It’s been a volatile year for cryptocurrency markets and a big year for Web3 thievery in general, from NFT kidnappings to hacks taking aim at the crypto exchanges and the “bridge” entities that facilitate sales and trades. Duke University lecturing fellow Lee Reiners has emerged as a vocal doubter of the viability of cryptocurrencies as a meaningful factor for nations and commerce, particularly for the kind of rights-laden contracts struck in the entertainment industry. Reiners, who also hosts “The FinReg Pod” podcast on money and regulatory issues, was blunt in assessing the crypto moment as little more than a tulip-like investment fad in a conversation with PvNew Co-Editor-in-Chief Cynthia Littleton.
What makes you so wary of cryptocurrencies?
Crypto, in my opinion, still does not provide any genuine economic utility. There’s no real-world-use case. Not many people are actually using it for money, which is why it was invented. But it’s too volatile to use as a medium of exchange. If you’re a small merchant, why accept something in payment that can go down 20% in value in an hour?
But people are starting to use crypto for gaming transactions and such. Can you give a specific example of the threat posed by its volatile nature?
A good example of real-world problems is Axie Infinity — a decentralized video game that was essentially like Pokémon; characters would battle one another. The characters were NFTs, and you could buy the characters. The more you played and won, you’d earn cryptocurrency. It became pretty popular in the Philippines. And what happened is, normal economics took over. The value of the NFTs increased. It became harder for people to buy them. Wealthy people were buying them and renting them out to poorer players. This is digital fiefdom. And then the game got hacked, and people lost a lot of money. [In March, a so-called bridge exchange tied to Axie Infinity lost $600 million in a hack attack.]
Given that it is prone to hacking, why has crypto created so many evangelists?
It’s a tale as old as time. It’s a get-rich-quick scheme. There are a lot of factors at play that made it so popular. At their core it comes down to what some would call greed; others would call it hope. Especially among younger people, the reality is you can’t get ahead in this country if you’re just a wage earner. Economic opportunities that were there for their parents and grandparents are not there. It’s really hard to climb the socioeconomic ladder from work alone. Some people see crypto as a big economic opportunity. That hope and desire has been fed by commercials (for cryptocurrencies) with Matt Damon and Tom Brady.
Were you surprised to see names like Damon and Brady endorsing this nascent, radical departure from monetary tradition?
We’ve seen financial bubbles throughout time. A lot of people bought into the narrative that this is the future of money and technology, and there was a feeling of “Well, geez, I don’t want to miss out.”
What has surprised you about this bubble?
The feckless response by policymakers. The 2008 crisis raised a lot of suspicion of what were trusted third parties that handled transactions. Banks aren’t fulfilling that role out of the goodness of their heart; they charge fees and have to mediate disputes. Transactions can be reversed. The idea behind the blockchain is to replace that sense of trust with cryptographic proof. That’s the innovation behind blockchain — it allows people to trust the contents of the ledgers. But we still don’t know how we are going to regulate a decentralized system of finance. What are the on- and off-ramps?
We’re seeing more and more movies and TV shows coming to life through blockchain investments and Web3 incubations through NFTs and short-form content. How will that model work in the long run if a property becomes a mainstream movie or TV show?
If we haven’t really seen blockchain used at scale in any context outside of crypto, why would we expect that it’s going to work in the content space? If you’re essentially crowdsource-funding for a movie [with crypto], that sounds like a security. If you do this through an existing funding mechanism, there will be lawyers doing due diligence. There’s a whole host of securities and regulatory issues. How do you make sure that people understand the risk? How do they know that you’re complying with laws and regulations around money?
What’s it going to take to stabilize the big names in crypto coins?
You need a good narrative to justify the price [to investors]. “Web3,” “the metaverse” — that’s where it’s going to be really valuable. I’m sure if Web3 and metaverse don’t pan out, they’ll be moving on to something else.
