The crypto landscape is filled with a myriad of experimental, or at least fringe, economic concepts. There are many projects that employ deflationary protocols, issue elastic supply tokens that change their circulation to reflect their demand, and offer non-collateralized loans lasting for mere seconds.
This is not inherently a problem. In fact, it is a strength of the industry. The fact such ideas exist, and are given breathing-room to develop, is why blockchain technology is at the bleeding edge of FinTech. But these ideas do require some examination. It goes without saying ideas like the ones listed go against standard economic practices (the likes of which are taught at universities and repeated by governments on a consistent basis).
This is not to say these are bad ideas, but considering how they go against the grain, it is worth critically analyzing these ideas, and exploring why they are so revolutionary, and what their pitfalls may be.
Now, I will not be examing either the merits or the pitfalls of any specific economic practices found in the crypto industry. I, unfortunately, do not have the knowledge to do so. What I will be doing instead, is answering one specific question:
This might seem like an odd question, so I’ll break it down.
The reason I have framed this as a moral question is because the crypto industry is made up of a significant amount of working-class and low-economic investors. This is especially true in the UK where a huge quantity of retail investors have a yearly income of below £20,000.
All financial activity is moral activity, as money is a survival tool. This is especially the case for low-economic individuals who do not have the privilage of frivolous spending.
The financial status of investors is significant because, if a project is utilizing an experimental economic practice, then there might be a higher chance of failure. It is hard to examine just how likely a project is of failing, and whether such failure would truly arise from its experimental features, but I believe it is fair to say the act of being experimental does increase its chances of falling apart.
For instance, Ethereum has recently set its deflationary protocols in motion. We have never seen such a big currency become deflationary before, and so we have no true statistics of studies on how deflation will affect the nature of the coin on a sociological level. The general theory is that Ethereum will continue to rise in price as it is now about to get more and more scarce. This might be true, and this might happen, but realistically we do not know because it is experimental, and so we have no concrete data to rely on for this.
Deflation is usually avoided by governments and central banks as it is often associated with recessions. It goes without saying that recessions lead to deaths; a study by the Bank of International Settlements found a correlation between mortality rates and countries in recessions during the COVID-19 pandemic. Mortality rates have also been linked to other recessions in the past.
You might read this and think “no cryptocurrency is widespread enough to trigger a recession by itself”. And you would be right… for now.
In previous years, the crypto industry was its own self-contained, niche, geeky underbelly of FinTech. It was a community of innovative developers and ambitious investors. But that changed this year, when El Salvador elevated Bitcoin to legal tender status. This is the first time a cryptocurrency has been given the same rights and footing as a fiat currency.
What if the same happened with Ethereum? Panama hinted at the possibility. If a country was to adopt Ethereum, would it be instigating a future recession? The realistic answer is nobody knows, because cryptocurrencies do not function in the same way as fiat does, so we have no data on the matter. The standard economic canon suggests this is the case, as economists are often trained to scorn and fear deflation.
I do not have the economic skill-set to examine the likelihood of this outcome. My point, more so, is that economic practices of cryptocurrency projects have real-world consequences, and so they should be examined from a moralistic perspective.
My current discussion appears to be arguing that experimental economic practices in crypto are not ethical, as they can lead to disaster. But this is not exactly my position.
Bear in mind, even standard and highly conservative economic practices can lead to downsides. For instance, a steady upward trend of inflation is aimed for by most countries, and yet, this also causes harm to low economic individuals, as their cost of living rises while their wages stagnate.
In other words, it is not that common economic practices are good, it is that we have no idea whether experimental practices are better or worse (and they could be much much worse).
When you are playing with people’s money, you need to be extremely careful. Especially when people are living cheque-to-cheque.
So to answer the question I posed, I would say: experimental economic practices are not exactly unethical, but the severity of harm incurred by these practices increases when low-economic individuals are exposed to them, as they need all their money for survival.
Some might read this and say:
This is the wrong question to ask. This is no different than asking “why do poor people gamble?” I hope my audience notices immediately that this is an offensive question to ask, but for the sake of humoring everybody, I will briefly examine it.
People living cheque-to-cheque, hand-to-mouth, or on the breadline are in a constant state of stress. They can never relax. They can never rest. They are constantly fighting against hunger, cold, and homelessness. If they have children, they are also fighting for their child’s individual flourishing. So, if somebody in these conditions comes across the possibility of winning large quantities of money, most will be at least a little enticed, and many will partake. Because, if they win, they can finally live comfortably. If they win, they can finally rest. It does not matter what the odds are, and whether it is clear that success is a slim chance, poverty is torture, and so people will do anything to escape it, including gamble.
So no, we cannot expect low-economic individuals to simply opt-out of experimental crypto projects. We cannot expect them to opt-out of any investment options, just like we cannot expect anybody to opt out.
Some people dislike comparing investing to gambling, and I can almost understand why. To some extent, research helps with investing, more so than some forms of gambling such as roulette and slot machines. But make no mistake, research can help with gambling, too– serious gamblers who engage in sports bets and horse racing usually conduct heavy research. Poker players spend a great deal of time researching their opponents and studying their own expressions and playstyles.
Just as the highly knowledgable and well-informed sports gambler can lose their bet, so can the highly knowledgable and well-informed investor. This is because, while research is useful, life throws an indeterminate number of curveballs.
Nonetheless, knowledge is still power. Knowledge still increases the chances of success. It is still preferable to come to the trading floor armed with information and data, rather than with nothing. This is why technical analysis exists.
Speaking of technical analysis, there is a lot of debate surrounding whether it actually works. The general consensus is that TA is not so much a successful predictive framework, but more of a self-fulfilling prophecy. It works only because investors are all taught to treat certain signs in the same way. In this sense, you could call it a type of language, where all traders communicate globally via market data, with such data only being intelligible so long as everybody in the market agrees it is intelligible.
As a sidenote, this is why cryptocurrency technical analysis is still frowned upon. Crypto has a disproportionately high number of retail traders, and this means not everybody who enters the market speaks the same language as professional traders, so the charts cannot be read with the same precision as traditional fields like stocks and bonds.
Limited success with technical analysis means traders have less knowledge to arm themselves with. If they are investing in experimental projects, then they have even less knowledge, as there will be no economic textbooks they can dip into to explain the nature of the scenario.
It certainly looks like that’s my argument. However, this is not what I believe. I am economically open-minded, and I am a crypto enthusiast, so I am very much for to pushing financial boundaries.
What I am arguing, more so, is that projects that use experimental practices should handle their activity with care, as the people getting involved will have less information to aid them than with other projects, and a large quantity of those people will fall within a low economic bracket, meaning their investments are more serious on a moral level as they can lead to greater risk of harm.
That would solve one problem, certainly! But it raises another. The idea of locking experiments away, only to be used by wealthy people, goes against the ethos behind the crypto industry. Cryptocurrency has always been about giving the masses the ability to be their own financial custodians. It is about providing widespread autonomy.
That means we cannot discourage low-income people from engaging in any aspect of this technology, because this technology is built by them, and for them.
Plus, it is impossible to lock people away from investing in crypto. It is decentralized and (largely) ungovernable. So this is not even a theoretical solution.
Now, this is the right question to ask!
Low-economic people will always engage with crypto, and that should not be a problem. We just need to figure out how we should care for them (as an industry).
Here, I am going to take a deontological position, or a position focused on the notion of duty and obligation.
I believe it is the duty of crypto developers to research what they are making, and if they come to the conclusion that it is experimental (meaning it goes against standard economic ideas), then they must inform their potential users of this as directly, explicitly, and emphatically as they can.
This is also known as informed consent, and it is at the heart of medical ethics regarding human experiments. When doctors and academics experiment on human subjects, they are duty-bound to offer as much information to the subjects as possible before they consent to the experiments at hand.
It is an extension of the ancient legal principle Volenti non fit injuria, meaning, “to a willing person, no injury is incurred”.
If somebody is informed of what could happen to them, and it is explained in fair and reasonable means, then it significantly reduces the chances of that person being exploited.
The reason doctors are duty-bound to seeking informed consent, and why I believe crypto developers should seek it, too, is that humans should not be used as a means to an end, as they have intrinsic value, and so they should be respected as their own autonomous selves, outside of any gains or successes that may come from these experiments.
It does not matter whether the experiments can help cure cancer, if you do not get informed consent from your subjects, then what you are doing is unethical, as it treats one person as having diminished value to others.
This is known as the categorical imperative, and it was created by the philosopher and ethicist Immanuel Kant. In simplistic terms, it is the idea that you should only act in a way that you think would be permissible if everybody acted similarly.
(there is a lot more to it than that, but for the purposes of this discussion, a minimalist definition will be sufficient).
In other words, you should treat everybody how you would want to be treated. Just because something is helping many people, if one person is being hurt by it, then it is not morally permissible. In the words of the Preacher Soloman Burke, “none of us are free, if one of us is chained”.
It might seem odd to compare a medical experiment with an economic experiment, but the reason I do so is because they can both incur harm, and that harm can be significantly mitigated by being open and honest with participants.
Somebody can only consent to something if they truly understand what is being asked of them. This is the crux of how informed consent works. This means, if you’re running a medical experiment on somebody who is illiterate, you cannot attain consent by presenting written documents.
Some people think this is the only complication that comes with informed consent, but this is a mistake. Even if you have a literate and highly educated person, if you explain something in terminology and vocabulary they are not used to, then they cannot give informed consent either.
Additionally, if you mislead the participants of an experiment and try to present an argument that side-effects are actually positives, then you are presenting a flawed notion of the situation, and therefore informed consent still cannot be attained.
For instance, if you are running a medical experiment that has a side-effect of participants possibly growing an extra ear on their arm, you cannot present this finding to them by saying “as a side-effect, you may gain better hearing”.
This might sound like a weird scenario to build, but something similar happens quite regularly in the blockchain industry. Without naming names, there are some projects that use their experimental features as a positive, exploiting side-effects as marketing strategies.
You need to be direct and open about the potential for harm. This is the only way to ethically deploy experimental features into the crypto industry. People need to know the risks, and they need those risks to be conveyed directly as risks, not as a marketing trick or an incentive.
It’s funny. I actually love experimental crypto projects. It was this type of cutting-edge energy that drew me to the industry in the first place, and it is this energy that keeps me here. But the reality is that I only like experimentation when I know I’m entering an experiment. I do not enjoy entering a seemingly sound project, only to find they are using some unorthodox and highly unusual practices.
I also don’t like when a project tries to sell itself under the guise of experimentation. Experimentation is great, but experimentation is risky, and risks should be presented as matters of fact, not as adverts. A project should have its own merits, lying outside this.
I am excited to see how the crypto industry grows, and I’m also excited to see how its experiments seep into the traditional financial world. I just hope, along the way, developers and teams understand the burden and duty they have to be as informative as possible.
