Talking Past Each Other
What the exchange between John Reed Stark and Paul Atkins reveals about the language of finance
Speculation Masquerading as an Investment
It is speculation masquerading as an investment.
That’s how John Reed Stark described crypto in a recent LinkedIn post. The phrase brings back some memories. When I wrote an amicus brief in SEC v. Ripple (PDF amicus), those were my choice words as well:
However, there is a new problem, and that one appears to be the primary one: the masquerading of speculation as investment.
On this point, I agree with Stark, the former chief of the SEC’s Office of Internet Enforcement, who was responding to SEC Chair defending crypto on Fox:
My objection is not to the ambition of making the U.S. the crypto capital of the world. If we want to build an ecosystem where blockchain technology eventually produces some real solid use cases, terrific. I don’t think we’re there yet–but I’m not ruling out the possibility that we might get there.
My objection is that we cannot build financial innovation on principles that refuse to align with clarity. This is the third leg of the stool that is missing:
Expecting the Clarity Act to deliver clarity–while it suppresses the most pressing question (“is crypto an investment?”)-- may be the biggest financial misconception of the century. It will not lead anywhere good.
Crypto > Dogs?
More people have crypto than have dogs.
That was Stu Alderoty’s (CLO, Ripple) claim:
I’m actually one of them. I don’t have a dog (the kids want one), but I do hold what is now a de minimis amount of crypto (I trimmed my position substantially recently). More broadly, crypto penetrating this deeply into society strengthens my case: America should be transparent about what crypto is before allowing it to penetrate into retirement accounts and other places under the moniker of investing.
Speculation, But Not a Ponzi
That’s how Al Pacino, playing Lt. Col. Frank Slade in Scent of a Woman, ends one of the film’s most memorable speeches. Charlie Simms (Chris O’Donnell) witnesses a prank, refuses to identify the culprits, and risks his future. Slade defends him not by claiming Charlie is perfect, but by insisting the school has mischaracterized him. Whatever else Charlie may be, he is not a snitch.
Criticize people and institutions for what they do. But don’t accuse them of what they haven’t done.
That thought came to mind this week after seeing Stark describe SEC Chair Paul Atkins as “America’s First Chief Ponzi Officer.” I believe crypto is best understood as speculation rather than investing, but that is a very different claim from calling it a Ponzi scheme (which it is not).
This isn’t about politeness. Criticism is healthy. Strong criticism is often necessary. But precision matters. A Ponzi scheme is a fraud. Speculation is a legitimate—albeit risky—economic activity. They are not interchangeable concepts.
The broader problem is that we rarely begin with the most fundamental question: What are we talking about? Instead, we jump straight to policy. One side argues that Americans should invest in crypto. The other argues that promoting crypto is irresponsible. Holding crypto might lead to gains or financial ruin. But before even deciding what we should do about crypto, shouldn’t we first decide what it is?
The debate is happening in the wrong order.
Before deciding whether crypto should be celebrated or condemned, we should first ask whether its purchase is an investment or speculation. This is not a semantic question, it’s foundational.
My own answer is that crypto is speculation. Investing, as I use the term, is buying the right asset (“right” meaning that it generates cash flows) at the right price (leaving a margin of safety):
Speculation is different: It embraces price uncertainty in pursuit of gain, and fits into either of these two categories:
1) Buying the right asset at the wrong price; or
2) Buying the “wrong” asset–one not designed to generate cash flows in the first place.
Crypto belongs to the second category.
People can disagree with that definition—that’s precisely the point. We should debate the definition openly rather than assume it. Calling every crypto purchase an investment obscures important distinctions. Calling crypto a Ponzi scheme does the same.
Both approaches generate headlines. Both energize supporters. Neither brings us closer to a common language for finance. When public debate swings between “invest in crypto” and “crypto is a Ponzi,” Americans are left with a false choice: Embrace crypto uncritically or reject it categorically. Neither response begins with understanding.
Before deciding whether something is worthwhile or not, we should first decide what it is. Otherwise, we’ll keep talking past each other—and wonder why we never seem to get anywhere.
