Commentary on Political Economy

Wednesday 21 June 2023

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Crypto shows‘innov­a­tion’ can­not be an end in itself

Big Crypto is in the midst of a big reck­on­ing. After a series of spec­tac­u­lar crashes and implo­sions last year, two of the most power­ful and prof­it­able crypto com­pan­ies still stand­ing — Coin­base and Bin­ance — were hit by law­suits from US reg­u­lat­ors on suc­cess­ive days this month. A third, Ripple Labs, is still fight­ing a case brought against it in 2020, hav­ing spent more than $100mn in legal bills so far.

It is not the most overt scam artists and con­men in crypto­land that are being tar­geted here (there are many of those around, but they tend to be rel­at­ively small fry). It is the com­pan­ies that have done their utmost to look like legit­im­ate busi­nesses; the ones that have tried to make them­selves pal­at­able to reg­u­lat­ors, Sil­icon Val­ley and politi­cians alike.

These are the suited-and-booted types who have din­ner with pres­id­ents and cosy up to Tory MPs-cum-Z-list celebrit­ies in the House of Com­mons. The types who boast of “great meet­ings” with the eco­nomic sec­ret­ary to the Treas­ury and who write altru­ist­ic­ally about their desire for the UK to “be a big part of [crypto’s] suc­cess” and their belief that Bri­tain must “put Web3 and block­chain at the heart of gov­ern­ment” (groan).

This “sens­ible crypto” crowd has relent­lessly pushed crypto by fram­ing it not as a mira­cu­lous way to make obscene amounts of money out of thin air, but as a cru­cial “innov­a­tion” coun­tries must embrace if they do not want to be left behind. Now, they and their back­ers are try­ing to fight back against the US Secur­it­ies and Exchange Com­mis­sion’s crack­down with the same rhet­or­ical argu­ment: any move to reg­u­late or pun­ish the Wild West of crypto will stifle said “innov­a­tion”.

“The SEC is look­ing to kill crypto innov­a­tion in the United States,” Ripple chief exec­ut­ive Brad Garling­house said in a video pos­ted to social media last week, after the release of some doc­u­ments per­tain­ing to the SEC’s case against his com­pany. “The SEC is cre­at­ing a reg­u­lat­ory envir­on­ment that is hos­tile to innov­a­tion,” Tim Draper — ven­ture cap­it­al­ist and friend of another fam­ous innov­ator, the incar­cer­ated fraud­ster Eliza­beth Holmes — told Fox Busi­ness last week.

So pre­val­ent is this charge that the SEC has even had to deny it: “We are not here to stifle innov­a­tion, we are here to stifle fraud,” the SEC’s dir­ector of enforce­ment said last week.

But what do we even mean by “innov­a­tion”? The Cam­bridge Dic­tion­ary defines it as “a new idea or method”, or “the cre­at­ing and use of new ideas or meth­ods”. Yet the way it tends to be used is more along the lines of “a tech-y thing that nobody quite under­stands but that might one day be use­ful and could def­in­itely make some money at some point”.

“It works very well for the industry to frame every tech­no­logy that they put out into the world — whether it’s crypto or gen­er­at­ive AI, or whatever else — as an innov­a­tion that we must pur­sue,” Paris Marx, host of the Tech Won’t Save Us pod­cast, tells me. “But Sil­icon Val­ley and ven­ture cap­it­al­ists are not actu­ally inter­ested in devel­op­ing tech­no­logy for the bet­ter­ment of soci­ety . . . What they’re inter­ested in is mak­ing money off of whatever hype cycle they are going to gin up next.”

Some­times the prob­lem with innov­a­tion is that while the idea in ques­tion might be new, it is not actu­ally very use­ful: it is a solu­tion look­ing for a prob­lem, as in the case of block­chain tech­no­logy. And some­times the prob­lem is that the innov­a­tion, while not without its uses, is incred­ibly harm­ful: syn­thetic opioids have provided mil­lions of people with pain relief, but they have also cre­ated an over­dose epi­demic, killing almost 80,000 Amer­ic­ans in 2022 and help­ing to drive US life expect­ancy down to a 25-year low.

Why is it, there­fore, that we have come to see “innov­a­tion” as such an unal­loyed good, and why is “stifling” it so unequi­voc­ally bad? Surely the object­ive of the innov­a­tion — and the pos­sible reper­cus­sions — should mat­ter, too. Innov­a­tion might be cru­cial in mak­ing pro­gress in all sorts of areas, such as medi­cine or sci­ence, but we seem to have got to a place where it is the idea itself that we ven­er­ate. That is wrong-headed: innov­a­tion should not be seen as an end in itself, but as a means of mak­ing something bet­ter.

Crypto might be novel but that does not make it use­ful or valu­able to soci­ety. We can­not go on ima­gin­ing that all innov­a­tion is a force for good. In prac­tice, “innov­a­tion” often just means exploit­ing gaps in exist­ing rules until the reg­u­lat­ors catch up — so called “reg­u­lat­ory arbit­rage”, a strategy that the crypto industry has very suc­cess­fully deployed and indeed relied upon. Unfor­tu­nately for these ingeni­ous crypto “innov­at­ors”, catch­ing up is exactly what reg­u­lat­ors are now doing.

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