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11 November 2022

How politicians failed to protect the public from crypto

Leaders have spent years indulging a dangerous trend that they couldn’t be bothered to understand.

By Will Dunn

Cryptocurrencies are once more in freefall as one of the world’s biggest crypto exchanges, FTX, appears to be heading towards bankruptcy having revealed a reported $8bn hole in its balance sheet. FTX is run by Sam Bankman-Fried, who also runs a hedge fund called Alameda Research. The collapse began when a leaked copy of Alameda’s accounts appeared to show that almost all of its net equity was made up of tokens issued by FTX and related companies, which led investors to ask if the assets were worth anything. The price of the main FTX token, FTT, has fallen by 90 per cent in the past week.

Readers may at this point crack out their very smallest violin for Bankman-Fried, who went from claiming he wanted to buy Goldman Sachs to trying (and failing) to sell his company to his main rival. But if FTX follows the pattern of other collapsed crypto businesses of the past year, the people who will lose out are the retail investors who made the business viable with their (real) money.

Those people have been betrayed, not just by crypto businesses but by the politicians, media outlets and regulators who have failed to interrogate the shady and under-regulated industry. In May this year Bankman-Fried was joined on stage in the Bahamas (where all reputable financial institutions are based) by Tony Blair and Bill Clinton. Next month Dick Cheney, the US vice-president under George Bush, and Boris Johnson will give keynote speeches at a blockchain conference in Singapore. Matt Hancock, as part of his campaign to get a new job outside politics, has spent months uncritically promoting crypto.

Rishi Sunak, when he was chancellor in April, announced plans to make Britain a “global crypto hub” that included pushing the Financial Conduct Authority (which has, to its credit, repeatedly warned consumers of the dangers of cryptoassets) to create more accommodating conditions in the UK for crypto businesses and asking the Royal Mint to make an NFT (non-fungible tokens, which are pieces of code that are often attached to automatically generated pictures).

On 27 August last year the BBC reported that a 12-year-old boy had “made £290,000” selling NFTs. He was about to make a lot more, because BBC News is the world’s largest current affairs website and digital assets – like cryptocurrencies and NFTs – are a means to turn attention into money.

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Five days earlier the boy’s Weird Whales had sold 13 NFTs at an average price of 0.14 ETH (the cryptocurrency Ethereum, whose price at the time meant the sales had a total value of about £3,900). As the BBC and other major news outlets ran stories on the project selling peaked at 306 NFTs in 24 hours, at an average price of 0.62 ETH (or about £1,400, for a total of about £428,000 in a single day). They continued to sell strongly. Ordinary investors had been persuaded that whatever this kid was doing, it was creating value. Those who read to the end of the BBC piece were treated to a quote from a traditional art dealer who thought people buying NFTs might be “slight mugs”, but these quotes were followed by further stories that explained why some NFTs were “worth millions”.

[See also: Is the crypto crash the end of Bitcoin?]

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As with its climate coverage, the BBC’s need to show balance had consequences. If you bought a Weird Whale after reading the BBC’s report, as hundreds of people obviously did, and you can find someone who’s prepared to buy it today, you’ll get about £35 for it (based on recent sales).

There are plenty of examples of the BBC reporting on the many scams that make up the crypto industry, but also a lot of credulous excitement. “Squid Game cryptocurrency soars 2300% in first few days,” it reported last October. The headline of the piece was later rewritten and a “buyer beware” section was added, which was prudent because less than a week later the token had collapsed, taking millions from investors. Last February BBC News quoted a business founder, Heather Delaney, who said Bitcoin was part of her pension plan; the report failed to mention that Delaney’s business is a PR firm that represented the Gemini cryptocurrency exchange.

But while news providers, and especially the BBC, should have employed the precautionary principle when reporting on a market that was provably manipulated, there was at least a reason for them to be reporting in the first place: in the attention economy, websites are driven to report on whatever people are searching for. If journalists hadn’t reported on the subject then Google would have directed the public to the investment professionals of social media.

Politicians have no such excuse. They have allowed cryptocurrency exchanges and speculators to prey upon the public for the same reason that they allowed social media companies to enable an epidemic of anxiety and depression among the nation’s children: because it sounded difficult and potentially embarrassing to get involved in, and there was always some opportunistic weasel (Matt Hancock) who claimed to be able to understand it on their behalf. Also, there seemed to a good bit of money in it, for someone.

A real cynic might say it looks as if there was a bit of money in it for the Conservative Party, especially if they knew that the Tories’ biggest single donor in 2022 – and indeed the biggest private political donor in the UK this year – is Christopher Harborne, a cryptocurrency investor.

Not all politicians are culpable. The Treasury Select Committee, led by its new chairwoman, Harriett Baldwin, will begin questioning crypto executives on Monday 14 November. As the truth about cryptocurrencies becomes even more screamingly obvious than ever before, its MPs should not hold back in their assessment of the real danger they pose to ordinary investors.

[See also: Oh Boris Johnson, how far you have fallen]

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