle’s complexity. 

While at first these puzzles could be solved using a traditional personal computer (PC), the evolving complexity of each puzzle now demands that competitive miners use more powerful technologies that require exorbitant energy to operate. These miners rely on specialized computers called Application-Specific Integrated Circuits (“ASICs”) that are more efficient at mining than a traditional PC but also consume much more energy. ASIC use has shattered the intended equality of cryptocurrency and created devastating environmental effects.

Considering the massive market, with thousands of people mining the same coin, the energy costs of ASIC operation have become excessive. Researchers estimate that mining and exchanging just one Bitcoin consumes 2100 kilowatt hours — the average American household consumption in 2.5 months. According to a 2021 study, a year of Bitcoin mining consumes 121.36 terawatt hours — more energy than used in the global consumption of Google, Apple, Facebook and Microsoft combined. Unfortunately, most of the energy used in cryptocurrency mining comes from nonrenewable resources. Thus, cryptocurrencies leave massive carbon footprints. Scientists warn that carbon emissions from Bitcoin mining alone could push global warming beyond 2 degrees Celsius, taking a hefty toll on the environment.

To protect our earth, national security, economy and ultimately the future of humanity, we must regulate cryptocurrency and its mining processes.

This regulation should not criminalize cryptocurrency. Many critics of extreme cryptocurrency regulation argue the importance of technology neutrality and the impossibility of prosecuting over 46 million American cryptocurrency users were the coinage to be made illegal. It would be imprudent to ban cryptocurrency simply because it can be abused. If that logic was applied to other financial instruments, we would have to ban cash, which can just as easily facilitate anonymous or illegal transactions. Nonetheless, it is clear that cryptocurrency requires some regulation. A middle ground — protecting innovation and promoting freedom while addressing the economic, civil and environmental implications of cryptocurrency — should be the goal.

Given modern technological advances and the importance of maintaining freedom of choice, there is no easy answer. Potential solutions lie in ASIC regulation — placing a carbon-tax on users, implementing a pollution cap or even banning the use of mining-specific technology altogether. ASIC regulation could reduce the environmental repercussions of cryptocurrency while maintaining technological neutrality. By disincentivizing the use of ASICs and returning miners to traditional PC usage, governments could more easily track criminal activity and double-spending.

Leaders have taken small steps towards regulation, as seen in the President’s recent Executive Order and bills like the Responsible Financial Innovation Act. These are merely initial steps on the path toward effective regulation. We must continue to educate ourselves on the growth and impacts of cryptocurrency. With that knowledge, we must vote for leaders willing to address the negative impacts of cryptocurrency through measured regulation. 

Ainsley Hillman, a sophomore living in Johnson Family Hall, is studying Business Analytics and Political Science. She currently serves as assistant direction of operations within BridgeND. Some of her research interests include U.S. foreign policy and the intersection of environmental and social justice.

BridgeND is a multi-partisan political club committed to bridging the partisan divide through respectful and productive discourse. It meets on Tuesdays at 5 p.m. in Duncan Student Center W246 to learn about and discuss current political issues and can be reached at bridgend@nd.edu or on Twitter @bridge_ND.

The views expressed in this column are those of the author and not necessarily those of The Observer.