Ethics of Cryptocurrency

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Moral and ethical implications of Cryptocurrency operation

By Fabiana Cecin, July 2020

I am dedicating lots of time and energy to the question of whether “Cryptocurrencies” are moral/ethical things to operate. E.g. Vinay Gupta thinks ICOs are not ethical.

My own answer, in short, is: Yes, absolutely.

I am convinced that operating cryptocurrencies, by itself, is not only “ethical,” but a right, and even a duty, and I include ICOs enthusiastically in that list. If we decide that doing so helps us help the whole and advance science, technology, and social justice, then we even have a duty to use the tools that are available to us.

However, we must not blind ourselves to what these tools are. Although they are ethical economic constructs, there are ethical implications, because all economic constructs have ethical implications, just as all software and hardware have security implications.

All scarce fungible assets, not only “crypto,” are vulnerable to market manipulation. The core attack vector is repeated accumulation and dispersion, i.e. the traditional “pump and dump” by organized “whales,” timed buying and selling by either individuals or organized collectives to benefit from information asymmetry. That asymmetry is the gap between the hopes and dreams of people who are building a Story of Value and projecting it into the future, and those who “farm” it by emulating that value in the present -- but only they know that this value is, at present, a consequence of a tactical market move, with a cause that they control, and not the actual direct realization of the hope and the dream.

Market manipulation is of this world and it has a positive side. The people behind the Bitcoin decades-long pump-and-dump scam are expanding the awareness of cryptoassets in general. By pumping Bitcoin, and then dumping, cryptoassets “10X” their market cap every 3-5 years, as the state after the pump is a valuation much larger than before the pump. Although ethically questionable, it is not an “evil” violation at a “spiritual” level. The people behind the Bitcoin pump and dump are, for the most part, “true believers” on their “crypto” cause. They really believe in the “Free Market.” But when we learn, we must not do this, just like when we learn to see “meat” and become e.g. vegans.

There is no way to prevent others from manipulating your ICO cryptocurrency. You have absolutely no responsibility when other people buy or sell the cryptocurrency that you issue. The “Free Market” is real in that sense.

You only sell your own ICO cryptocurrency when you need to. Covering expenses and investments. The Captain is the last to leave the ship. A cryptocurrency is a dream, and every time you sell the currency, you are liquidating a part of the dream, and if you can truly appreciate what that means, then you will know when it is OK to sell. The goal of an ICO cryptocurrency, for its creator and operator, is for it to never be sold. The ethics/morality question is quantitatively different for the “non-whales,” and qualitatively different for those who do not control the stories that underlie the creation and the operation of the currency (e.g. the operating and market-competing company for which the ICO raised funds for).

Cryptocurrencies are not modern money in the sense that people experience “fiat” money. People expect “stability” from cryptoassets. That is dangerous to their financial health. We must actively discourage the purchase of ICO cryptoassets as investments. Even legal company stocks are not “investments” that most people should make, and their general inaccessibility has prevented Wall Street from ripping off more people than they usually do. So “Crypto Investments” should be doubly discouraged. We must reiterate the consumptive utility of tokens for services. But we are also free to characterize them as donating for the creation of technology (i.e. Crowd-funding).

But since people will absolutely project stability and investment into cryptoasset ICO tokens, no matter what we tell them, that is not enough. We cannot just say “Utility!” and then leave it for the “Free Market” to “price the utility.” Not unless we have not learned anything from the EOS token disaster.

We cannot control the shape of the price curve of a cryptoasset in the long term. But, as an organization that did an ICO so that it could exist and do the products it does, we can and should want to share the profits of the company, when they do exist, with all token holders, by using the token as an identification mechanism. The partial distribution of profits to token holders, in one way or another, is the ultimate reason for having ICO tokens. The ICO tokens thus represent a virtual share, an a-legal, anarchic representation of a share of a company that people have helped fund. This is exactly how legal shares of companies work. Legal shareholders and ICO token holders are, from a moral and ethical standpoint, of the same importance when distributing profits, and profits should be distributed among them proportional to the funds raised by them (e.g. if 5% of funds were raised by selling shares and 95% of funds were raised by ICO, then 95% of profits go to token holders, and 5% of profits go to shareholders).

There is a fundamental conflict between the monetary, utility, and profit-sharing roles of tokens. That’s why no one buys anything with company shares, or why companies don’t give utility tokens to actual legal-shareholder investors. Utility and profit are correlated, but they are fundamentally not the same thing. And the “monetary” (i.e. stability) role attributed to the average ICO token is a mistake, as argued by smart people like Alex Howlett, from the project. A utility token at rest is a sort of money, and users will be shocked if their “utility” tokens drop in value as the value of the utility will naturally fluctuate. In that “token price shock” possibility lies a subtle ethical implication.

There is no correct formula to address this issue. I believe “stablecoins” will supersede utility tokens in the long run. That is, there is no reason why you can’t pay for a service (a “utility”) with e.g. tokenized dollars (based on solid, stable monetary policy) and price that utility in dollars. Regardless of whether dollars are good or evil, you’d want to just use them to get rid of the ethical load: dump the ethical implications into the underlying monetary system with its legal system, central banks, and stability mechanisms. If your useful system consumes a currency/token/share that you’re not responsible for, then you have no ethical implications of currency/asset operation, because you are not operating one.

An ICO token can be morally/ethically phased out via a buyback, which does the final return of value to its backers, if you ever want to get rid of it (e.g. a large tech company wants to buy an “ICO” company) for whatever reasons. Then you can redesign your utility system to consume “stablecoins” or other cryptocurrencies that you are not responsible for. A buyback can be an event that lasts e.g. 6 months. Just place a fat buy order with the money given by the large tech company that bought you, enough to buy every single token that’s in circulation at an attractive price, and the rest is the responsibility of token holders -- it is a token holder responsibility to observe buybacks. Then close the buy order and consider your duty done.

It is also possible to fail as a company, in which case you have no responsibility for the token whatsoever. If you don’t have money, then obviously you cannot buy it back and you have no moral or ethical obligation to come up with the money to do so.