CAI0020

Written evidence submitted by Dr Diarmid Weir

About Me

I have degrees in medicine and in economics and philosophy, and a PhD in monetary economics. My PhD supervisor was Professor Sheila Dow of the University of Stirling who has researched and written extensively on monetary economics and policy and on economic methodology. My doctoral thesis was a survey and analysis of both orthodox and heterodox theories of money. I have taught and published in economics.

Introduction and Policy Proposals

I will state from the outset that I believe cryptocurrencies, in their present form, can serve no useful economic or social purpose. As such they should be treated with extreme scepticism by governments and regulatory bodies. Most cryptocurrency ventures are nothing more than scams on gullible retail investors. Whilst the outright banning of cryptocurrency issues would likely be counterproductive, I believe that regulatory bodies should discourage the purchasing of crypto ‘assets’ by retail investors and should offer no form of specific compensation or relief to those who lose from them. On the other hand those perpetrating clearly criminal misrepresentation and fraud relating to cryptocurrencies should be pursued to the full extent of the law. If new legislation is required to clear up any ambiguities relating to deceptive marketing and promotion of these, this should be drawn up and enacted as soon as possible.

Financial institutions that purchase and hold cryptocurrencies should be warned that where they appear as balance sheet assets they will be zero-rated for liquidity and capital requirements, and regulation should reflect this. This should also be the case for other crypto ‘assets’ such as Non-fungible Tokens (NFTs), unless and until these come under some consistent enforcement and monitoring framework.

I will explain these views in the following paragraphs.

Cryptocurrency and Monetary Theory

Economic theorists with a commitment to free markets with minimal regulation have promoted the idea that currencies have arisen more or less spontaneously from market activity. Theoretical models do not support this and neither does the historical record. Where currencies have not been commodity-based – valued on the basis of their silver or gold content, for example – they have been based on transferable credit tokens originating from reliable sources such as substantial traders or governments with tax-raising powers. As well as providing the economic and social benefits of a means of exchange, the issue of credit allows the acquisition of labour and physical capital to create additional value over time.

Cryptocurrencies have neither intrinsic value – they have no purpose or use in themselves, unlike precious metals - nor are they credit tokens that can extinguish debts or tax liabilities. They are issued by no authority and with no promise. They are simply constructed via an algorithm when the prescribed amount of computing work to irreversibly register a transaction is done by ‘miners’. The transactions and new ‘coins’ are indeed registered on the ‘blockchain’ and so are publicly accessible to all, but otherwise anyone with access to the technical know-how could set up such an algorithm and issue cryptocurrency ‘coins’ to those willing to ‘mine’ them or to pay real money for them. The fact that there is now a plethora of such currencies proves this point.

Crypto Has No Real Value

‘Mining’ is a term of art. Because some sort of ‘work’ is done – in this case the exercise of computing power and the expenditure of electricity to enable that power – there is the illusion that something of value must have been created. But this is not so – much effort and energy might be expended to dig a hole and fill it in again – but nothing of value has been achieved. With cryptocurrencies the processing hardware involved in mining and the energy required to run it is equally wastefully expended.

Any ‘value’ that crypto has depends on nothing other than the willingness of someone else to pay real money to gain title to it on the blockchain. Either the purchaser is relying on the ‘greater fool theory’ that someone else will pay more for this otherwise worthless token or they are themselves a ‘greater fool’.

Such a tenuous source of valuation means that cryptocurrencies’ values are extremely volatile. They may rise to extraordinary heights, but are equally likely (in fact much more likely, particularly as the crypto bandwagon rolls on) to go to zero. As such they are of little use either as means of exchange or as stores of value. Since they are not created by the issue of credit they play no part in enabling production or other forms of new value creation.

Crypto is Parasitical

In summary, creating, purchasing and holding cryptocurrencies is nothing other than a form of gambling – with a zero-sum outcome and mainly benefitting scammers and those with inside access. They are parasitical on the financial system, economic capacity, energy and thus the environment, and on human capacity and well-being.

Non-Fungible Tokens

NFTs are assets, which may themselves exist in any form, that are linked in some way to a blockchain record of their sale and purchase. In itself this may be a perfectly efficient and effective form of recording transfers of ownership, which benefits (or suffers, depending on your point of view) from great transparency. But it is difficult to see how NFTs represent an advance on existing forms of transfer and ownership recording, since the actual assets themselves and the information linking them to the blockchain must exist outside of the blockchain. Moreover, as yet there is no legal or regulatory infrastructure to enforce and monitor ownership recorded in this way. Given the above any value in introducing such a framework is moot.

What is worse is that in the same way as the perceived sophistication (really opaqueness to most users) of the blockchain has created the non-real ‘value’ of cryptocurrencies, it has also allowed scammers to sell in the form of NFTs the apparent ‘ownership’ of uninteresting, non-unique and purely conceptual non-assets to the ignorant and gullible.

Further Information

I have written two referenced articles on Bitcoin and Non-fungible Tokens. These are
The Fragility of Bitcoin, available at https://www.futureeconomics.org/2017/10/the-fragility-of-bitcoin/, and
Beyond Bitcoin – Speculation and NFTs, available at
https://www.futureeconomics.org/2022/05/beyond-bitcoin-speculation-and-nfts/

I would also recommend the work of Stephen Diehl who is a UK-based software engineer and has carried out extensive research on the fraudulent and criminal aspects of the cryptocurrency boom. He summarises his views in The Case Against Crypto, available at https://www.stephendiehl.com/blog/against-crypto.html His work (with two co-authors) is also available in book form as Popping the Crypto Bubble ‎(Consilience Consulting UK, 2022).

September 2022

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