IEEE Blockchain Podcast Series: Episode 8

A Conversation with Lana Swartz
Assistant Professor, Department of Media Studies, University of Virginia

Part of the IEEE Blockchain Podcast Series

Episode Transcript:

Brian Walker: Welcome to the IEEE Blockchain Podcast Series. An IEEE Digital Studio Production. This podcast series entitled "Research Notes in Blockchain" is hosted by Quinn Dupont, former Assistant Professor at the University College Dublin School of Business and Founder of Alumni, a Web3 startup with a mission of putting university diplomas on blockchain. Quinn is also the author of "Crypto Currencies and Blockchains." In this episode, Quinn and Lana Swartz, Assistant Professor in the Department of Media Studies at the University of Virginia, take an intriguing look at how fraud and scam play within the crypto currency space and on a broader societal level in respect to established investment and payment systems.

Quinn Dupont: Thanks, Lana. I've been a big fan of yours for quite some time, and your work on blockchain spans a bunch of interesting dimensions. But the area I kind of want to focus on today is your recent work on scams. In particular, I read your preprint article on the 2017 ICO boom, and I think this is a really interesting case example of both the kind of opportunities and risks of blockchain. So, before we kind of get into the nitty-gritty of it, maybe you can just tell me a little bit what the 2017 ICO bubble was.

Lana Swartz: Sure, well, first off, thank you for having me and of course the fandom cuts both ways. And if we have a way to talk about some of your own work on some of the scammier side of crypto, like with the Dow event and such, then you know, I hope we have the opportunity to do so. So, just putting that on the table. But yeah, so in 2017, you know, it was one of the-- I think that this peak has been topped by now-- but 2017 was at the time one of these like big peaks of blockchain enthusiasm. And at that point, much of the enthusiasm, much of the investments that were happening, much of the, you know, I guess you could say innovation that was happening was the happening in the form of ICOs or initial coin offerings. And ICOs are a way of fundraising. So, this is kind of the official version of like what they are supposed to be technically on paper. An ICO is a way of fundraising for a blockchain based technical project by doing an initial coin offering. So, an initial offering of a coin. So, people oftentimes these are, you know, the coins are based on Ethereum, a new token, and you would create this token, sell it for cryptocurrency or in some cases, various like national currencies, and then take the funds raised through the sale of the token to build whatever blockchain project you have proposed. And then theoretically the tokens will be valuable because they will be necessary and useful. They'll kind of serve as gas for whatever the blockchain project is that you ultimately wind-up building. And then if other people want to use the blockchain project that you've built, they will need to purchase those tokens. So, the tokens that you initially sell will be useful both-- they'll have both use value in the blockchain based system that eventually gets built, and they'll have exchange value because other people who want to use the system will have to buy them. So, you know, it's kind of an interesting amalgam of an IPO, an initial public offering, and crowdfunding, and it seems like a pretty interesting way to get the blockchain ecosystem built up. Now, you've already-- there's no spoiler to say, if you've been paying attention, 2017 was an ICO bubble. It was an ICO boom-and-bust. And the reason for this is that the vast majority of systems that were proposed were simply not built. And many of the systems that were not built were, according to just about every analysis were scams. That is to say it wasn't just that they didn't get built because they, like almost all ventures, failed; you know, it's being an entrepreneur, being an innovator, requires risk. And there's always the risk that you won't be able to build the thing that you hoped to build. But according to most analyses for many of these ICOs, they were simply what was called exit scams, where people, you know, the builders took the money and ran, without ever intending to build the system that was proposed. And then there were, somewhat relatedly, many other pump-and-dump scams. So, where people knew that the blockchain-based system would never get built. But that didn't stop them from pumping and engaging kind of coordinated market manipulation to pump the value of the related token and then sell it at the right moment and reap the spoils. So, you know, many people sort of analysts point to the ICO boom as one of the catalyzing events of the literal crypto winter that we saw in 2018 or so. But it's this interesting moment in blockchain history that we rarely hear about these days in the kind of new heady moment of NFTs and other kinds of speculative and innovative frenzies.

Quinn Dupont: Yeah, I mean, we both, as researchers, we’ve both seen these boom-and-bust cycles over and over again. Everything-- all the way back to 2013 with Mt. Gox, to 2014/'15 with the launch of Ethereum on to 2016, the Dow, and it seems like there's these cycles that happen which suggest something is interesting about crypto. And if we could maybe just zoom out. There's a bunch of details that you talked about just a second ago that I want to explore. But you know, you frame this bigger picture of crypto and a history of scams. And in your article, I thought it was very interesting that you sort of talked about this distinction between legitimate and illegitimate capitalism, right? It's sort of-- and you give some offer-- some sort of suggestion of its early history. Can you talk a little bit more about like scams, their ambiguity, and what that is all about?

Lana Swartz: Yeah, so you know, as you mentioned, I have, for better or worse, spent almost a decade now paying attention to cryptocurrency, so I wrote my first paper, it was kind of a cultural analysis of the early days of blockchain with my colleagues Bill Maurer and Taylor Nelms, and that piece was published in 2013, based on data that we began collecting in 2011. So, in blockchain terms, I'm a dinosaur basically. But my research isn't just about bit coin and blockchain and cryptocurrency, it's also about payment systems, mainstream payment systems, ecommerce of all kinds, the history of payment, kind of think about the future of payments. So, what happens when you spend a lot of time around these topics, around systems that try to make new money forms and make new ways of moving money around, as well as old ways of moving money around, is that you accidentally develop an expertise in scams and fraud. So, you know, one of the biggest challenges for payments of all kinds is to manage fraud, and fraud and risk of fraud and risk of chargebacks and other things that are related to fraud, really does drive a tremendous amount of the business models around payments as well as a kind of technical arrangements around payments. You know, PayPal is successful for many reasons, but one of them is certainly that they developed some pretty good systems for detecting fraud. And of course, you know, anyone who is honest and has spent a lot of time around bitcoin and crypto more generally, has to admit that, you know, scamminess plays a big role. So, after my book, the 2020 book, "New Money, How Payment Became Social Media," was published by Yale University Press, I was sort of thinking like, "What's my next big topic?" And I realized I had all of this expertise and like a huge backlog of just stories about scams. So, this is kind of my one of my new big research projects alongside some work I'm doing-- which is I'm happy to talk to you about in other times, work I'm doing on CBDCs-- but that is really my big project right now is to kind of think about scams, think about how they've shaped communication and notably payment infrastructure, and how they are shaping the future of these systems. So, I'm a scholar of media studies. Like scams have always been an important part of new communication channels and technology. So, you know, classified ads, the scams that were in classified ads made up a huge part of business models for newspapers during their heyday, as well as Craig's List. The telephone has always been a vector for scam phone calls. And there's interesting work by Jovan Scott Lewis, for example, that looks at how the geography of corporate call centers, particularly in Jamaica for his work, produced infrastructures and training that allowed both call centers, both legitimate and illegitimate, to function. As soon as people started using the web for social reasons and certainly for commercial reasons, they immediately started using them for scams. There's been a lot of interesting work about so-called 419, or Nigerian print scams. You know, and so often, and this is something media study scholars like Tarleton Gillespie demonstrate, you know, socio-technical systems always react to negative or undesirable behaviors. So, every scam in turn shapes the norms and rules of communication systems. So, I'm really interested in sort of doing a history of scams and then a history of how those scams have shaped the way we build, you know, the social web, the kind of like social communication infrastructure. So, I'm interested in this kind of reciprocal relationship between scams and technology. And then, you know, in the-- I also think that this is particularly important to study and to understand right now, because we're living in a moment where institutions, you know, really feel like they're failing. So, you know, there's unprecedented distress in the financial system, in the traditional governments systems. And many of that distrust, many of that kind of concern about the collapse of institutions, fuels of course you know, peoples', many peoples' interests in cryptocurrency and blockchain systems. But it also means that we're living in a moment where people are exploring all kinds of new ways to make money. New ways to have a livelihood outside of traditional institutions like colleges, nine-to-five jobs, these kind of tra-- you know, 30-year mortgages, these traditional arcs of our livelihood that are patterned by institutions. And so,, we're living in a moment where we're constantly being told that everything is a scam. The litany of institutions I mentioned is a scam. Nine-to-five is a scam. Government is a scam. The two-party system is a scam. College is a scam. But that's almost always a predication to kind of jump ship and join up with something else, whether it's the gig economy, whether it's a for-profit college, whether it's trying to get rich through trading foreign currency exchange, or NFTs, or shitcoins. Whatever it is. You know, all of these other things are, in fact, maybe equally scammy <laughs> as the institutions that they're purporting to replace. But the difference is that they seem to be scammy on more transparent terms. So, you know, I always think about this kind of Wall Street bets moment where game stock gave the GameStop stock went through the roof. And the message there was always that among the people who are-- you know, "The Apes," as they call themselves-- who were kind of driving this bubble, the message was, "We know it's casino capitalism. We know it's a scam. We just demand equal footing to participate in that casino and participate in that scam." And so, I think whether it's GameStop or any other new kinds of like speculative activities that we're starting to see, or entrepreneurial activities that we're starting to see, in the kind of shadow of this institutional crisis, it's really a caveat emptor society. And caveat emptor sort of becomes a value, like a normative value that-- and so one thing I'm really interested in is what happens when traditional notions of consumer protection begin to fall flat. When people don't want to be protected from scams, they just want to have more access to them and sort of see -- follow-- see where their luck brings them. See how they can kind of thrive or not thrive in this kind of new Wild West. So, as a media studies scholar, trained by sociologists

and historians and anthropologists, I'm interested in kind of understanding this moment and what it all means and then how those shapes sociotechnical systems, mostly payments.

Quinn Dupont: It sounds like on your analysis, scams are at least endemic, if not even perhaps in a weird way, maybe even essential to new media in particular. I mean, you talked about OP scams, you can find them all over the place. But something particular about new media. And in your article, you have this really sort of telling phrase. You say, "The scam label is a way of seeing." It is interesting because I've heard people talk rather enthusiastically about, for instance, hustles. Right? And I think hustle is similar to scam in that it has that ambiguity sort of baked into it. So, how do we tell when something's a scam or not. It doesn't seem to have anything to do with whether or not it's illegal, because there might just be a lack of regulation, but nonetheless we should still be able to identify a scam, shouldn't we?

Lana Swartz: Well, I mean, I think that the argument from so many folks who are shifting into these kinds of deinstitutionalized practices, these kind of caveat emptor practices, is that all of these-- the things we're leaving behind, you know, traditional corporate capitalism, traditional market economies, traditional systems of governance are themselves scams. Right? And that some of those scams are institutionalized and certified and, you know, for example, like if you want, gambling seems scammy. It seems less scammy when you're doing it inside of a legal casino. And it seems even less scammy when you're doing it as part of a licensed fiduciary inside of a hundred-year-old stock marketplace. And so, I think what we're seeing is people, as I put it, thinking about scams as capitalism out of place. Or a way of kind of identifying, "These are capitalisms we like. And these are capitalisms we don't like. These are the people we think should be able to gamble. These are the people we think shouldn't be able to gamble." And so, I think it's, you know, really a crisis of protectionism and paternalism. And I'm really torn on it. Because I do think that there's a tremendous amount of truly predatory practices that are emerging, but I also know that there were many predatory practices that were endemic, and that are endemic, to the kind of mainstream legal non-scammy practices that we've participated in for hundreds of years. So, I think we're really at a kind of crisis moment around kind of ways of seeing. And that's what I'm trying to understand.

Quinn Dupont: Mm hm, this is interesting, because the comparison that leaps to mind for me is Silicon Valley style venture capital. This has long been understood as-- well, the criticism is that nothing comes out of most of these companies, right? They're vaporware. You talk about this in your article about how most of these blockchain companies that came out of the ICO boom were effectively just vaporware. But we've internalized this institutionally somehow, right? Silicon Valley style venture capital is not just comfortable with the fact that most of their investments won't pan out, they actually are really actively seeking this. So, is this-- is blockchain is different? Or is this just an early phase of the formation of the transition from scam to, as you said, out of place capitalism and eventually to, I guess, just institutionalized capitalism?

Lana Swartz: Well, I've been thinking about this in some of the conversations I've been following around say like Web3 and that kind of new boom of speculation and innovation that we're seeing in blockchain. And you know, there's a critique that platform capitalism, Silicon Valley capitalism is only focused on scale, right? They're not focused on getting companies to profit. And they're able to float these companies through venture capital until they figure out how to make money. And usually that making money is in the form of surveillance capitalism through user data of some kind. In the meantime, they're able to really disrupt what were profitable firms. So, many taxi companies were small businesses or medium-sized business that made money. I don't know the numbers off-hand, but I don't know how long it took for Uber and Lyft to actually start turning a profit to make any money at all. So, but they were able to kind of be supported by venture capital funds as long as it needed to basically destroy the taxi industry.

Quinn Dupont: Yeah.

Lana Swartz: You know, as a socio-- you know, someone who's trained by sociologists, that isn't like how capitalism is supposed to work. Right? Capitalism is supposed to be a competitive marketplace and that marketplace is driven by your ability to profit. And so, I think a lot of people who are interested in kind of Web3 are noticing that Silicon Valley capitalism doesn't play by the rules that we were told capitalism played by. I've seen that critique kind of embedded in a lot of visions for Web3 where, "Okay, well, instead of allowing VCs to do this, we will rather fund the new stage of platforms. New stage of kind of whatever Web3 social formations there are through our own investments." And that's debatable. Whether or not that's true. There's a lot of VC money behind a lot of blockchain enterprises. There's this idea that the ability to use capital to make something exist in the world and to change the world in some ways divorced from immediate profitability, is something that's seen as democratized, and it's democratized through the funding of various blockchain Web3 projects through the speculation on crypto coins.

Quinn Dupont: I read some recent research that suggests that there is a high probability or a good chance that traditional platform capitalists are going to overtake crypto basically, right? And we see this, there's an emergence of new kinds of what we call whales, but even just that traditional venture capital money flowing into crypto. And this bothers, I think, a lot of people in crypto, because of course they look at this as their opportunity for some kind of collectivity or something like this. And here, I want to point to the place in your article where you talk about as maybe a differentiating factor for how we can talk about scams as you say, "Basically, you know, it's that the collective doesn't really believe in the future that they're promoting."

Lana Swartz: Yeah, so one of the, what I hope contributions of the article is, is that traditionally when we talk about scams, we imagine it as a game with two players. Right? There's the scammer and the scammmee. The conman and the mark. But what we're seeing now is, and what I argue is something more like what I call a "network scam." Which is that there isn't-- it's that scams themselves aren't two-player games. I kind of half-jokingly describe them to continue the game metaphor, as like not a two-player game, but a massively multi-player online role-playing game, where everyone is participating in the scam. There isn't a clear set of perpetrators and victims. But rather it's a context where everyone is kind of obliged to pump their bags. Everyone is sort of obliged to protect their investment and make sure-- by making sure other people invest and buy the coins that they themselves have. And so, in that case, you know, what could be called a shill is indistinguishable from a true believer. And indistinguishable from someone who's just desperately trying to protect their life savings. So, kind of getting into it. Entering into this like uncharted waters of the crypto economy and sort of requires everyone to occupy both positions of scammer and scammee. And I hear this again and again in my interviews. This is something that comes out in the kind of behind-the-scenes conversations but is rarely said on the stage, say, at like a cryptocurrency conference. But you know, how an interviewee told me that like all crypto projects are a little bit scammy. That that's like salient to their nature. <laughs> I hear again and again that it's not a scam if you HODL long enough and that everyone needs to HODL, but no one wants to be a bagholder. You know, you hear that I shouldn't-- I'm told that I shouldn't trust any of my interviewees, because everyone is just trying to pump their bag and that's just the nature of what happens. In the article, I try to theorize this idea of "the network" scam. A scam that is itself decentralized in the way that the architecture of a cryptocurrency project is also decentralized. And then I try to think about-- I try to theorize that a little bit more and think about the way that all money projects are an attempt-- you know, this is something I've argued, something Finn Brunton has argued, quite a few scholars of money, in particular cryptocurrency have argued, that all money and all investing is really an attempt to bring about some future. So, you are staking your claim that the thing you're investing in now will be worth more tomorrow. And it'll be worth more because tomorrow will be a context in which it'll be environment in which the thing that you have invested in will thrive. In the case of bitcoin, you know, that often gets read as kind of a libertarian future where traditional governments are either too weak or too authoritarian or both, to provide a thriving economic system. So, something like bitcoin becomes more important and more valuable. But it can also be mundane. More mundane, like you're betting on a future in which technologists and entrepreneurs have figured out a way for bitcoin to serve a useful purpose in society. So, you know, if all money projects are a bet on the future, how does that intersect with scams? And the way that I've talked about it is that, you know, network scams are an attempt to bring about a shared future. Wealth for individuals but also how the economy is run. But what makes them a scam is that this effort is very much characterized by ambiguity, right? And that among participants there is an uneven but unknowable likelihood of benefit from the scam. So, like if you're running a pump-and-dump and you're telling me that I should put my money, you're pumping your bags, you're telling me I should put my money in-- token, your shilling at the moment, but you know you're going to get out of it before I can, I know that you're more likely to benefit from it than I am, because you have more of the coin than I do. And I know you might be closer to the inner rings of various like pump-and-dump telegram groups and that sort of thing. So, there's this uneven benefit. You know, you're likely to make a return on your pump-and-dump investment, and I'm likely to be left holding the bag. But what's also uneven, and frankly I would argue unknowable, is belief in the likelihood of this promised future. So, you know, you're telling me that I should invest in your particular shitcoin, because it is the future of whatever, solar energy. And you might believe it, and you might be telling me that because you truly believe that this is the future. What's unknowable is belief in that shared future that the crypto coin purports to bring about. So, you might be saying, "Definitely put all your money in this solar power, you know, solar energy crypto system, because in the future we'll all be, you know, running solar grids using this blockchain based system." And you might believe, or you might just be pumping your bags, and there's no way for me to know. And I might believe it, or I might just be trying to get rich quick and get out before the unwinding of the pump-and-dump happens. And so, what we see is in what I call the network scam is this unevenness both in likelihood and benefit and unevenness of belief. But the unevenness and likelihood of benefit is knowable, whereas the unevenness and likelihood belief is unknowable. And I think that kind of ambiguity at the heart of many of these projects is just totally fascinating. And relates to many other kinds of scammy activities, what I would call network scams in a digital economy. Whether that's MLMs and pyramid schemes or even the gig economy. You know, you're being sold a vision, but you don't really know who believes in that vision, and you don't really know whether or not you're expected to really believe in the vision or just invest in it and hope it pays off.

Quinn Dupont: This structural nature of this what you're calling a network scam, I think it's really interesting because as you say there's this ambiguity, it's almost like there's an implicit critique of capitalism here. But I feel like you don't want to go there, you just want to point out it's ambiguity, but it's also a kind of a classic business problem this idea of lack of information or knowledge, which of course is what things like markets are supposed to be able to address. Would you consider transparency to be a, I don't know, antiseptic for a scam?

Lana Swartz: Well, I mean, I think that we can have the kind of transparency offered by say a blockchain and that might tell us something about how the market is moving, but it doesn't tell us anything about kind of human belief <laughs>, I guess. It's a classic question of transparency, and kind of the unknowability of the other. And this is something, I mean, I think you and I, we might get too dorky theory-heads if we go too deep into this. But you know, Sybille Krämer who's a scholar of communication, you know, a theorist really of communication, writes about how one of the most beautiful things about money as an active communication is it allows you to communicate without knowing anything about the internal world of the other. <laughs> So, you know, I give you money. You have it now. We know that that has occurred. We're able to perfectly and flawlessly communicate that money from one person to another, but we're sort of communicating without communion, right? We have no like shared understanding of anything other than the fact that that money itself has value. So, that might not be what you were looking for, but that's something I think is one of the questions that is really fascinating about money as a kind of communicative act. In terms of kind of the critique of capitalism, I mean, in the paper I draw from a novel from the 19^th Century, "The Confidence-Man" by Herman Melville, which is a, in some way a critique of capitalism. It's a bunch of people, you know, characters that would be familiar to anyone who's been on social media, like an herbal medicine doctor shilling snake oil; a dubious beggar; a dubious person looking to raise money for widows and orphans; literally a sketchy stockbroker with too good to be true deals; and they're all in a steamboat together and they're all kind of trying to deceive each other. And it's totally unclear by the time you get to the end of the novel, like who the so-called confidence man is. Because they're all cons. But one of the other pieces of this novel is that it points to the fact that the people who abstain from conning, and abstain from being conned, the people who refuse to play a trust game, or to trust at all, those people are the most miserable. Right? So, it's the miser, the misanthrope, the people who refuse to kind of get in and play the game, who wind up left out. Who wind up kind of withering away. And he was, you know, Melville was writing this at a moment of tremendous change in the American economy. He was writing this at a time where there was all sorts of new communication channels. It's no accident that they're traveling down a river on a commercial steamship. And it was a time when markets and opportunities in those markets and ways to communicate were truly cacophonous. And so, it was about kind of learning to distinguish fact from fiction in a complicated landscape. And to kind of let yourself go and let yourself play the game and recognize that it's kind of better to trust and be scammed and maybe do a little scamming yourself than to kind of stay on the sidelines and not participate in any kind of like shared sociality at all. And so, Melville was kind of ambiguous on this. Like he's really giving us this vision of both like freedom, of sociality, of participation, but also one on terms that are highly ambiguous and highly uneven. And even though the novel is so long and so dense that you almost feel like you yourself have been scammed if you get through the whole thing <laughter>, I think it rewards-- I think it's reading provides us with some interesting lessons for today.

Brian Walker: Thank you for listening to our interview with Lana Swartz. To learn more about the IEEE Blockchain Initiative, please visit our web portal at blockchain.ieee.org.