It’s taken vastly longer than we ever imagined, but authorities around the world have woken up to the fact that mis-named cryptocurrencies (which we will call “crypto” for sake of convenience) unique selling proposition is to facilitate crime, although it’s also proven to be not bad at sucking rubes into pump and dump schemes. So the question now is how quickly they will act and how bloody-minded they will be in crushing them.
We have pointedly avoided posting about Bitcoin and crypto because those articles would inevitably attract touts and true believers in comments. We didn’t like expending the considerable energy it often took to debunk them. We didn’t even like dignifying the concept by giving it attention (not that NC’s view would make any difference; this is a philosophical issue). The dot com bubble went on longer and became far more frenzied than we thought. Even though cyrpto has no legitimate use,1 there seemed to be little point in objecting to yet another speculative mania.
Having said that, Nouriel Roubini, who was early in calling out the housing bubble by starting to issue warnings in 2005, was acute in his timing on Bitcoin and crypto. He wrote a blistering op-ed in the Financial Times in February. That led to follow-up interviews in which Roubini recapped his critique:
The key flaw is simple. The cost and time involved in validating Bitcoin transactions makes it unusable in retail transactions. So they will always be foreign currencies, where you have to trade in and out of them into a real world currency. That means foreign exchange risk, as in price volatility, and frictional costs (the transaction cost of swapping in and out of the real world currency, which will be a combination of fees and spread). And in many cases, it will also mean doing the trade into the real world currency with a different counterparty than the one from whom you bought the crypto.
And this deficiency is fatal. It means it fails on its premise:
And having a whole bunch of crypto currencies makes matters worse. Fragmentation may further speculation, but it undermines any hope of much real world use.
The CNBC host broaches the idea of Bitcoin being limited to billion-dollar trades. Roubini pooh-poohed that as almost certain to be the province of criminals. Even if not, you’d see very few trades at that level, with resulting even more extreme volatility and large bid-asked spreads if any legitimate players were to step in as facilitators.
Even if most of this terrain is familiar, please be sure to listen Roubini at 8:55, where he eviscerates the widely-held view that Bitcoin is decentralized and democratic.2
The Colonial Pipeline hack appears finally to have focused a few minds. Out of gas signs and lines at gas stations have an oil crisis/stagflationary look to them. Even though Jimmy Carter inherited the 1970s economic malaise, his inability to do much about it was one of the key reasons for Reagan’s election. Similarly, Biden isn’t responsible for IT vendors and buyers for prioritizing convenience and cost over security or for a crypto offering a way to receive large ransoms at virtually no risk.
Colonial isn’t the only victim that would rattle the PMC. Interestingly, the management of this institution has managed to dampen down press interest, but word seems to have gotten around. This from our IM Doc on May 10, based on a May 1 “security incident”:
In the USA – we have multiple large tertiary referral centers that have quite the national reputation – I would include in that list MD Anderson, MAYO, Johns Hopkins, and …… The Scripps Clinic in La Jolla, California. I have innumerable patients that are seen there – they cater to that type of clientele. I first heard about this impending disaster over the weekend – and today things appeared to get immeasurably worse there…… see the following article……
I know we have a major pipeline down from ransomware now – but this is just as scary if not more so. This is a major medical system in this country – and it has been hobbled. All of my patient’s appointments there have been cancelled until June – they are admitting no one – and no one seems to know if it will be back or not anytime soon. It has already been going on for a week.
ANNNNDDDDD – they use Epic – which has repeatedly touted itself (I have been in the meetings multiple times in my life) as completely impervious to hacking.
Again – I knew this day was coming at some point. These EMR systems are a complete disaster waiting to happen. The hackers have managed up to this point to take down non-EPIC systems at Bugtussle Memorial Hospital across the country – but nothing like Scripps.
Wow, just wow. And to boot – I honestly have not heard a peep about the whole thing on any national news source. Again – going on for a week – and I only learned about this because patients of mine were being cancelled and inconvenienced.
I am not saying anything about any certain celebrity – but I am looking for the day soon – when we have XYZ Oscar actor’s entire herpes history online, etc. We have all kinds of these patients here where I live – and this hospital has a former [as heavyweight as it gets org] as its IT guy – they take this shit seriously here. I wonder what happened in La Jolla.
The latest update was that only some Scripps systems had come on line. From HealthCareNews:
Three weeks after a cyberattack led to a network outage at Scripps Health, employees say some systems are coming back online.
According to reporting from ABC News, several Scripps Health workers said they’d regained access to “read-only” medical records from before May and payroll systems, along with some computers, emails and X-rays.
Its Epic-powered patient portal, MyScripps, was still down as of Thursday….
The San Diego-based health system continues to keep mum about the specifics of the attack…
The statement reiterated that in-person care was still available, and that patients could and should confirm appointments via phone. It noted that the Scripps team had backup workflows and paper processes in place, and that care providers currently had “view-access” to patient history and records. Virtual visits were also still available….
It advised that requests for medical records should be completed by mail…
“It’s likely that it’s taking a long time because of negotiations going on with the perpetrators, and the prevailing narrative is that they have the contents of the electronic health records system that are being used for ‘double extortion,'” said Michael Hamilton, former chief information security officer for the city of Seattle and CISO of healthcare cybersecurity firm CI Security, in an email to Healthcare IT News.
If that’s true, Scripps certainly wouldn’t be alone: The healthcare industry saw a number of high-profile ransomware incidents in the last year, including a cyberattack on Universal Health Services that led to a lengthy network shutdown and a $67 million loss.
Frankly, I have assumed that medical industry IT security was on a par with candy stores, and hence I have been leery of having my records in electronic form and centralized.3
Roubini assumes that the crackdown will the civilized sort that one uses on investor types with dough when they use banks and other financial intermediaries: complying with know your customer rules and being subject to reporting of income (as in trading profits). He points out that over 70% of Bitcoin mining takes place in 3 countries outside the US rule of law: Russia, Belarus, and China. By that, I assume he means none have extradition treaties with the US.
Doomsberg has a May 15 post I wish I had written on crypto (except he’s agnostic about the premise of crypto, where as I’ve seen enough financial innovation to regard it with prejudice). The money section:
My thesis begins with a simple observation. The power to control a society’s currency is the ultimate power over that society. The people who currently have control over the world’s fiat currencies have, by definition, a lot of power. Usually, people with a lot of power don’t like to give it up. When confronted with a risk to their power structure, those in power tend to fight back. They are often late to recognize the threat, especially in the Western democracies, but once they see it for what it is, they crush it.
I’m the first to admit that I’m shocked at how long the cryptocurrency game has been allowed to be played. The top cryptocurrencies globally have a market cap of over $2 trillion! Bitcoin alone recently traded over $1 trillion, although it has pulled back under that number in the past week. To put this into context, $2 trillion is equivalent to roughly the entire annual budgetary outlay of the US government in the early 2000s.
Yves here. If Roubini is right, that market cap has been pumped up by a lot of phony-baloney trades. However, today, the Financial Times is clutching its pearls over the fact that the Bitcoin crash appears to have pulled down bona fide assets:
A huge drop and snap back in cryptocurrency prices this week rippled into traditional asset classes, potentially offering a taste of what could happen in the event of a more severe shake-up.
Some government bonds gained in price on Wednesday, while futures on the US benchmark S&P 500 equities index dipped and oil also pulled back after the price of bitcoin plunged 30 per cent on signs that China was preparing a crackdown on digital tokens. The Japanese yen — a currency often in demand in times of stress — also popped higher.
Hours later, bitcoin rebounded sharply. But it was unusual for the ructions to catch the attention of mainstream market participants.
Correlation is not causation and the pink paper was short on explanations. However, it wasn’t that long ago that the markets operated in “risk on/risk off” mode, where “risk on” and “risk off” assets would move in synch. Here, the Bitcoin plunge, even if understood as the result of an official intervention, could spook the horses about other frothy positions.
Oddly, the article does not discuss leverage, when a quick Google search shows that services like Kraken allow crypto holders to leverage up to five times. And while the plural of anecdote is not data, some market watchers report they know investors who have borrowed against their stocks to buy Bitcoin.
As more and more people are acting like mini global macro players, the better operators among them will act as the big boys did during the acute phases of the financial crisis: when a position gets a margin call due to a downdraft, rather than sell into a falling market (and likely crystalize a loss), they’ll sell an asset in a market not under pressure (as in take a gain elsewhere if one is to be had). Bitcoin and crypto investing is big enough, and enough is in the hands of freewheeling players like family offices that we might be seeing cross-market selling to cover margin calls.
Doomsberg continued with a list of new rules, prosecutions, and other Bad News from Turkey, India, and the US, with the latest being an unusually blunt IRS warnings and the surprise (and in close succession) Bitcoins reversals by former fanbois Elon Musk and Jack Dorsey. We thought Musk must have been warned by a little birdie; so to does Doomsberg.
After this post ran, the IRS implemented its new rules requiring crypto transactions of over $10,000 be reported as cash ones are now, meaning that parties are also subject to “know your customer” style reporting. Bloomberg Tax says the IRS intends to pursue crypto-related taxes aggressively. China banned crypto exchanges and initial coin offerings and is now targeting miners, saying that their energy profligacy is at odds with China’s climate change goals. Individuals are still allowed to hold crypto.
If the US intends to gradually take the air out of the crypto bubble, or has other reasons for going after crypto a bite at a time, this approach might do. But if it wants to put a virtual end to extortion-via-crypto, it has to be a lot more bloody minded.
Cracking down on crypto crooks is easier than stopping, say, money launderers. There is a lot of cash floating around, particularly in the US. So it is easy for criminals to hide many of their activities in the stream of regular cash transactions. It’s only when they get to be big crooks that it gets more difficult. But even so, there are lots of businesses that handle cash that can serve as fronts. The trick for the money launderer is to get the cash into the banking system so he can do things like buy real estate.
By contrast, with crypto, there is not a large stream of legitimate commercial transactions to serve as protective coloring. There are only crypto transactions. And the IRS cutely demanding that transactions of $10,000 or over being reported is not going to stop any ransomeware artist from holding hostage your favorite pipeline or grid or hospital or local government. Said ransomware artist may not even be in the US or not plan to be here for very much longer if he is. I am highly confident crypto could make its way to Panama, which is supposed to be a decent expat haven and also has no extradition treaty with the US.
If the US is not hopelessly captured by libertarian ideology (and the volte face of Musk and Dorsey says possibly not), it is likely to find it necessary to criminalize crypto on a widespread basis. The fact that China is already ahead of the US in going that way may make it an easier sale.
Current holdings could be grandfathered, but query how one could sell them at any price if new purchases are verboten.4 Vlade came up with a simple but effective kneecapping:
You could start by making it a crime to be in any blockchain that includes a wallet that can be tied to a known criminal use, as participation in money laundering. Just the uncertainty of that would kill crypto.
I’m sure readers could come up with other elegant approaches.
Ironically, crypto-bashing could also serve as a way to at least marginally improve badly damages US-China and US-Russia relations. China is now in open warfare with its crypto industry. It’s hard to imagine that Russia is keen about theirs. By design, it is outside the legitimate tax paying economy. Even if Russia understands that it is a fiat currency issuer and does not need to tax, Putin has made a point of keeping Russian oligarchs at least somewhat in line. Crypto undermines that by letting the super-rich hide income and wealth and directly creating new oligarchs. Plus they can’t be keen about crypto mining competing with industrial uses of energy.
And please spare me the claim that blockchain is revolutionary. It is a clever mathematical solution still looking, after over a decade, for an application. I thought it could potentially be used to validate documentary letters of credit in trade transactions, but that has apparently come to naught. Roubini poured more cold water in his chat with Goldman’s Allison Nathan, as quoted in Heisenberg Report:
Finally, Goldman’s Nathan asked, “Doesn’t the concept of decentralized ledgers and networks have value, though?”
There too, Roubini is skeptical. “I’ve honestly spent a lot of time looking at this because more and more people are saying that while maybe these aren’t currencies, blockchain technology could be revolutionary,” he said, before noting that,
Something truly based on blockchain technology should be public, decentralized, permissionless, and trustless. But looking at DLT and corporate blockchain experiments, almost all of them are private, centralized and permissioned—because a small group of people has the ability to validate transactions—and most are authenticated by a trusted institution. And even among these projects, few have actually worked. One study looking at 43 applications of blockchain technologies in the non-profit sphere for reasons such as banking the unbanked, giving IDs to refugees, and transferring remittances found that zero actually worked.
In other words, our original “Prosecution futures” call for Bitcoin still stands, even though it is playing out in a remarkably leisurely manner.
1 I do not consider speculation to be a legitimate use. And other “no bones about it” types of speculation provide more socially useful by products. Betting on sports supports those types of entertainment (look at what happened to horse racing); casinos provide employment; lotteries support little newsstands and state budgets.
2 Roubini gave more detail in a May interview with Goldman’s Allison Nathan. Per the Heisenberg Report:
The crypto ecosystem is not decentralized [as] an oligopoly of miners essentially controls about 70-80% of Bitcoin and Ether mining… and 99% of all crypto transactions occur on centralized exchanges.
3/sup> I have regularly and at length discussed in comments how the way I handle my legacy insurance policy has allowed me to avoid that, albeit at the price of my paying for treatments and later submitting for reimbursement.
4 Bitcoin may prove to be worthless anyhow. As reader vlade pointed out:
It is estimated that about quarter of all BC in existence is vulnerable to a quantum-computer attack (see https://www2.deloitte.com/nl/nl/pages/innovatie/artikelen/quantum-computers-and-the-bitcoin-blockchain.html for example). IMO, it’s not inconcievable that within a decade or two there will be something capable of that. Do you want to have an “asset” (never mind currency) that becomes worthless as a technology can advance?
The article I link above (a disclaimer – I’m not a crypto expert, never mind quantum computing one, and you’d need someone who can do both and has no dog in the race, which may be hard to find) also states that BC could be terminally broken if a quantum computer was able to break BC signature in less than 10 minutes (which is the time BC block takes to mine and this time is sort of in-built in the BC, being the whole point of “proof of work”. Making it shorter won’t help, as it means the problem to solve is easier which means that a quantum computer can also solve it faster. The relation between the two is unlikely to be 1-1, so it may be some hiccups but anyways).
Hence, for all the “BC is here to save the world”, _IF_ you’re a technology wonk, you’d ignore BC because it can become worthless overnight if someone builds the right quantum computer. Which we know is _theoretically_ possible is “just” a matter of engineering (which is more than can be said of cold fusion).