Crypto's High Ideals About Freedom Take a Beating

Earlier this year, the crypto community went into an uproar over news that Canadian banks had frozen financial accounts tied to protesting truck drivers who had been blockading a key boarder crossing. The truckers were angry about vaccine mandates and other Covid-19 measures, but as the narrative went, you didn’t have to agree with them to recognize that Prime Minister Justin Trudeau had used the financial system to punish political adversaries, an episode that reinforced the need for cryptocurrencies that were fully resistant to any interference.

That was all well and good, until it wasn’t.

Just months later, the interference-resistant, permissionless money industry is itself getting into the business of locking up people’s assets. On Thursday, Voyager Digital Ltd. became the latest crypto firm to limit customer withdrawals from its platform, adding to similar moves recently from Celsius Network, Babel Finance, CoinFlex and others. The moves show an industry that doesn’t stand up for many of its core ideals when push comes to shove.

To hear the zealots talk about it, crypto was supposed to be an antidote to state hegemony, meddling central banks and a financial system that failed Americans in the run-up to the Great Recession, and some of that was arguably true of foundational innovations like Bitcoin, provided owners stored their coins outside of centralized exchanges. A key wrinkle in the Canadian trucker protests was that the government actually went after crypto, which stunned some people who thought they were beyond the reach of the state. In fact, that’s rarely true when you entrust the keys to your crypto to an outside custodian.

Of course, not everyone is comfortable keeping their coins in “cold storage” hardware wallets, and an industry has sprung up to bring crypto access to the masses that has turned out to be far from the permissionless ideal.

To be sure, the industry’s latest troubles aren’t entirely of its own making. Everything started when global central banks, including the Federal Reserve, pledged to aggressively raise interest rates after a late start in tackling the worst inflation in 40 years. That has simultaneously torpedoed every financial market in the world, and crypto happens to be particularly vulnerable. The main coins trade like high-beta tech stocks, which means they fall when the Nasdaq 100 does — only more.

The industry might have slipped through this mess with just a few scrapes if the ecosystem that sprung up to profit off the coins hadn’t entangled itself in such in an interdependent labyrinth of risky leverage, but that’s just what transpired. Many of these not-so-permissionless platforms promised eye-popping “yields” on crypto deposits by lending out funds to high-risk speculators whose positions have blown up in the market downturn.

Certainly, the limits on withdrawals today are of a different nature from what happened in Canada. Ultimately, these platforms look as if they’re taking steps to prevent the crypto equivalent of bank runs, not expressing a political view. The people behind many of these crypto lending operations are scared, and their true colors are starting to show. But you don’t get to grandstand about financial “freedom” when it’s convenient and then get a free pass when you become everything you’ve been criticizing. As it turns out, the values of permissionless money mattered until they didn’t.

Jonathan Levin has worked as a Bloomberg journalist in Latin America and the U.S., covering finance, markets and M&A. Most recently, he has served as the company's Miami bureau chief. He is a CFA charterholder.