On Sept. 24, 2021, Chinese authorities officially announced a final and full-scale crackdown on cryptocurrency trading and mining businesses within its border. Almost immediately, one of the most popular crypto trading platforms in China, Huobi, announced that they would stop new registrations and gradually retire existing accounts by Dec. 31. The global crypto market fell sharply in response, though made some recovery in the following week (Ossinger and Huang 2021). A cryptocurrency, according to the dictionary, is a digital currency that relies on cryptography and has no central authority but instead uses a decentralized system to record transactions and manage the issuance of new units (Merriam-Webster 2021). It was by no means the first time the Chinese government expressed its strong dissatisfaction: as early as May this year, the financial officials in China stated in a joint statement that banks and financial institutions must suspend transactions related to cryptocurrencies, specifically including cryptocurrency “registration, trading, clearing and settlement” (Ponciano 2021), causing widespread market panic and sell-offs from crypto holders worrying that their assets would soon lose their value. The significance of the latest announcement is, however, it makes clear that all crypto activities are punishable, rather than simply imposing measures to reduce their influence.
This series of actions have received backlash from many staunch crypto fans and holders who strongly oppose government intervention and advocate for the broader application of cryptocurrencies. They have a variety of advantages compared with a fiat currency, money issued by the government, as claimed by the supporters. The major selling point is “decentralization”, a process of distributing power and resources among individuals. However, one common confusion is that it is indeed a feature of blockchain, a technology to create a database containing information shared within a decentralized network (Merriam-Webster 2021). Cryptocurrency is nothing special but one of the many products that utilize blockchain technology, so it is wrong to assume that they are equal. Even if cryptocurrencies are somewhat beneficial, people often overlook the significant downsides behind them. In fact, cryptocurrencies may bring devastating destruction to the order of society and the market if uncontrolled, which is why government intervention has become exceedingly essential.
Though by no means being prevalent, cryptocurrencies have gained some degree of approval from merchants. A recent report From Yahoo Finance shows that several major companies in the US, including Microsoft and Newegg, have already started accepting crypto as a form of payment alongside traditional methods such as credit cards (Lisa 2021). However, the adoption of cryptocurrencies in the black and gray markets dated much earlier in time, and they provided an umbrella for illegal and criminal activities worldwide since then. For example, crypto payment is commonly used in computer attacks by ransomware, a type of malware that limits users’ access to their system or files until a ransom is paid, such as the notorious WannaCry virus observed in over 150 countries in 2017. Once infected, it would encrypt users’ files on their computers, which was challenging to mitigate because the encryption keys were stored in a remote server owned by the hacker. The only way to unlock those files was to pay a large ransom within a time limit, and the users were provided with step-by-step instructions on how to purchase cryptocurrencies and send them to a specific address (Akbanov et al. 2019). More common payment methods such as banking wiring or PayPal were not accepted, since they were usually associated with a real person who must provide ID for verification when setting up the account, which was undoubtedly not ideal in this case.
Crypto transactions are conducted more secretly. When the victims transfer Bitcoin as ransom to the attacker, they add the attacker’s address to their coins and sign with their private key, and then the transaction is broadcasted over the network. Though the transaction is made public, the receiver’s address is still private, as it is just a long chain of numbers and letters generated randomly by some algorithms which are not tied to anyone’s identity (Roberts 2011). Plus, no ID verification is required to acquire a wallet address, unless you register at larger public trading platforms. Even if the current address becomes suspicious, a new address can be easily generated by the same receiver, making crypto an almost perfect tool to make anonymous transactions despite law enforcers’ efforts to track or investigate. Hitherto, the criminals behind WannaCry have still not been brought to custody, though the FBI suspects Park Jin-Hyok from North Korea to be one of the initiators (FBI 2020). Regardless, the damage was already done, as an estimated 300,000 devices have been affected (Akbanov et al. 2019), including those at critical facilities, threatening people’s health, safety, and livelihood. If the computer system at a hospital is attacked and some patient records are lost, it will take days to roll back from backups and redeploy necessary software. The entire site may have to remain nonoperational during that period, a consequence that can potentially cost lives. Though cryptocurrencies do provide a certain degree of privacy for regular users due to their anonymity, the ethical dilemma is whether the villains should be given the same right to protect their privacy, even if their actions are purely evil.
Apart from being used as an alternative to fiat currencies, cryptocurrencies have also become a popular destination for financial investment. Though sometimes they bring massive monetary returns, everything comes with a cost: there are hidden risks that are often neglected in their promotions. Unlike traditional investments such as stocks, funds, and futures which are regulated by the authorities, crypto accounts are not backed by any government. If you store cryptocurrencies with a third-party company, and the company goes out of business, is hacked, or seizes your money, the government has no obligation to step in, warned by Federal Trade Commission (FTC 2021). One other concern about crypto is that it can be easily and frequently manipulated by trading platforms. Statistics by China’s central bank on random transaction samples from crypto trading platforms show that they violate Benford’s Law, a probabilistic observation that the leading digit of real-life numerical data is more likely to be small. “Some numbers in the transaction amount exhibit abnormal peaks at their tails”, says the report, which indicates that “those numbers have been embellished artificially and are not a result of natural trading” (PBC 2020). This type of scam usually appears on a newly introduced cryptocurrency whose price suddenly soars for no explicit reason. Inexperienced investors may misinterpret it as a sign of opportunity and can be tricked into purchasing that cryptocurrency, though the high volume of transactions they see does not exist. The larger dealers who plotted with the platforms, as a result, successfully get rid of their shares at a high price and make a huge profit. After their exit, the market quickly cools down with tremendous price drops, leading to the loss or even bankruptcy of small investors.
Platforms, however, are not the only players in market manipulation; sometimes, even individuals can make an impact. Elon Musk, Tesla’s chief executive, went viral earlier this year for his Twitter comments on Dogecoin. He emerged as one of its biggest backers and has repeatedly endorsed the meme-based bitcoin rival (Bambrough 2021). Each tweet caused an immediate reaction on the Dogecoin market, with price spikes as high as dozens of percent. Though we do not know whether he intends to manipulate the price for his own gain, the question is, whether it is ethical for him to use his influence, given that it can impact people’s investment strategies. An analogous controversy that sounds more familiar is the endorsement of a product from celebrities. Customers who have no idea of how a product works often rely on advertisements to make purchasing decisions, but when an influential person recommends something, it neither means he or she has real hands-on experience with it nor represents a guarantee that it will work as advertised. If customers are deceived, there is no legal obligation for the celebrity to compensate for their loss in most cases. It may not be too unfortunate if you waste a few dollars on a bad-tasting drink because of your overtrust in your idol, but for financial investments, a wrong decision can lead to a loss equivalent to months of income or even your lifetime savings. Most Dogecoin investors have zero knowledge of its principles, but they proceed to buy only because a random tweet from Elon Musk convinces them that it can make them into a millionaire overnight. While some are lucky, the majority of them end up being locked in a fake promise, which makes people wonder if cryptocurrencies are indeed decentralized if one single entity can exert such power on the market.
Traditional fiat currencies such as coins and notes are simply some metal, paper, and plastic produced at printing plants. Cryptocurrencies, however, do not belong to the physical world: they must be mined on computers that rely on electricity, and usually, a large sum of it. In terms of Bitcoin, for example, one simple way to understand mining is that it is a reward by solving some math problems required to keep the decentralized network consistent. Nonetheless, the mining difficulty is constantly increasing as more miners join because the algorithm automatically adjusts it to keep the mining speed roughly constant regardless of time (Antonopoulos 2014). More computing power is required to complete a more complicated math problem, and thus more electricity is consumed. Nowadays, it is not even profitable to stay in the mining business unless you maintain at a scale as large as a mining farm. Those farms consist of hundreds of computers dedicated to mining and consume a tremendous amount of energy daily, leading to criticisms of their environmental impact. According to the Cambridge Center for Alternative Finance (CCAF), Bitcoin alone consumes around 110 Terawatt Hours per year – 0.55% of global electricity production (Carter 2021). Mining farm owners in water-rich provinces of China even build small-scale private hydropower stations to power their machines due to the relatively low cost to generate electricity, though many of them have been shut down in the latest crackdown (Borak 2021). Though hydropower is considered as relatively clean energy, a good economist will ask about the opportunity cost, the cost of not applying the energy elsewhere. One may argue that we could use this electricity to light up people’s houses in those less developed parts of the world where people still have no access to electricity. This makes some intuitive sense – but not in reality – since by today’s technology it is almost impossible to store this energy and transport it to those far regions. A better argument to make is the potential benefits it could bring if we connect those hydropower stations into the main grid so that they provide alternative ways to supply electricity locally besides coal. A small hydropower station used by the miners is typically rated 50 megawatts. Given that 988 kilograms of CO2 will be released on average per megawatt of electricity generated by coal (EPA 2019), a rough calculation shows that we could save about 50 tons of CO2 emissions per hour, or 440,000 tons per year. Unless we can justify that crypto can bring more social welfare (the general well-being of the society) besides the economic benefits earned by the miners solely, we are currently experiencing a welfare loss, the benefits lost to society because resources are not allocated efficiently, from an economic perspective (Tragakes 2012). Thus, there is no reason why we should not diverge the resources from that industry to elsewhere so that our social welfare will be maximized.
Problems with cryptocurrencies do not end within themselves; as they gain more recognition, they even start to cause negative side effects on other industries as well. Some cryptocurrencies, Ethereum for instance, demonstrate much higher mining efficiency when a GPU is used for computation instead of a CPU. GPUs typically execute more instructions per cycle and have a larger number of Arithmetic Logic Units (Seth 2021), which makes them more powerful in performing certain computational tasks including those used in the mining process. Therefore, a crypto mania usually means high demand from the miners for dedicated graphics cards, with clear evidence that Ethereum’s market price and graphics cards’ listing prices are closely related (The Economist 2021). In general, chips including GPUs gradually lose their value over time as more powerful alternatives are introduced. However, the price for GPUs has risen so much that many graphics cards have gained value recently. An AMD RX580 released in 2017 at $229 is now listed at more than $700 in 2021, and Nvidia’s latest RTX3080 with a suggested price of just $699 has been fetched up to $2,400. The current shortage of graphics cards has led to various ethical problems, such as scalpers hoarding graphics cards purchased at the official prices and reselling them on eBay for huge profits, further pushing up the market price. Many gamers on a budget, as a result, are forced to pause their PC upgrade plans and turn into indefinite watching. The crisis becomes worse as the GPU shortage spreads to regular PCs as well. Though high-end graphics cards are always preferred, they become so costly that many crypto miners have turned their attention to mid-range or low-end ones which are normally used on PCs for commercial and educational purposes. As a result, prices for those computers surge noticeably, making them less affordable to the general public, which is especially unfortunate during a global pandemic when PCs become necessities for remote working and learning while families face financial difficulties.
Not surprisingly, people have already identified the hazards of cryptocurrencies a long time ago. Many well-known trading platforms, Coinbase for example, require users to provide a government-issued ID and address verification to “comply with anti-money-laundering laws or to verify customers’ identity and protect them from potential fraudulent activity” (Coinbase 2021). However, cryptocurrencies are designed in such a way that they are not controlled by one government and can flow across the borders freely. Unless the world comes to an agreement on such regulations, which does not seem promising, malicious users can always register accounts somewhere else without legal obligations to verify their identities, and freely interact with entities around the globe. Even though countries like China vow to eradicate crypto, the influence could hardly reach those parts of the world outside their borders. Nevertheless, government intervention is still crucial, as they are one of the only few entities that have the influence and power to contain the negative effects. Campaigns should be rolled out on state websites, social media, and billboards to educate people on common scams in crypto. Registered trading platforms should be required to display conspicuous warnings of volatile prices and potential losses before users invest.
Though it still looks somewhat pessimistic to bring cryptocurrencies under full control, the good news is, we may still be able to take a few positive things from them. Recall that they are one of the by-products of blockchain which potentially inherit its advantages. What if, inspired by crypto, we create something similar but government-backed and accessible by the general public? Top financial economists around the world have already discovered this opportunity and convinced their governments to turn it into reality. e-CNY, the official central bank digital currency (CBDC) of China, is set for rapid take-off on its expected launch in 2022. Similar to cryptocurrencies, it embedded some key features of blockchain, especially a decentralized network for record-keeping: individual banks no longer possess customer and transaction information, allowing a greater degree of transparency and privacy protection. Meanwhile, e-CNY is still classified as M0, or direct liability from the central bank, which means it is risk-free and comparable to traditional cash. To address concerns over illegal usage, China’s central bank describes its privacy protection capabilities as “controllable anonymity”. That is, it “gives its users the option to hide their identity from counterparties, while allowing law enforcement to have the ability to trace illegal transactions” (DB 2021). The US Federal Reserve, coincidently, is also researching to better understand the underlying technologies, potentials, and policy issues of digital currencies, though “to date, no decision has been made on whether to issue a CBDC in the U.S. payment system” (FR 2021). While cryptocurrencies should certainly not take over the world, there is no reason for us not to feel excited about more innovative and salutary applications of blockchain for years to come.