This week, we continue our discussion of speculative financial technologies, particularly those that operate on the blockchain: cryptocurrency and non-fungible tokens. Since I started writing about these technologies last month, I feel like my crypto marketing has grown tremendously.
Every app I use for banking has invited me to invest in cryptocurrency or attend a blockchain investing seminar. The question guiding the newsletter remains: “What problem does this solve?” Last week, I offered an answer: For a small group of very wealthy people, blockchain and crypto solve the problem of where to put a lot of money. And, for some ambitious people, crypto culture makes them feel part of the action.
But why are politicians and other institutions so drawn to the promise of crypto?
One reader suggested that these technologies will ultimately solve the problem of the unbanked, those few million American households that the FDIC said not, as of 2019, have a current or savings account. People are detached from banks for different reasons. Some are put off by high retail bank fees, minimum balance requirements and rigid terms of service.
Others live in banking deserts, places where there aren’t many retail banking options. (I support postal banking services for this very reason. After years of proposals from various people before Congress, the US Postal Service finally launched a pilot program offering routine financial services, then that would be a good reason to understand how it does it and under what conditions. This begs the question, who is responsible for figuring this out?
In last week’s newsletter, I spoke to Anil Dash, a tech executive who helped invent NFTs nearly a decade ago and is ambivalent about how they’ve been used today. I asked him which regulatory or institutional body is responsible for ensuring that all these new blockchain tools deliver on their promises. The answer is nobody.
“Part of the reason this entity doesn’t exist is that there’s a really deliberate tactic of toggling between when the domain code and when the domain is politics or culture,” m’ Dash said. He added: “They say, ‘You can’t regulate the code that we can write. That’s innovation, isn’t it? Then, whenever it suits them, they say, “Well, you can’t regulate what people can sell themselves on the open market. It is innovation. So you have this unassailable thing where it’s a dessert topping and a floor polish, and the prevailing regulatory regime is the one that’s most hands-off.
What Dash is describing is fertile ground for predatory schemes. In a recent newsletter, Paul Krugman compared crypto to subprime mortgages: uninformed borrowers with narrow margins for losing money taking on risky financial products that extract profits for asset holders. elite at the top. One could say that the risk and reward structure has the form of a pyramid.
Despite the obvious disadvantages for small investors, the idea that blockchain is the wave of the future has taken hold. I’m fascinated by that. It reminds me of American popular economics.
Popular economics refers to the very human impulse to describe complex economic processes in simple terms. The most popular example refers to the national budget as a household budget. Politicians encourage this kind of folk knowledge every election year when they allude to the “average” American family balancing a metaphorical checkbook at the dinner table. (Someone recently asked me to pay by check and I freaked out. I have no idea where my checkbooks are. I have them somewhere safe, so safe I don’t have them. Haven’t seen them in years. I don’t need them. Paper checks are weird enough to me that the idea of balancing a physical checkbook rather than taking it to my kitchen counter is basically science fiction. I doubt I’m the only one.)
Although checkbooks are an outdated metaphor, you can see why we like to think of a system as complex as budgeting in simple terms. It allows us to feel informed and in control. Knowing just enough to use a system is more than enough for everyday life. But the oversimplification of complex financial instruments and obscure market rules leaves us vulnerable. We’re starting to believe that these things are as intuitive as our folk models and don’t need oversight or even a clear use case.
I asked Daniel Hirschman, sociologist at Brown, about the power of popular economics. One of the things Hirschman studies is how we make sense of statistics and how powerful they become. I don’t want to exaggerate the popularity of blockchain, crypto and NFTs. They are still niche investment vehicles. But their centrality in media discourse is growing rapidly.
Crypto’s future popularity rests on what social scientists call stylized fact. A stylized fact is an observable phenomenon that can be counted but cannot be easily explained, or as Hirschman puts it, “empirical irregularities that require explanation”. A stylized fact about crypto is that it has a high market value. The exact value changes – cryptography is volatile – but the particular number matters less than the fact that it’s a big number and repeats itself ad nauseam. It gives you the impression that crypto is important without explaining why. And when people have a big number and no way of knowing what the number means, they fall back on popular understanding of economics.
What holds the ecosystem together is a belief about technology: that its innovations are indisputable and inevitable. Anil Dash found something that clearly highlighted this for me. Fintech culture is very expertise agnostic, to put it mildly. A reader emailed me after my first crypto newsletter to say I’m skeptical about this because I have a Ph.D. The implication is that officially credentialed people are wary of anything that might undermine their authority.
Dash called this phenomenon the non-credit of tech culture. It stems from the internet’s early days as a staunch libertarian and anti-institutional, and thrives in online spaces like Reddit and Discord. The idea that technology can’t “trust these strangers” poses a problem for technology’s ability to solve real problems. As Dash said, “The challenge is that a maturing industry must have continuity of expertise.” I offered a counterpoint: a mature industry could also have regulation. So far, it’s a pipe dream.
Hirschman’s latest article examines the power of popular economy using the gender pay gap as an example. He recommended two books by Finn Brunton to better understand the cultural connections between scams and fintech: “Spam: a history from the shadows of the Internet,” and “Digital Money: The Untold History of the Anarchists, Utopians, and Technologists Who Created Cryptocurrency.”
I also found Joseph Laycock’s test discuss whether crypto is a very interesting religion. Laycock says the question isn’t as useful as thinking about the characteristics of people’s irrational faith in technologies to solve all of humanity’s problems. It just seems right.
Tressie McMillan Cottom (@tresiemcphd) is an associate professor at the University of North Carolina at the Chapel Hill School of Information and Library Science, author of “Thick: And Other Essays” and 2020 MacArthur Fellow.