Willie Sutton likes crypto

Willie Sutton was a quintessential American bank robber, a kind of “best-in-class” criminal. He was one of the first members of the FBI’s most wanted list, which is notable in and of itself. His real claim to fame, however, was his prescience about the cryptocurrency market. When he was asked why he robbed banks, aka as cryptocurrencies in the future, he replied that he did so because “that’s where the money is.” He is important because at least a handful of cryptocurrency market participants have shown themselves to be little Willie Suttons. It also explains why the EU has taken to bank regulation to reign them in.

Crypto currencies are a type of private money. They are not secured by the full faith and credit of the central government but have some exchange value. There is a long tradition of private currencies in the US. These are issued by non-governmental entities and have a variety of different structures and uses.

Private currencies have, for the most part, disappeared. It is in the interest of the public currency to eliminate the competition from private currencies. That does not make the public currency, especially our fiat currency, the dollar, an ideal type of currency. In fact, cryptocurrency was originally designed to overcome one of the primary limitations of a fiat currency – devaluation. Crypto currencies were thought to be superior to fiat currencies since a limited supply of them would be minted.

Crypto currencies have failed to live up to expectations as an inflation hedge or other moneyness functions. Money serves as a medium of exchange, unit of account, and preservation of value. Cryptocurrency probably has failed on all these functions, depending on how one defines them. At this point, cryptocurrency serves as a technology experiment and social movement with blockchain as the underlying technology. The industry is embroiled in a wide-ranging public debate about how to regulate it. The debate is about the uses of cryptocurrency, not of implementing blockchain financial applications. One likely use of the blockchain is for public currencies and central banking.

An outline for future crypto use

The Bank for International Settlements (BIS) produced a very thoughtful discussion of cryptocurrency. It addresses a seeming contradiction in crypto uses. Cryptocurrency transactions are public. But theft is high. How is that possible? The user’s identity in cryptocurrencies is hidden behind a private key. This is, as the article says, a type of pseudo-anonymity. The ultimate holder of the key is very often unknown and cannot be assumed to be innocent though surely many are average investors. A great deal of the crypto market is opaque and actively attracts both the Willie Suttons and nefarious foreign entities.

As with so many enterprises, success has exposed the structural flaws to the crypto system. The crypto platform does not scale very well. Congestion and high fees accompany high trading volumes in networks like Ethereum. One solution in use to overcome the operational problems of classical crypto systems is especially disturbing—the DeFi ecosystem. Under this system, decisions about the network are made by the holders of "governance tokens." This contradicts the original premise of decentralization because decisions can be made by a handful of governance token holders, including developer teams and early investors, rather than the entire grouping of holders. This is an open invitation to a Mr. Sutton.

Now you work in a bank

The EU adoption of a comprehensive regulatory framework for the cryptocurrency industry is provisional and will take several years to fully implement. Nevertheless, it is a clear sign that regulators are going to want bank-like compliance in cryptocurrency transfers. It places the EU at the lead in crypto regulation, but it clearly puts the industry on notice. What final rules will reach back to current transactions we do not know. But the industry is clearly on notice.

For the industry, it is the first full foray into crypto regulation and will surely spur the US into action in the area to preserve its interests. The current bills under consideration in the Congress will likely be strengthened considerably considering the EU action. The current news about another possible crypto theft of $100 million by North Korea will undoubtedly strengthen the legislation even more. Investors need to be extremely careful in this space or risk being fleeced by a Willie Sutton.

For investors:

1. More transparency in the industry will be forced by regulators.

2. More disclosure in Crypto may well hurt prices if current trends continue to expose corruption.

3. Investors should exercise a very high level of self-reliance even after the adoption of regulation. Regulation of this opaque industry will be a challenge as history has shown.

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