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opinion

The ecosystem of digital currencies, assets and businesses becomes more dazzling, complex – and hypocritical – by the day.

On the complex and dazzling side, this week we learned about the launch of a non-fungible token (NFT) powered cannabis brand that one tech publication breathlessly described as “a new community that exists in the heady intersection between cannabis, crypto and the Metaverse.”

Clear enough? We might need another drag on the spliff to better understand this product. And does the cannabis get delivered by AI-powered drones made by Mark Zuckerberg?

On the hypocritical side, we have lots of material to choose from, the latest being the U.S. Justice Department’s seizure of more than US$3.6-billion worth of bitcoins nabbed from a cryptocurrency exchange called Bitfinex in 2016. It was the largest recovery of stolen crypto ever. Two suspects in Manhattan were arrested for allegedly trying to launder the proceeds.

Why hypocritical? Because the denizens of the crypto universe tout the benefits and joys of a decentralized – that is, government-free – financial system. Except, of course, when criminals infiltrate that system and, all of a sudden, they want government prosecutors to lay criminal charges and trace and retrieve the stolen coins.

In other words, the victims in effect reluctantly admitted that DeFi – tech bro argot for decentralized finance – cannot really work without government involvement.

According to Chainalysis, a blockchain data platform, a record US$14-billion in cryptocurrencies was stolen last year, almost double the amount in the previous year – mostly via platforms that you could label DeFi. Exchanges themselves also get hit. Mt. Gox of Japan was the first biggie, back in 2014, when hackers stole about 850,000 bitcoins, valued at US$450-million at the time (the exchange filed for bankruptcy the same year). Exchange hacks continue today.

DeFi was supposed to be the techies’ digital utopia.

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The term came into vogue in the crypto world about two years ago. The DeFi system would operate without costly intermediaries such as banks, investment firms, credit unions, insurers, advisers and lawyers – goodbye, Wall Street, Bay Street, the City of London and their besuited and overpriced hangers-on.

Driven by blockchain ledger technology, its users could use cryptocurrencies and other digital assets to transfer funds, trade, invest and lend, all using automated “smart contracts,” which TechRadar defines as “digital contracts which are ‘smart’ enough to automatically trigger when the terms of their associated agreement are fulfilled.”

So far, so good. Cryptocurrency users even convinced themselves that Bitcoin, Ethereum and their hundreds of rivals with zany names such as SushiSwap and PancakeSwap (and market values of US$568-million and US$2.2-billion, respectively) were en route to becoming legitimate currencies, even though they had no political or institutional support.

A real currency has support from both, all the more so since legal currencies are more than ever a political construct, with gold-backed currencies long gone. Money is generally not considered money unless it is a means of exchange, a store of value, a unit of accounting – and governments accept it for tax payments so they in turn can pay their suppliers and employees.

You cannot pay your taxes with Bitcoin or any of its rivals, though a bill before the Arizona legislature proposes including Bitcoin as legal tender. Fiat currencies would not be worth the paper they’re printed on without a government’s insistence that they be used to pay tax obligations.

The theft of the bitcoins in the Bitfinex hack and the alleged laundering of those coins rather upset crypto users’ dream world. The victims – we don’t know who the real owners of the bitcoins were – needed the help of the non-DeFi world, in this case the Justice Department, to retrieve the missing coins and press charges. The department has scored a few other victories in tracking down stolen cryptocurrencies.

The coin owners were lucky. The department could have declined to investigate by arguing that Bitcoin is a speculative, unregulated financial game, so buyer beware – you are on your own. It didn’t. It appears that most of the bitcoin owners, if they can be identified, will be made whole because of the Justice Department investigation (Bitfinex says it has already compensated them). The owners were happy to operate in the lawless crypto jungle until they got ripped off. Then they called on the law to bail them out.

In effect, cracking open the case showed that unregulated DeFi is too risky even for the advocates of DeFi – that it can’t run without government oversight. If the users of cryptocurrencies want those currencies to be accepted as real money, they will have to accept government oversight and regulation. Doing so would rather ruin the founding philosophy of decentralized currencies, but their users can’t have it both ways. They can’t demand to operate without government interference and yet demand it when things don’t go their way.

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