Cryptocurrencies. Virtual currencies. Digital coins. Studies from ING and St Andrews University reveal that, “while most of us now know something about these terms, many of the details are still a little sketchy.” Cryptocurrency is defined as virtual or digital money which takes the form of tokens or coins. Investopedia explains that the ‘crypto’ in cryptocurrency as a complicated cryptography which allows for the creation and processing of digital currencies and their transactions across decentralised systems. “Alongside this important crypto feature of these currencies is a common commitment to decentralisation; cryptocurrencies are typically developed as code by teams who build in mechanisms for issuance (often, although not always, through a process called “mining”) and other controls.”
Cryptocurrencies and digital coins have a floating reliance on future prestige. Being an early investor in something that might acquire value in the future distils an air of status within the industry if and when the risk pays off. Cryptocurrencies wish to disavow or even transcend conventional currency but are utterly reliant on such currencies as a reference in order to describe how they work to prospective investors. Despite their libertarian rhetoric, in practice, the jackpot for a cryptocurrency is to demonstrate its popularity amongst a core base of early investors such that it may be considered a viable option for established financial houses: selling the glamour of revolution with the security of the state.
The symbolic value of these products, rather than their immediate value, calls to mind the work of ‘father of postmodernism’, French sociologist and cultural theorist Jean Baudrillard, who wrote in his essay ‘For A Critique of the Political Economy of the Sign’:
Far from the primary status of the object being a pragmatic one which would subsequently come to overdetermine a social value of the sign, it is the sign exchange value (valeur d’echange signe) which is fundamental – use value is often no more than a practical guarantee (or even a rationalisation, pure and simple) […] An accurate theory of objects will not be established upon a theory of needs and their satisfaction, but upon a theory of social prestation and signification.
Baudrillard’s intervention into the value debate between Marxist and liberal political economists added a sociological dimension to their competing theories of value. Per Baudrillard, objects are bought and displayed as much for their sign-value, i.e. prestige or status, as their use-value, and that the phenomenon of sign-value has become an essential constituent of commodification and consumption in contemporary consumer society. This can be witnessed from early collections of Fabergé eggs in 19th century Imperial Russia through to Gen-Z’s obsession with the intentionally underproduced Supreme brand – everyone wants to get in on “the next big thing”, and sometimes that next big thing has value based on hype rather than utility.
An extract below from St Andrew’s study highlights that the poorer participants in the study were actually more likely to invest in cryptocurrencies, viewing it as aspirational and ahead-of-the-curve. In other words, the association with complex financial manoeuvring, of being somebody who knows about Bitcoin and willing to put their money where their mouth is, may be a primary motivation behind retail client investment, under conditions where they are unable to explain how they work. Furthermore, recent studies reveal that “consumer knowledge about digital currencies is limited, and cash is still king.” The paradox is that “the more financially literate candidates were less likely to own cryptocurrencies and they are more likely not to intend to own them in the future.” More specifically:
The average purchasing power parity (PPP)-divided monthly household income per capita in the sample is €1,116.4, with owners and prospective owners of cryptocurrencies being poorer by some €140 per month on average. Individuals intending to own cryptocurrencies in the future have some €237 per month lower income, compared to individuals who have heard but do not intend to own cryptocurrencies.
As you can imagine, this is a huge problem for the expansion of the industry. Has there ever been a product so heavily lent on by banks and investors where the more you learn about the product, the less likely you are to want to invest in or use it? The conventional compliance problem is when individuals with specialist expertise and mastery of regulatory loopholes or aspects of a product’s application, try to circumvent thorough examination by the compliance analyst or officer. In the case of cryptocurrency, it may be the case that many investors know as little as any untrained analyst.
Furthermore, if a product appears unintelligible from its marketing materials, regulators should not be afraid to operate under the assumption that this opacity may be deliberate. Angela Scott-Brings, writing for Tech Bullion, states: “as a new user, you can use Bitcoin without understanding all its technical details. Once you install a Bitcoin wallet on your mobile phone or computer, it will generate the first Bitcoin address and you can generate more whenever you need them.” It is understandable to be a technology consumer and enjoy a company’s products without fully understanding how everything goes together (if you broke up my laptop, I would struggle to put it back together), but whether you are buying into Bitcoin because you believe in the currency, or you are buying into an investment fund that has bought into Bitcoin, the line between buying the product and buying into the company blurred: even if you do not directly invest in the company, to invest in the currency is a similar act, done for similar reasons. To invest in cryptocurrency is to invest with the belief of future utility, of future returns, and due to the lack of transparency within these products, it has been easy for scammers and fraudsters to manipulate the system for their advantage, promising the world with little substance behind the hype of the discourse.
On a popular BBC podcast, ‘The Missing Cryptoqueen’, the broadcasting crew discover that Dr. Ruja Ignatova, aka “the Cryptoqueen”, had managed to defraud her users for millions of pounds all under the guise of being the genius inventor of OneCoin, the next Bitcoin. “Investors often told us that what drew them in initially was the fear that they would miss out on the next big thing. They’d read, with envy, the stories of people striking gold with Bitcoin and thought OneCoin was a second chance,” according to Jamie Bartlett, reporter and podcaster at the BBC. When told directly by reporters that they were victims of a proven fraud and that there was an international arrest warrant out for the very person that had convinced them to part with their cash, locals often remained true believers. A combination of the anchoring effect, the sunk cost fallacy and the growing political distrust of interloping proscriptive elites lays the ideological groundwork for this type of scheme to operate effectively, acquiring an arguably cult-like following of supporters as emotionally invested in the OneCoin revolution as much as any financial investment made.
Dr. Ignatova managed to launch her OneCoin product in a remote village in Uganda, despite publicised revelations in the Western international press flagging it as a potential scam. This illustrates the study by St Andrews that poorer candidates – as those in the Ntangamo region of Uganda were – wanted to invest in something new which can get them out of their current situation. In Europe, less money was invested in the first six months of 2017 compared to the same period in 2016. As the money started drying up in Europe, promoters turned more and more to countries in Africa and the Middle East. The Financial Conduct Authority (FCA) in the UK issued a warning to investors about the risks OneCoin poses on its website. But how was someone in the Ntangamo region of Uganda supposed to find that out? Western sellers of OneCoin sold the dream to those living in remote towns in the Global South; taking their own lack of transparency and the user’s lack of awareness to their advantage.
Ultimately, cryptocurrency has numerous problems. There is an unintelligibility and unfamiliarity of its technological innovations with the layperson, their popularity with first-time retail clients without adequate financial literacy and a growing prevalence of multiple cryptocurrency scams that exploits the aforementioned intelligibility. Furthermore, the inherent volatility of products that are bought on the basis of projected brand legitimacy. These all factors that must be addressed within the industry. Whether they are a truly revolutionary idea, or an illusory asset destined to collapse, cryptocurrencies are hitting the mainstream, and the world may not be ready for them.
Sharon Kits Kimathi is Editor of Fintech Futures and Banking Technology since May 2019, having been Deputy Editor at the International Financial Law Review (IFLR) and a capital markets Reporter at Global Capital and mtn-i. She has worked as a Paralegal for Freshfields Bruckhaus Deringer; as a Legal Compliance Associate for Goldman Sachs; and Paralegal at Reed Smith LLP. Her forthcoming article “Is This Our Plumbus? An exploration of crypto and virtual currencies through a compliance lens” will be available in the May 2020 edition of the Compliance Elliance Journal published by the University of Miami.
Notes:
1). Jake Frankenfield, Cryptocurrency, Investopedia (November 3rd 2019). Accessed at: https://www.investopedia.com/terms/c/cryptocurrency.asp
2). The ING study by behavioural scientist Jessica Exton can be accessed at: “Cryptocurrencies: Curiosity and confusion among consumers”. ING (18 September 2019). https://think.ing.com/articles/sizing-up-the-money-revolution-crypto-bitcoin-currencies-digital/, whilst the St. Andrews University study by Georgios A. Panos and Tatja Karkkainen can be accessed at Financial Literacy and Attitudes to Cryptocurrencies, Working Papers in Responsible Banking & Finance, WP Nº 20-002, p.6 (2020).
3). Angela Scott-Briggs, 10 Types of Digital Currencies and how they work. Tech Bullion (September 24 2016) Accessed at: https://techbullion.com/10-types-digital-currencies-work/
4). Jamie Bartlett’s ‘Missing Cryptoqueen’ podcast and the accompanying article is available for free courtesy of BBC Podcasts: Cryptoqueen: How this woman scammed the world, then vanished. BBC (November 24 2019). https://www.bbc.co.uk/news/stories-50435014