Sam Bankman-Fried has posted $250 million bail for the privilege of living with his parents in home confinement until his trial on charges arising from his failed FTX cryptocurrency exchange. What began as a venture aimed at making people’s lives better ended up temporarily improving SBF’s life, but now he faces prison time for bilking money from people who believed in “effective altruism.”
The bankruptcy of FTX has shaken confidence in cryptocurrency, a computer-generated code that people put their faith in as an alternative to traditional money. Much more difficult to understand than gold or silver, cryptocurrency coins are “mined” by huge supercomputers that solve mathematical problems to harvest the money and assign it to the individuals who have invested in it. It is a complicated process that may be as harmful to the environment as mining, for it requires huge amounts of electricity to keep those computers humming along — more of a draw than most countries use. The idea was to create a superior currency that avoided the payouts to middle-men — banks, investment companies, Wall Street — which are heavily regulated to maintain the status quo, keeping the rich wealthy and the poor on welfare or on the street.
The status quo is represented by the Federal Reserve, which aggressively raised interest rates to try to tame the soaring inflation, hiking them from near-zero in March to around 4.5% nine months later. Its goal is to control inflation by putting more people out of work and making owning a home more difficult. As Business Insider reported, rising interest rates give savings accounts higher yields, meaning that holding onto cash may become more attractive than investing in assets like stocks, real estate, and cryptocurrencies.
Crypto was already in a decline when the FTX bankruptcy in November made matters worse. FTX’s new chief executive officer, John Ray III, said he had never seen a company in as bad a shape as FTX in 40 years of dealing with bankruptcies. The company’s Chapter 11 filing revealed that the group's crypto holdings were worth just $659,000, and that it had been audited by a little-known firm that claimed to be the first certified accountant with an office in the metaverse.
Abandoning cryptocurrency for traditional paper money is almost as fraught with trouble. Having abandoned the gold standard, the dollar — and other world currencies — are just as much a house of cards, except for one thing: Those currencies are backed by their governments. That means that taxpayers are guaranteeing that the money is good. Yes, there are regulators who provide a gloss to normal currency by establishing rules, but for every rule there is someone looking for a way around those rules. Bernie Madoff, one-time chair of the NASDAQ stock exchange, masterminded the largest Ponzi scheme in history, involving about $64.8 billion. A New Hampshire Ponzi scheme defrauded Granite State investors who were sucked in by promises of easy wealth. The New Hampshire Legislature decided taxpayers should pony up to reimburse some of those losses from the risky investments.
Then there are the credit card companies, which charge high fees to users who do not immediately pay the money back while also garnishing the money collected by businesses that accept the cards. Merchant fees typically range from 2.9 percent to 4 percent per transaction, forcing merchants to charge higher prices for the goods they sell. Merchants looking for ways to save money on credit card processing may implement surcharges for those using a credit card, or cash discounts for those who pay cash. Surcharges have largely disappeared, and cash discounts are not as frequent as they once were, but they are experiencing a resurgence as inflation takes its toll. With cash, merchants do not have to wait for the money transactions to be completed, sometimes days later. It is immediate money, not subject to any decrease in value from inflation.
Cash also allows “under-the-table” transactions that do not get taxed, but that, of course, is illegal. Italian Prime Minister Giorgia Meloni, however, says there’s little evidence that a greater use of cash leads to tax evasion. Italy had a 1,000-euro cap on allowable cash transactions which was doubled earlier this year. Last month, the Meloni government raised the allowable amount to 5,000 euros “to boost poor Italians and mom-and-pop businesses that might have less access to digital payment methods,” according to Eric J. Lyman in the Charlotte Observer.
If someone truly wants to avoid the profiteers, whether they be financial institutions, stock brokers, credit card companies, or cryptocurrency exchanges, there is a much simpler solution: barter. Trading services or goods avoids currency of all types and with it the siphoning off of value. Of course, the regulators are still there to capture the value of “income” from barter. People must claim the fair market value of the services they provided and may even be responsible for tracking capital gains or losses.
And so it goes.
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