Last month, one of my closest friends came to me with an interesting proposition.
He said, “Look, Mark, there are these new things called Bitcoin Ordinals.” And it took a little explaining. I know what Bitcoin is. You know what Bitcoin is. We’ve explained it. We know what a blockchain is. I’ve explained how a blockchain works.
A blockchain is a ledger. There’s data in that ledger. You can append as much data to any ledger entry as you want to be able to. Bitcoin Ordinals take a specific bit of data – it might be a little fragment of a song or might be a fragment of an image, it might be a 3D model of some sort, could be lyrics, could be words, really it doesn’t matter, It’s just all data – and inscribes that into the blockchain.
Rather than having a pointer to something, or something that’s hanging off somewhere on a server that could go bye-bye, a Bitcoin Ordinal is persistent in the same way that Bitcoin is persistent. It’s in the blockchain.
The blockchain is one thing: everyone agrees on what’s in that blockchain, and it will be around forever and ever. My friend said, “Wouldn’t that be great, our work would be available forever, it’ll end up on planets and stars because they’ll shoot it into space. And we should be able to sell that work to someone so they have rights to that Bitcoin Ordinal, and we should be able to make money at it.”
It was an interesting proposition. That proposition got me to thinking – but the outcome of all of that thinking was nothing like what I expected…
G’day, this is Mark Pesce, and since 2017, we’ve been engaging in a conversation about cryptocurrency. It started with an episode with my friend Mark Jeffrey, whom I invited on to talk about Bitcoin. When we looked at the numbers for that episode, they were head and shoulders above any other show we’d done to that point. So we decided, let’s start doing a series and we did a series called CRYPTONOMICS – several different episodes around all sorts of different aspects of cryptocurrencies of blockchain, of coins of how they work, of what the future might be like in a world with digital currencies.
I feel like we’ve covered all of that world. It’s the same world that we talked about back then, yet people are still inventing slightly new things, and slightly new systems. But in essence, it hasn’t really changed much from the beginning of this series.
Now – in this episode – we’re coming to the end. This is the final episode of CRYPTONOMICS. It’s not just the final episode of CRYPTONOMICS – this is the final time I will have anything public to say about cryptocurrency, or publicly have anything to do with cryptocurrency.
I want to explain why that is. To do that, I need to take you on my own journey, so that you can see through my own eyes why I have come to that decision.
That’s coming up on this episode of CRYPTONOMICS.
For a little over five years, I have been involved with a group called the V20. The V20 started as an idea between a few people – including my friend Ron Tucker, who has been on this show – to be able to start to bring some order, even regulation, to the way that cryptocurrency exchanges were operating.
These cryptocurrency exchanges – which had been around almost since the beginning of cryptocurrencies – have had a problem, which is that the banks are basically allergic to them.
Why are the banks allergic to them? Because cryptocurrency has from its beginning been used as a money laundering mechanism. It has been used to transport money across international borders in ways that international law specifically prohibits. You don’t want outflows or inflows of money into an economy that is not being tracked by a nation. You also don’t want to be funding terrorism or any other things that are considered very bad by the governments of the world.
Those governments have created a range of regulatory institutions and bodies in order to be able to make those rules stick. Perhaps the most important of those bodies is the FATF. The FATF is a part of the G20, their ‘Financial Activities Task Force”. It was more or less produced out of 9/11, after it became clear that a lot of the funding for the terrorists was happening through Saudi Arabia – through transfers of large sums across international borders.
The FATF was established in order to institute policy frameworks for various countries, so that most kinds of money transfer and money laundering would become effectively impossible. I’ve talked about the FATF a little bit on this show because I have been in their orbit for about five years now.
In 2019, during the G20 meeting in Osaka, I was privileged to be the facilitator and the convener of the first V20 Summit. This was was when the virtual asset service providers – that’s the cryptocurrency exchanges – got face to face with the FATF.
The FATF were about to promote pronounce a whole set of recommendations, that would affect the cryptocurrency industry. We need to be clear, when the FATF makes recommendations – because they have no formal regulatory power – what they’re actually doing is they are basically ordering the financial ministries of every nation that wants to be able to trade internationally to follow these guidelines, turning these guidelines into regulation in their own national domains.
If nations don’t implement FATF recommendations, then they end up on the ‘gray’ list. The gray list is a warning that if you don’t get your house in order within about two years, you’re going to end up on the ‘blacklist’. That blacklist is Iran, North Korea – I think Russia is on the blacklist these days. On the blacklist you are completely cut off from international markets for money, you can’t work internationally with money. That is not a happy place for any nation to be, so nations tend to do what the FATF recommends.
These 2019 FATF recommendations requested that cryptocurrency exchanges follow the same rules as banks would with respect to international transfers. So if you’re moving more than USD $5,000 equivalent in cryptocurrency, you have to indicate who the party who’s sending that money is and indicate who the party who is receiving that money. That’s done through a framework called KYC – Know your customer. Those customers – sender and recipient – have to provide some secure form of identification. You actually have to go through the trouble of making sure that this is in fact the person. Banks do this, and so the FATF recommended that cryptocurrency exchanges should have to do this.
Naturally, at this V20 meeting in Osaka there was a great deal of to-ing and fro-ing about the right way to do this. Could they do this inexpensively? Etc. But by the end of the V20 meeting there was broad consensus that it was possible – and that it was a good thing to do. Because the carrot that was hanging at the end of the regulatory stick dangled by the FATF was that if the cryptocurrency exchanges did this, if they tightened things up, if they implemented the ‘travel rule’, then the banks would no longer be so allergic to them. The banks would be able to trade with them, because the banks would not have to worry about being contaminated by money that had been laundered.
Banks get very frightened of that because bankers can do pretty much whatever they want and not go to jail – except participating in money laundering. That is something that will send bankers to jail, and bankers do not like to go to jail. As a result, you might expect that the cryptocurrency exchanges would implement the travel rule, so the banks would then be able to do business with the cryptocurrency exchanges – and everyone would go on happily into the sunset.
That’s what you’d think.
So that was 2019. There should have been a V20 meeting in 2020. But there was a global pandemic. So we skipped a year, and had a meeting – virtually – in 2021. That meeting involved some of the same people some of the same players, but with some of the new products that have been introduced during the pandemic – such as DeFi, or decentralised finance – where really we’re writing smart contracts into money. Cryptocurrency with code written into it can behave in peculiar ways, and introduces a whole other set of questions about how you rein in the behavior of money that is thinking for itself. We actually had a panel on DeFi and listened to a lot of people say a lot of things about the right way to be able to regulate it.
That was the 2021 meeting. It was interesting, but there was no immediate policy created out of that. However, we started to frame the landscape – so regulators and cryptocurrency exchanges could start to think about what to do with DeFi.
In addition, there had been some progress on the implementation of the ‘travel rule’. Some of the exchanges were doing it. Some of the exchanges were not doing it yet. Some of the exchanges were trying to agree to a common format for an implementation, so that one exchange could talk to another exchange electronically, and they’d both be able to understand the data they were sharing about their customers. That was promising – all very slow, but promising.
And then we come forward to 2022.
In 2022, the G20 took place in Bali. And the V20 got ‘blessed’ by the G20, becoming an official G20 event, with a venue just up the street from the Leaders Summit.
We were there to carry the ball further, in this effort to get effective, stabilising regulation in the cryptocurrency market. The day before that V20 began was the day that the house of cards imploded in on FTX. Plenty of the people that I was working with at the V20 knew Sam Bankman-Fried; they’d known him for years, they’d met him, they might or might not have liked him. Opinions varied. But no one was terribly shocked at what had happened – because there had been a steady drip of information about loose financial controls at FTX.
For all of the other exchanges attending the V20 meeting – FTX had pulled out just days before the event – it became a teachable moment. I opened my facilitation with a challenge, asking them to consider the collapse of FTX as their moment of existential choice. “The decisions that you make at this meeting will determine not only your future, but the future of your sector.”
Behind the scenes – while I’m talking to the major folks who are working in regulation, or working in cryptocurrency – what I keep hearing is that the biggest exchange in the world – Binance, run by CZ – has been designed to be as opaque to regulation and as invisible to national regulators as possible. It’s not quite domiciled anywhere, it’s not quite incorporated anywhere – except it kind of is here or it kind of is there in whatever minimal fashion that it needs to be in order to be able to operate within that domain.
Binance got chased out of Australia for precisely these reasons. They were playing too fast with the rules.
People said to me privately, “Yeah, you know, FTX did a lot of bad things, but Binance – look out for Binance.” It took you the better part of a year before the house of cards fell in on Binance, too.
What we witnessed was the two largest cryptocurrency exchanges, FTX and Binance, both imploding because neither of them could be bothered to operate safely or wisely inside regulatory frameworks that would have prevented them from the excesses that got them into trouble.
I’d like to say that these are exceptions, but when you’re talking about the two largest companies in the field, these are not exceptions. These are the rule.
I came away from the 2022 V20 meeting sensing that many cryptocurrency exchanges were still resisting regulation – the only thing that was going to carry them through to success – and were going to fight it every step of the way. Because regulation was bad. Because unrestricted markets were clearly and completely useful. Despite all of the evidence to the contrary, these firms still held on to that belief above all others.
Why? Well, not being regulated is very good for the bottom line. But of course, not being regulated is also disastrous because it means that there is no oversight. There are no checks and balances. It means that basically you get to play all you want with other people’s money and there are no costs if you lose it.
After five years, I’ve learned that that most cryptocurrency exchanges – and I will freely admit there are some exceptions – have never had any desire to play by any one’s rules except their own. It has always been a casino and the house always wins.
I spent five years working to save the cryptocurrency industry from itself. Trying to regulate an industry that simply did not want to be regulated.
Whether they couldn’t see the need for regulation, or whether they simply prefer to operate without regulation. I don’t know. I don’t need to know. All I know is that it is still this way.
There are big exceptions to this rule – companies that have complied with regulation, sometimes because they’ve been dinged so many times by the regulators they have been strong-armed into regulation. And people are still trading cryptocurrencies. All of that is still completely true.
But basic fact that the casino is open, and that this environment is filled, fundamentally, with grifters, has never changed — from the beginning. Because there’s always been too much money on the table. From the beginning, even when Bitcoin was basically worthless, there has always been too much money on the table to get people to act sensibly or safely. Everyone just sees the pile of money, and their greed gets up, and they just want the money and they don’t care who gets hurt on the way to that pile of money.
That has not worked out well.
So that’s one reason to leave all of this behind. But there’s another reason.
I own and continue to own a small amount of Bitcoin. It’s not really an investment, I bought it because I thought if I was going to be talking about it – and working with regulators – it would make sense to own some.
When this conversation about creating a Bitcoin Ordinal came up, I started to think about my own position around this. Bitcoin is problematic in all of the ways I’ve just mentioned, and in another way that is not quite specific to Bitcoin, but it is certainly centered on Bitcoin: it uses an enormous amount of energy.
Bitcoin corrects its ledger through a process known as ‘proof of work’ where basically a whole bunch of computers are generating random numbers and trying to make sure that this random number is the magic number. It’s a bit like a lottery (technically the checksum that is the sum of the block that they’re currently all calculating) and the one that gets it correct wins the lottery, and gets a payout of coins.
That’s been the way Bitcoin has operated from the beginning. It’s considered to be an effective way to prevent cheating in the blockchain.
Proof of work was fine when Bitcoin was relatively small and constrained. But proof of work did not scale – or rather it scaled in such a way that Bitcoin is now consuming vast amounts of energy.
There are different calculations as to how much energy it uses: one that I read the other day said that Bitcoin consumes more energy than all of the rest of the finance sector. I don’t know if that’s true, I don’t know if it’s consuming more energy than Israel or Iceland or wherever. I do know that it is consuming an enormous amount of energy in order to regulate its blockchain.
Bitcoin’s proof of work mechanism is a convention. It doesn’t need to be that way. But it was in the rules laid down by the mythical Satoshi Nakamoto, about a way to be able to make sure that people didn’t cheat. Again, when it’s a small number of players doing a small number of things, that’s a small amount of energy. Now that there’s a lot of money on the table, and there’s a lot of players, there’s a lot of energy being used in this.
I have done my best to look the other way through all of this. And yes, more and more Bitcoins are being mined with renewable energy, but you can’t really look past the fact that a lot of that energy is being generated by burning coal. Bitcoin miners tend to move to the domains where the energy production costs are the lowest. They’ll use as much energy as they can in those domains until the energy generators throw them out – because Bitcoin ‘mining’ is considered a non-productive use of energy.
So you have this other fundamental problem in Bitcoin, which is that it is essentially wasteful. That waste is its safety mechanism. You have to balance the idea of safety and waste against the fact that we really shouldn’t be producing one more atom of carbon dioxide than is strictly necessary right now – a topic I’ve gone into at great length on this podcast.
I have done my best to ignore this waste, and was able to do so – until my friend raised the issue of Bitcoin Ordinals, because we’d have to invest some money and then we would be inscribing something into the Bitcoin blockchain. Until the end of time, some of the energy in the Bitcoin blockchain would be used to support the fact that we had written an Ordinal into the blockchain. So I would be a permanent part of the problem.
That’s when I realized, “Mark, you are holding onto Bitcoin right now.” It’s not that much, it’s about AUD $1000 in Bitcoin. And it’s actually worth less than when I bought it. But none of that matters: For all of the time that I’ve owned it – since around 2019 – through to today, in order to support that Bitcoin on the blockchain, I have been in part responsible for the enormous energy use of Bitcoin. The enormous waste of Bitcoin.
That was when I had a moment of clarity. I realized that not only was I not going to do a Bitcoin Ordinal but I actually had to unload any cryptocurrency that I owned – starting with anything that operated via proof of work. I own a couple of other cryptocurrencies that don’t use proof of work, and I will be unloading those as well – because I don’t want to be participating in the casino, I don’t want to be putting any energy into the casino, I don’t want to be lending the casino any legitimacy.
This does not mean that digital currencies are a bad idea. Digital currencies, which will be offered through a central bank of some sort, like the Bank of Japan, or the Reserve Bank, or the Federal Reserve in America, will possess all the features that we have with cryptocurrencies, but they will be implicitly and intensely regulated.
However, getting those projects to scale well is difficult, is taking time, and it may be the end of this decade, even into the next decade before we really see those deployed at scale. So this is not the end of digital currencies, but cryptocurrencies, I’m done with – because of their waste, because of the casino, and because the people behind them are either grifters or full-throated libertarians who simply reject regulation as an unalloyed evil, rather than accepting it as a fundamental effort to make society equitable.
For all of those reasons, I can’t play this game anymore.
I don’t want to talk to startups who are doing products like this. I don’t want to talk to friends who are engaged in products like this. I don’t want to be reading articles about this – though I’m sure they will continue to float by as the next big cryptocurrency innovation comes out.
I’ve made the decision – for myself – to pull back completely, liquidating all of my cryptocurrency holdings. But more than that, I’m taking a principled stand here, because of the journey I have been on. I have seen a lot of this from the inside.
I do not like what I have seen.
I will not participate in that world.
I’m now telling anyone who wants to know why I’ve made that choice, what I’ve seen. And even if there are substantial changes in the future, I would be very careful – because as long as there’s enough money on the table, the grifters will come out, the casino will be open, and those people who are trying to steal – by making governments irrelevant in the equation of protection – will always be circling.
We’ve spent a couple of hundred years building a financial system which is designed to be at least moderately resistant to most of those kinds of attacks. That doesn’t mean that it’s perfect. Take a look at 2008 or 1997 or 1989 or 1929. They are big examples of how finance can get things completely wrong.
But when you take a look at the casino environment of cryptocurrency over the last ten years, all I can see is wrong. I can’t see any example of something being better because someone threw a blockchain at it.
It hurts me to say this, because I do feel that the technology is quite useful and quite valid, but from the beginning it has been so continuously polluted – by the grifters and by the casino – that any potential benefit has always been overwhelmed.
That’s a sign that I need to go elsewhere.
And so with that, this was the final episode of CRYPTONOMICS.
This is also the end of my involvement in all things blockchain and all things cryptocurrency.
I know you will make your own decisions about how you want to proceed. Your decisions may not be my decisions – but now you understand why I’m doing this.
I hope you’ll be able to take that knowledge and apply it to your own situations.
This final episode of CRYPTONIOMICS was written and produced by Mark Pesce. Production by Isabel Vanakarthano, and Ampel.
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This is Mark Pesce, thanking you for listening.