This is part 1 of a planned series of discussions on the issues and values of crytpocurrency technology and NFT's.
Background
A couple of days ago, from out of the blue, Microsoft published an article describing a new stance on the allowed use of NFT's within the Minecraft ecosystem. The full article describing the stance is published at the following link, but they also kindly included a TL;DR: https://t.co/3S4uYmiSvf
Media Reaction
In the aftermath of Microsoft's rewriting of the Minecraft T&C's to prevent the use of NFT's on the platform, there has been an outpouring of support for Microsoft's stance both in the mainstream media and on social media. Here are some examples:
Kethriss, the worlds prettiest snakeboy - in his own words
And perhaps the most vitriolic one of all comes from a childhood hero of mine, Jeff Minter, the iconic creator of all llama related games:
For balance, here is one of the few posts in opposition to Microsoft's new stance, and not surprisingly comes from someone closely linked to the metaverse movement:
Sebastien, Co-founder of The Sandbox
My Response
I responded to this announcement via a reply thread to Jeff Minter who I was surprised to learn felt so strongly in favour of Microsoft's stance. I wanted to try and educate on the benefits blockchain brings to gaming. Here is the start of that thead:
My attempts at explaining the benefits are falling on deaf ears though, the people who hold such strong views (the majority) do not want to listen to a reasoned argument, and I'll try and explain that further below. Every negative response to my posts were liked and nobody posted in support. Here is an example of the hatred held for NFT's which was another response from Jeff Minter this morning:
So for anyone else who has played NFT Worlds, Critterz or The Sandbox, does that sound like the sort of experience you have had? I'm yet to see an advert in any of those environments, have only ever met like-minded individuals that believe strongly about the community, decentralisation and freedom from losing access to assets on the back of a governemnt or corporate decision.
I know of Jeff well having been a fan of his games since the early 1980's. I would probably describe him as a peace loving hippy with a passion for animals, gaming and curries. I would have imagined somebody like Jeff was anti-establishment and would have supported a vision of self ownership, control, decentralisation and protection from interference. But, Jeff's view is the perception held by most people outside the crypto space. Let's dig deeper.
The vision of crypto
The first real usage of the blockchain and crypto was with the introduction of Bitcoin in January 2009, following a whitepaper published in late 2008 by the anonymous developer Satoshi Nakamoto. The Genesis block of the Bitcoin Blockchain contains this simple message:
"Chancellor on brink of second bailout for banks"
Bitcoin was designed from the start to be deflationary with an ever decreasing production over time until the maximum of 21 million Bitcoins exist, with the final Bitcoin scheduled to be produced around the year 2040.
The great banking rezoom of 2008
I worked for one of the bailed out banks in 2008 and in order to prop up the financial industry the government had to effectively print an additional £500 Billion via a process known as quantitive easing. Though quantitive easing doesn't actually print more notes, it can be viewed that way. In reality it is more complex and involves changing the balances of the banks at the bank of England and the reserves they need to hold, but the effect is the same. Governments can do this because in most countries they have direct control over the money supply.
This creates Inflation, which actually measures the increase in the money supply of an economy. When things go up in price, what really happens is the ratio of money required to buy items increases as the value of the currency decreases. This decrease correlates to more money existing in the system with the same amount of goods to be bought. That means your savings in real terms are going DOWN in value every year you hold them.
When the production of money increases too fast, you end up with Hyper Inflation where the value of the currency spirals ever downwards, wages do not keep pace and everyday products become too expensive for people to acquire. Here is a simple summary of the process from thebalance.com:
The early founders of the crypto-currency systems were part of the cypherpunk movement, started in the late 1980's. This movement was formed by a group of highly skilled scientists in the cryptography field who believed in freedom from state and government interference and a right to privacy and self custody of data.
Crypto in the Media
The hatred of NFT's mostly stems from the narrative in the media around the underpinning technology, the blockchain and the crypto assets built using it. I even experience this hatred in my own household, where my daughter exposed to the media only sees crypto as relating to crime and bad actors. She loves the band BTS and when she learned they were going to release limited edition cards for the band as NFT's she felt betrayed and didn't want to believe that her peace loving idols could stoop so low.
This negative media bias really started to gain traction in late 2017, towards the end of the previous bull run as described in this article:
I won't copy and paste headlines from the hundreds of negative articles online linking crypto to crime and scams, but instead provide links to a few articles that have studied that link:
https://finance.yahoo.com/news/media-gets-wrong-persistent-crypto-151900844.html
https://news.bitcoin.com/research-exposes-anti-bitcoin-bias-in-mainstream-media/
What isn't covered with the same veal are many of the examples where the crypto community has come together to help with major disasters and economic events. For example within two weeks of the invasion of Ukraine by Russia, almost $100m had been donated by the crypto community to the fund setup by the Ukrainian government.
Why do does this bias exist in the press? It is for a few different reasons:
- Ignorance of the technology and how it is being used
- Sensationalism and pandering to the now established viewpoint
- External interference from vested interests in the existing financial system
Crime in crypto
Crime does exist in the crypto space for the simple reason it requires less physical effort and the potential proceeds of that crime are bigger. But the majority (80%+) of proceeds from illegal activity in crypto is not from money laundering and trafficking drugs money, it is crimes against crypto users via smart contract exploits, scams or rug pull.
Finance Brokerage, is this the end of crypto crime?
The ChainAnalysis report on crime showe an increase in proceeds from crime in 2022 to $15Bn. That sounds like a lot of money, and is a lot of money, but that is on a transaction volume of over $15Tn so still represents a tiny portion. The vast majority of victims are the non-savvy crypto users new to the space who haven't learned how to protect themselves when they have custody over their own funds, not the man in the street.
Plus if we look at the portion of that crime linked to drugs / money-laundering it is less than $2Bn a year total. Is that a lot? Well according to the United Nations Report the amount of money laundered last year was between $800Bn and $2Tn, so crypto represented between 0.1% and 0.25% of the the total money laundered.
If crypto is such a perfect vehicle for money laundering why is such a tiny percentage of the proceeds of crime flowing through it? That's simple, crypto is NOT anonymous. In fact it is more traceable than any other forms of payment. Here's why:
- Crypto Exchanges and On/Off ramps require full KYC. That means anyone converting money to or from Fiat currency (£/$/etc) has to pass the full Know Your Customer controls a bank employs when opening accounts.
- Every transaction written to the blockchain is Public. There are no visibility controls on the blockchain, it is public for everyone to see and trace forever. Just take a look at Etherscan and even some of the recent scams can be fully explored and analysed by anyone.
- Exchanges share data with crime agencies when they are looking into electronic crime and have access to the KYC data
But there are problems
One of the biggest benefits of Cryptocurrencies is self custody, which means that the person that has the private key to the wallet has sole ownership and sole responsibility for securing it. If you know the Private Key, you own the funds it secures on the blockchain.
For the seasoned investor this isn't an issue. We know never to reveal your private key or seedphrase to anyone. We know best practise is to secure your private key in a hardware wallet and to read any transactions we initiate to make sure they are doing what we expect them to, and not to blindly sign a message without reading what it is doing.
Unfortunately somebody new to the crypto space who has relied the custody of their funds being managed by a bank hasn't yet developed the know-how on how to keep their funds safe. These can be easy pickings for scammers. When the friction of crime is low and the impacts on the victim not apparent, that can be a happy breeding ground for the sorts of individuals who like to exploit people and if crypto didn't exist would be finding other ways to commit those crimes.
Ever increasing coverage of KYC, the growth of blockchain knowledgeable law-enforcement and the increasing sophistication of users will continue to see the size of this problem continue to diminish.
Another commonly stated problem is the environmental impact of running the different blockchain networks. This is true for some, but not the majority of blockchains. Bitcoin is probably the worst offender and currently has no plans to change to a consensus mechanism that requires less power. But let's not forget the thousands of data centres around the globe required to operate the existing financial system. That consumes far more power than Bitcoin does.
Ethereum is the is the network used for the majority of DeFi and NFT's at the moment, but we are less than two months away from Ethereum switching from Proof of Work (PoW) to Proof of Stake (PoS) which will reduce the environmental impact by over 99%. Most other blockchains are already using PoS which have a minimal power requirement.
What next
This article is already becoming War & Peace, so rather than go into the bright future crypto has in the world of DeFi (Decentralised Finance), Digital Assets in Banking and the implications NFT's will have for gaming, artists and community, I will save that for a future post.
I'm sure this article will generate plenty of feedback and I look forward to discussing it with you all further.