The Media’s Effect on Crypto

For many people, the first time they heard about cryptocurrency might have been in splashy headlines about the skyrocketing value of digital currencies Bitcoin or Ethereum. They might have seen their favorite celebrities endorsing cryptocurrencies during the Super Bowl. If they hang on Elon Musk’s every word, they might have heard some mentions of dogecoin. But even after all that hype, some people still might not have understood what’s the deal with crypto. To answer that question, the New York Times tried to help.

In March 2022, the New York Times published tech columnist Kevin Roose’s “The Latecomer’s Guide to Crypto,” which offered some basic explanations to questions like, “what is a cryptocurrency?”or,  “what is a blockchain?”. But in anticipation of criticism, Roose acknowledged that “crypto boosters will likely quibble with my explanations, while dug-in opponents may find them too generous.”

Swiftly after the Times hit publish, software engineer Molly White, software engineer Grady Booch, journalist Amy Castor, “Crypto Critics Corner” podcast co-host Bennett Tomlin, Dr. Catherine Flick, Ph.D., of De Montfort University Leicester and other cryptocurrency skeptics annotated Roose’s article to address the “many questionable or entirely fallacious arguments from cryptocurrency advocates,” they wrote. The annotations included critiques of arguments made in the article, ranging from the definition of the supposed market value of cryptocurrency to the unscalability of blockchain technology.

Roose, for example, points to El Salvador’s President Nayib Bukele announcing that the country would develop a “Bitcoin City.” But as skeptics pointed out, a Rest of World article published just days before the Times’ crypto guide, detailed the lack of Bitcoin adoption among local businesses and consumers. Another article in Bloomberg, illustrated how local businesses were not using the digital currency to transact. (El Salvador adopted the U.S. dollar as its official currency in 2011, according to USA Today.)

Roose’s ambitious crypto explainer was written before the FTC disclosed that consumers lost millions of dollars to cryptocurrency scams and fraud, an indicator that scammers were using the novelty of cryptocurrency to defraud people, primarily between 20 and 49 years old in investment-related, business imposter, government imposter, and even romance scams. But perhaps more importantly, it was written after some articles in publications like Mother Jones and the Wall Street Journal and warnings from former PayPal CEO Bill Harris and JPMorgan Chase CEO Jamie Dimon all called Bitcoin or cryptocurrency overall a fraudulent concept. Those warnings beg the question: Why have some publications continued to boost the crypto industry when there were signs of its invalidity?

The criticism that followed the Times’ article is indicative of a much bigger problem about the way the press has covered—and indeed amplified—the cryptocurrency industry to regulators and the general public. The question is why. In light of crypto’s monumental collapses, isn’t it the job of journalists—who have the power to lead and shape the conversation—to do due diligence, ask the difficult questions and delve into the industry as deeply as possible, so readers understand what they’re getting into?

Decoding Crypto

Much like the rest of the financial sector, the cryptocurrency industry is fairly complicated to understand. Hilary Allen, associate professor at American University’s Washington College of Law, who has testified before the U.S. Senate Committee on Banking, Housing, and Urban Affairs on the risks of stablecoins and argued that Congress should prevent crypto from causing a financial crisis, explains that crypto appears to be deliberately complicated to circumvent scrutiny from the public and regulators, even as it has been labeled as a tool for financial inclusion.

We’ve seen this before, during the 2008 subprime mortgage crisis, when the finance sector said credit default swaps (CDS) were too complicated for regulators to understand, Allen explained. Investopedia defines CDS as a financial instrument that lets an investor offset their credit risk with another investor’s risk, meaning that a lender buys the CDS from another investor who pays them if the borrower defaults.

During the 2008 financial crisis, subprime mortgages, which were bundled into another financial instrument called mortgage-backed securities, enabled previously excluded consumers (particularly Black Americans and middle-income Americans) from buying a home. But when those new homeowners began defaulting on their homes and the economy collapsed, the people targeted for the so-called financial inclusion product were the same people who lost both their homes and their jobs, Allen said.

Is the cryptocurrency ecosystem substantial enough to send shockwaves through the U.S. economy as the Great Recession did? No. But it shares similar traits. Both target disadvantaged groups looking to build wealth. Both have had a disproportionately negative impact on people of color. And both continued to harm unsuspecting people until the problems they caused are too big for regulators to ignore. Now, the crypto boom has left consumers reporting more than  $1 billion in losses from outright scams and billions more from the platforms proclaiming to be reputable.

One takeaway from the Great Recession was that journalists must maintain a critical eye on any financial services firms’ grand proclamations. Though there may be a wave of positive news coming out of a sector, it’s critical for reporters to consider their underlying motives. If investors and regulators with their authority and expertise did not see these collapses coming, how can journalists be more discerning? And to what extent does not being a subject matter expert influence a reporter’s ability to question the hype surrounding the cryptocurrency industry?

For Francine McKenna, lecturer at the Wharton School at the University of Pennsylvania and a financial journalist who previously worked in consulting and accounting at firms like KPMG and PwC, said “crypto is more than I can completely understand.” But, she noted, it’s not impossible for journalists to learn the crypto beat and cover it critically without a financial background—though having an economics education is an advantage.

The lie of transparency

Many journalists on the cryptocurrency beat make the mistake of accepting the industry as inevitable—believing that no matter what happens with the future of finance, it’s here to stay. But too many reporters ignore the high risks associated with this form of ephemeral currency.

For years, the crypto industry has been plagued by rug pulls (running off with investors’ money and leaving them with an incomplete crypto project) hacks, the launch of numerous “shitcoins” (worthless coins trying to replicate the once-skyrocketing value of bitcoin), and misuse of customer funds, making the continued investment in this space akin to gambling with the odds stacked heavily against consumers. Despite reports of such scandals and risks, some journalists, alongside other influencers, crypto proponents, and some regulators, continued to give the industry the benefit of the doubt, leaving consumers to fend for themselves in a largely unregulated space.

“I’ve always been thinking about crypto through the perspective of how do we prevent this from tanking the real economy so that people who never even invested in crypto don’t get hurt? Because that’s what can happen if you have a financial crisis,” Allen said. “And if you think about who gets hurt most in financial crises, [it’s] those [in] underserved populations.”

Though cryptocurrency companies and entities may seem opaque at first glance, the possible business models for the industry—ranging from broker-dealer or custodian of funds to an exchange or clearinghouse—are well-known at this point, McKenna said. At some point, there should be a cohesive explanation for the flow of funds, she said.

“Like a lot of stuff that in technology, you have people that want to want it to be very, very, very complex because that creates a nice little club for them where they can control the narrative, but there’s a lot that you can say about what’s going on there that can be reduced to pretty basic stuff,” McKenna said. “I didn’t have to really know anything about crypto to review the financial statements that were prepared and say these are a complete mess.”

Journalists also need to be mindful that the cryptocurrency industry’s claims to be transparent; it is anything but.

Take the claim that cryptocurrency transactions can be tracked on the blockchain, making it more transparent than the traditional financial services industry. Sure, you can track some cryptocurrency activity on public blockchains, and you’re definitely not getting a peek into the inner workings of say, JPMorgan Chase or Bank of America. But while some transactions can be tracked on a publicly available blockchain ledger, there are other transactions occurring on off-chain tools, because the blockchain is difficult to scale. In other words, some cryptocurrency transactions aren’t occurring on publicly available ledgers, because they’re faster, cheaper, and more private than validating transactions across all the computers connected to the blockchain, as Investopedia explains. Therefore, wrongdoing could occur in the space without being detected even by cryptocurrency enthusiasts that know how to analyze crypto transactions on the blockchain.

Furthermore, the financial health of exchanges or their conflicts of interest might not be clear from analyzing blockchain transactions, explained Allen. Take the bankruptcy of FTX, for example. Though Sam Bankman-Fried told the Financial Times in July 2021 that he thought FTX could grow large enough to buy Goldman Sachs one day, a leak published last November on the crypto news site CoinDesk ultimately revealed the company’s troubling balance sheet, a revelation that wouldn’t be obvious to anyone working outside the company.

The Impact of Covering Crypto

Though major publications have played the role in amplifying the cryptocurrency industry in a positive light, researchers have tried to sort out exactly how much the press has played a role in driving cryptocurrency prices.

In an April 2022 paper published in the Royal Society Open Science journal, Kelly Coulter, founder of the digital assets and machine-learning analytics firm West Street Research, analyzed the correlation between crypto media coverage and Bitcoin prices from 2018 to 2020, as have other researchers in recent years. Coulter found some minor Bitcoin price fluctuations that appeared to correlate with reporting on cryptocurrency crime, government regulation, and the overall crypto market.

Other researchers have examined the possible correlations between media coverage and cryptocurrency prices. A September 2022 paper published in the Journal of International Financial Markets, Institutions and Money found that press coverage catalyzed Bitcoin returns amid an economic bubble. In other words, there’s a possibility that press coverage may have played a partial role in influencing Bitcoin prices for better or for worse. For consumers wanting to know whether crypto was worth investing in, uncritical or celebratory articles about the space wouldn’t tip them off to the messiness of the largely unregulated industry.

Well before this year’s collapses of FTX, Celsius and Terra / Luna, there were major hacks of QuadrigaCX, Bitfinex and Mt. Gox, which resulted in millions of dollars worth of assets being stolen digital assets, driving down the trust in the industry, Coulter noted.

“The crypto crime really plays a huge role in negative sentiment and pushing the crypto prices down because of the lack of trust,” Coulter said. “These hacks obviously instigate public debate about how public digital assets are not being kept safe on these exchanges and there’s lack of regulation to protect consumers.”

The SEC and the FTC did not comment regarding how the press coverage of the cryptocurrency industry affected their view of it. In a statement to DAME, the CFPB said it “enforces federal consumer financial laws as directed by Congress, and part of our charge involves monitoring all consumer financial markets. We will continue to monitor the crypto-asset market closely—including through the complaints filed to us regarding these products.”

In light of the FTX collapse, there’s a danger that “the bad apple” narrative will become the dominant story, meaning that FTX was an outlier in an otherwise sound crypto industry, Allen said.

Aside from warning the public about what’s happening in the crypto industry, properly reporting on the risks of cryptocurrency is critical for informing regulators and policymakers who aren’t glued to the cryptocurrency industry drama on social media, Allen noted.

Following the collapse of Terra Luna, Allen said that, while she observed an increase in critical coverage, “there was plenty out there in the press that was sort of very puff piece-y. And I think this is particularly important because I think for a lot of people in Washington who are making the rules, developing policy, drafting legislation, etc. I think they don’t get their news necessarily from Twitter, right? They get their news from media outlets. And the critical coverage of crypto is very accessible on Twitter if you want to look for it.”

In the end, it is our government’s job to protect the public from potential financial harm and to understand and regulate complex financial services. And while social media and influencers play a huge role in driving crypto hype, the press also plays a crucial role in shaping public perception of the crypto industry, not just among unsuspecting investors but also regulators.