Cryptocurrency

WTF? I don't get it.

Three federal lawmakers are calling on the U.S. Department of Housing and Urban Development to stop any initiatives involving cryptocurrency and the blockchain, saying the scantly regulated technologies should be kept far away from the agency’s work overseeing the nation’s housing sector.

[…]

The letter is a response to reporting by ProPublica that the housing agency recently discussed taking steps toward using cryptocurrency. The article described meetings in February in which officials discussed incorporating the blockchain — and possibly a type of cryptocurrency known as stablecoin — into the agency’s work. The discussion at one meeting centered on a pilot project involving one HUD grant, but a HUD finance official in attendance indicated the idea could be applied much more expansively across the agency.

“We are looking at this for the entire enterprise,” he said in that meeting, a recording of which was obtained by ProPublica. “We just wanted to start in CPD,” he added, referring to HUD’s Office of Community Planning and Development. The office administers billions of dollars in grants to support low- and moderate-income people, including funding for affordable housing, homeless shelters and disaster recovery, raising the prospect that these forms of aid might one day be paid in an unstable currency.

[…]

The HUD official pushing the idea internally was Irving Dennis, the agency’s new principal deputy chief financial officer, a staffer said at one of the meetings. Dennis denied to ProPublica that HUD was considering any such experiment. He published a book in 2021 in which he wrote that HUD should use the blockchain.

The blockchain is a digital ledger most commonly used to record cryptocurrency transactions. Boosters of the technology depict it as a way to cut middlemen such as banks out of financial transactions and to make those transactions more transparent and secure. One such evangelist is Robert Judson, an executive at the consulting firm EY, who is listed in a document obtained by ProPublica as an attendee of one of the HUD meetings. Judson has written glowingly about the potential of blockchain to prevent aid money from being misused. (Dennis was previously a partner at EY.)

Certain industries—e.g., adult websites, guns-and-ammo, gaming, bail bonds, and lawyers (!)—tend to have higher chargeback rates. These industries are often served by a subset of banks that specialize in high-risk payment processing. Crypto companies also fall into that category of having high chargeback rates, but the chargeback risk posed by crypto is fundamentally different.  Chargeback risk is manageable when it is predictable, but that requires that it be uncorrelated. Lots of happily married men might claim they did not authorize that purchase OnlyFans subscription, but they aren't all making that claim suddenly and at the same time. The chargeback level if high, but basically static and predictable.

Crypto doesn't work like that. Although there is probably always a relatively high baseline level of chargebacks for crypto, the chargebacks are also likely to be highly correlated whenever there is a market crash or allegations of fraud about a particular coin. If the market goes up, everyone is happy with their transactions, but when it falls, customers try to get out of their losses by claiming that the purchase was never authorized in the first place. Now Visa has a 120 day time limit for issuers to chargeback transactions to acquirers, so the acquirer has to worry about market movements in a completely unpredictable market for the next four months.  If say, Bitcoin crashes, chargebacks are going to soar at the very time when the risk of the crypto company customer going bankruptcy rises. So the scenario that the payment processor is facing is that it will be hit with a tidal wave of chargebacks and that it will not be able to recover them from the crypto company, but will instead just have an unsecured claim in the crypto company's bankruptcy.

Fully diluted valuation is an estimate so flawed that even publishing it should be considered journalistic malpractice. It is calculated by taking the current going price for a crypto token on an exchange and multiplying it by the total number of tokens that may ever exist for that cryptocurrency. To use $TRUMP as an example, people are currently trading these coins for around $53 apiece. There are 200 million of them in circulation, which puts the token’s (already highly questionable, as I explain in a moment) “market cap” at around $10.7 billion. Eventually, over a period of three years (assuming Trump does not lose interest or change the parameters of the deal), 1 billion tokens are set to be released. It is this supply — three years from now — that is being multiplied by the current price of the tokens to achieve estimates in the several tens of billions for how much Trump’s “net worth” has increased, as though it can be safely assumed that not only will the price remain stable over the next three years, but that there is another more than $40 billion that is guaranteed to just materialize.

This is not to downplay the extent to which Trump is grifting his devotees and those crypto traders looking to make a buck on memecoin speculation. But it is important that we accurately report on his cons and do not contribute to misleading crypto hype for the sake of large numbers.