Cryptocurrencies like Bitcoin and Ether are an ideological project, an investment asset and – according to their supporters – the basis for a new economy. Yet after the collapse in crypto prices in 2022, the spectacular fraud at crypto exchange FTX and the criminal fines against Binance, the debate around crypto has changed. Critics say these events underscore the inherent risks of attempts to remake money without the backing of governments – that they are the inevitable result of a sector that is built on false promises, snake oil and scams. Supporters argue that fraud and money laundering at centralized intermediaries like FTX or Binance do not reflect on the promise of “truly” decentralized technologies. In this view, the breakthrough potential of the technology is still just around the corner.
The debate extends to whether – and how – the crypto sector should be regulated. Long before the recent shocks, observers argued whether crypto is the “Wild West” – a place of lawless, unregulated activity. SEC chair Gary Gensler drew the comparison at the 2021 Aspen Security Conference, to lament the lack of investor protection in the crypto sector. His fellow SEC commissioner Hester Peirce took a different tack, drawing on the history of her home state of Ohio to argue that the West of the frontier days was less wild than some may think. A number of central bankers piled in – like Carolyn Wilkins (former Bank of Canada, now Bank of England, channeling Lucky Luke) and Fabio Panetta (ECB, who slyly referenced a Spaghetti Western in his speech, “For a few cryptos more”). Among researchers, Lana Swartz and Bill Mauer (then at USC and UC Irvine) put on Californian schoolmarm bonnets to discuss the parallels. And Gary Gorton and Jeffery Zhang (from Yale University and the Fed) took this further, comparing stablecoins (a type of cryptocurrency that targets a stable value against fiat currencies) to 19th-century Wildcat Banking. That set off a predictable debate with libertarian free banking acolytes and counterpoints from the crypto industry. Speaking at DC Fintech Week last November, Brad Garlinghouse of Ripple reiterated that “crypto is not the Wild West”, as applications are already regulated in countries around the world.
I will argue that the comparison between crypto and the real Wild West is broadly fair. I write this from both a professional and personal perspective. As an economist, I have spent the last 8 years doing research and policy work on the digital Wild West, including crypto and stablecoins, at the Dutch central bank (DNB), Financial Stability Board (FSB) and Bank for International Settlements (BIS). I’ve attended bombastic private sector crypto events and staid, public sector policy meetings (and much in between). I’ve met countless crypto believers and crypto skeptics (and many in between). I’ve read and researched actual applications of blockchain technologies. Meanwhile, I have a personal connection to the real Wild West. My family lived in the American Wild West, in South Dakota. The family stories I heard growing up color not only how I see economics and the role of government, but also how I view crypto debates today.
In my view, the crypto sector is indeed underregulated (if not fully unregulated) relative to the rest of the financial system – both in the US and in other countries around the world. Except in a few jurisdictions with a clear regulatory framework (notably Japan and the European Union), it is not a stretch to call the sector lawless. But the parallels between the crypto sector and the real Wild West go far beyond lawlessness. There are both positive features of the sector (entrepreneurialism, self-reliance) and problematic ones (hostility to governments, boosterism and a disturbing tendency to concentrate wealth in the hands of a few) that echo the West of the American frontier. Among some (but certainly not all) in the crypto industry, there is an almost paranoid stance about the role of public institutions. I think much of that is overdone. The actual history of the Wild West, including my own family’s story, gives grounds for a more hopeful outlook on collective enterprise and the role of public institutions in the future.
The Real Wild West
Historians generally consider the “Wild West” to mean the US territories west of the Mississippi River in the time between the end of the Civil War in 1865 and the full settlement of the American frontier around 1890. These territories had not yet been admitted to the Union as states, and had only a few Euro-American settlers. In a famous 1893 essay, Frederick Jackson Turner discussed the importance of the idea of the frontier for American identity; in his view, the wilderness shaped the settlers and American democracy, leaving behind traits of self-reliance and pragmatism. Many trace American “rugged individualism” to the frontier, and the Wild West remains a crucial part of the American psyche and popular culture, from movies and literature to art and country music.
My own family was there. My dad was born in Rapid City, South Dakota, on the edge of the Black Hills. He is the fifth generation in the family to live in what had been, until 1889, Dakota Territory. His great-great grandparents Frederick (Fritz) and Catherine (Dvorak) Sternhagen were immigrants from Germany and Bohemia. They settled first in Iowa in the 1860s and then, like many immigrants, kept going West, to start a farm (homestead) in Dakota Territory. Their son John Sternhagen (born in 1865) married Bohemian immigrant Anna Fresh in the town of Tabor in 1886. John and Anna came of age in the time that South Dakota achieved statehood. In a sense, they followed the famous words of Horace Greeley (now printed in every US passport), to “Go West, young man, and grow up with the country.”
Of course, the American West, including South Dakota, was not always lawless. Native peoples, such as the Lakota Sioux, had lived in the area for thousands of years, and had their own political institutions and customs prior to Euro-American settlement. Around 1730, they adopted horse riding after horses had been introduced by the Spanish. But a wave of disastrous epidemics decimated the population, and it was followed by violence and intimidation by the US government. In the 1868 Treaty of Fort Laramie, the federal government promised to the Lakota what is now the Western half of South Dakota, including the Black Hills, which they considered to be a sacred place. But the government’s promises were broken almost as soon as the ink was dry. When gold was discovered in the Black Hills in 1874, prospectors flooded into the reservation, and a gold rush began. The Great Sioux War of 1876 is now remembered for the valiant stands of Chiefs Crazy Horse and Sitting Bull, and for Custer’s Last Stand. But it was above all a violent invasion that resulted in the forced displacement of thousands of people, to make way for settlers. It resulted in the annexation of the Black Hills and the settlement of what would become Rapid City, but also places like Deadwood, Lead, Sturgis and Mount Rushmore. The political order of Native societies was pushed out, and it would take time for new political institutions to be developed.
The Black Hills were prototypical for the lawless Wild West. The town of Deadwood, now memorialized by a TV series, was founded as an illegal settlement in Indian territory in 1876. It is famous as the stomping ground of larger-than-life figures like Wild Bill Hickok, Calamity Jane and Wyatt Earp. Murder was rampant, gambling and prostitution were commonplace, and the legal ambiguity of the town’s status meant that the judicial system was not reliable.
The lawless economy brought great wealth to a few – but not all. The Homestake Gold Mine, in nearby Lead, became a highly lucrative source of wealth and employment over subsequent decades, with over 40 million troy ounces (1.24 million kilos) of gold produced in the next century. Its founder, George Hearst, became infamous for his strong-arm tactics to expand the mine – cajoling or forcing neighbors to sell their land. One Hearst employee even murdered a landowner who refused to sell. (In the shaky legal system of the time, he was not convicted). Hearst amassed a personal fortune from the mine, and he went on to become a US Senator. His son, William Randolph Hearst, became a famous media tycoon, the father of highly biased, sensationalist “yellow journalism” that whipped up racist and xenophobic sentiments and is credited with corrupting US democracy in the 19th and early 20th century. He was also the inspiration for the 1942 movie Citizen Kane.
The open pit of the Homestake Mine, next to Lead, South Dakota. Photo source: Trip Advisor
These extractive industries remained largely in place in subsequent decades. And while George Hearst made a killing (excuse the pun) in the Homestake Gold Mine, another George – decades later – fared less well. My great-grandpa George Sternhagen (John and Anna’s son) worked in the mine during the Great Depression. As my great-grandma Bea recounted on tapes still kept in the family, George earned $4.25 a day – a good wage at the time, though a lot of it was spent at the mine’s company store. In the absence of strong labor laws or regulations, work in the mine was dangerous. One day in 1939, while working in the new Yates Shaft, my great-grandpa and another worker fell to their death. George left behind his widow Bea and three young daughters, including my grandma Dale.
Our family remained in South Dakota for several more decades. My great-grandmother Bea remarried and lived a very long life. My grandma Dale grew up, graduated from high school and married my grandpa Joe, whose father was also a miner and had lived next door. When the family did eventually move on, they went yet further west (more on that below).
Work in the Homestake Mine was dangerous. To emphasize safety, the company kept track of the number of days without disabling injury (as seen in the Black Hills Mining Museum).
Photo source: author’s photo
A fair comparison?
The crypto sector has grown rapidly since 2008, and many see it as a new frontier. There are parallels, some obvious and some less so; some favorable and some less so.
Let me start here with the positive parallels. Certainly, like the Wild West, the crypto sector has attracted a wave of entrepreneurial talent. Just as many Americans from the East and new immigrants from Europe and Asia were attracted by the promise of gold rushes (and homesteads) in the American West, many software developers, financial professionals and even former regulators are now applying their talents in the crypto sector. Pioneers of the frontier time sought the chance to build up a new society far away from the large corporations and governments of the East. Likewise, many in the crypto sector have ambitions that sound even grander – to decentralize the internet, give users control over their personal data and wrest back control from big techs. Just as previous newcomers didn’t know what they would find before they set out, that burst of entrepreneurial energy may yet yield something that can’t yet be predicted. It may even be quite different from what developers themselves are expecting.
There is also a shared thread of self-reliance. Homesteaders had to build up everything from scratch – from fresh water supplies to lodgings to household necessities. (My great-grandma recounted that they had to pipe water from the Missouri river for their farm). This use of one’s own skills and resources meant that they could push further onward as needed. As in the famous essay by Emerson, self-reliance also meant a certain degree of non-conformity, not being bound to imitation of anyone else. In the crypto sector, many seek to build money and finance from scratch, building self-driving banks and their own, automated trading protocols. Self-custody of digital assets and self-sovereign identity are important concepts. And there is definitely a streak of non-conformism in the crypto sector. That can be an important strength in helping to redesign the financial system.
But then there are some parallels that are quite problematic.
Certainly, parts of the sector can be described as lawless. There are many scams and “rug-pulls”, as founders of new crypto and DeFi projects take off with the funds of unsuspecting investors. The FTC estimated in June 2022 – before the FTX collapse – that Americans had lost over $1 billion to crypto scams since the beginning of 2021. There are cases of terrorism financing and sanctions evasion (though the scale is likely smaller than with other payment methods). There are grifters, crypto heists and ransomware, such as the theft of $625 million in coins from the company behind the game Axie Infinity by the North Koreans. It is easy to draw an image of modern-day crypto bandits attacking wagon trains or duking it out with sheriffs like FinCEN.
And there is the hostility in both the American West (in the frontier days and since) and in crypto toward public authorities. Many early pioneers were overtly hostile to the government. Few people know that the Wizard of Oz was based on a book by L. Frank Baum, inspired by his life in South Dakota in 1888-1891. The wizard is thought to represent scheming Washington politicians, and the wicked witches of the East and West are thought to represent the industry of the East and West coasts. That hostility has persisted, in some form, to the present day. Many voters in modern-day South Dakota harbor a very dim view of the federal government, visible in the hostile stance of many toward the Centers for Disease Control and Prevention and mask mandates during the Covid-19 pandemic. Similarly, the crypto sector is built on a libertarian idea of bypassing public institutions like central banks and regulators. In fiction popular in the crypto community, national governments wither away entirely after a new, more decentralized “media net” means that tax authorities can no longer trace financial transactions. Not surprisingly, these fictional futures are dystopias with huge social problems.
Similarly, the crypto sector is also characterized by boosterism: overblown claims by supporters, or “boosters,” that don’t always align with facts. In the Wild West, many newcomers were lured by overblown claims by developers and railroad companies about new towns and the possibility of fertile land or quick riches. Similarly, crypto boosters have been seen to employ messianic rhetoric to sell what are, in the end, investment products. Crypto exchanges make over-the-top claims about their services, as evidenced by their ads at the 2022 Super Bowl – with celebrity endorsement from the likes of Matt Damon (for Crypto.com) comparing crypto to the invention of airplanes by the Wright Brothers, and Larry David (for FTX) comparing it to everything from the wheel to the Declaration of Independence, and telling people simply – “don’t miss out.”
In other countries, advertising regulators are on the watch for this as they seek to ensure fair and accurate claims are made in marketing materials. In the UK for instance, regulators have fined over 50 crypto exchanges for deceptive advertising, including creating a sense of urgency and downplaying the actual risks.
For me, the most grating parallel between crypto and the Wild West is how the new economy has enriched the few, but not (yet) the many. In the Wild West, very soon after settlers arrived, new companies grew and became monopolies, from the Union Pacific Railroad to Standard Oil. We often hear claims that crypto will democratize finance, but in practice it has above all enriched new insiders – some of whom became members of the Forbes list – at the expense of retail investors who followed. Holdings of Bitcoin and other cryptocurrencies are highly concentrated. In multiple periods where crypto prices peaked then crashed, the big holders (“whales”) cashed out as retail investors bought in. Over time, just as many gold prospectors ended up making very little off their claims, many retail investors who recently entered cryptocurrency markets will likely walk away with losses. Meanwhile, the crypto sector has fueled the growth of many auxiliary service providers – from blockchain analytics companies to professional services firms advising on how to define a digital currency strategy. These firms, like their Wild West predecessors, understand that during a gold rush, you can make the most by selling shovels. It is, of course, an open question whether crypto and the decentralized internet (Web3) will do a better job of generating broad-based wealth over time. I remain to be convinced.
The role of public institutions in a fairer society
Cryptocurrencies are often premised on libertarian notions that public institutions are irredeemably flawed and that technology can take the place of institutions, whether private banks or central banks. Personally, I am fine with the idea of bypassing private banks; if new technological applications can do banking better, that is a good thing. But it is the outright hostility to public institutions, and fatalistic views about what they can achieve, that irk me the most.
Our own family’s fortunes show that public institutions can contribute to a fairer society, and this too has plenty of evidence in the history of the American West. Another great-great-grandfather, Robert Barr Ellis, was a postman in Gettysburg, South Dakota, soon after statehood. The US postal service is often held up as a pillar of public enterprise in the past, and this inspires calls for postal banking today. In the 20th century, our family achieved the fabled American dream – more of the prosaic “working class to middle class” version than the “rags to riches” variant of the gold prospectors or Horatio Alger. In the 1960s, my paternal grandparents and father moved to Seattle – another town founded on land taken through broken treaty promises, which grew in large part due to the Yukon Gold Rush of 1896. Yet Seattle had moved beyond its original, largely extractive economy (based on timber, coal and fishing), and formed public institutions that helped to create widely shared wealth. For instance, the land grant university formed in Washington Territory in 1861 went on to become the University of Washington (UW) – now considered one of the top 30 universities in the world. The presence of this and other major educational institutions have helped Seattle become a tech hub for global companies like Microsoft, Amazon and Boeing. There are certainly problems with inequality there – with rapidly rising house prices and homelessness – but it is safe to say that things are far better than they would be without the role of social services and other government policies.
My parents benefited directly from public institutions. Both studied at UW – in fact, they met there, in a math course. While studying, my dad worked summers in the oil patch and then on the railroad in Wyoming, where his cousins lived. He has said that the experience of swinging a sledgehammer all day convinced him to get a college degree. He went on to become a computer programmer for the university. My mom, meanwhile, became a public school teacher. She was influenced by the experience of her parents, who had grown up poor during the Great Depression but studied at UW to become an engineer and a nurse. My mom’s motto has always been “education is the great equalizer.” And while the US education system certainly has its flaws and inequities, it has played a critical role in generating more widely shared wealth over the decades, and bringing many into the middle class. Along with the highway system, public libraries, the postal service and other public institutions, public education has helped to lay a foundation for widely shared economic growth and opportunity, thus countering the concentrating tendencies of extractive industries.
Other members of our family ended up across the West, from Montana to Texas, and from Illinois to Utah. Some stayed in, or came back to, South Dakota. Visiting our family has given me an appreciation for the American West as it exists today. It is not lawless anymore, as societies have developed and become institutionalized. Government institutions and policies played a role. In fact, even the Homestake Mine is now run as a public research institution and is the site of pioneering scientific experiments. (The Yates shaft, where my great-grandpa died, was also where Ray Davis conducted underground experiments to find neutrinos – for which he won the 2002 Nobel Prize in physics). The West is stunningly beautiful, and its public parks – another public institution – are known the world round.
Public institutions have also played a critical role in technology. Not to belabor the point, but the internet was developed by the US federal government (originally as ARPANET). It was developed by early researchers at public universities and research institutions around the world, including CERN in Switzerland. Federal government funding has also played a role in global positioning systems (GPS), LED lights and touch screens. From my own side, the first time I saw the new world-wide web was when visiting my dad in his office at the university, a few years before we got our own home (dial-up) connection. And in a twist of irony, much of the encryption in cryptocurrencies like Bitcoin is built on SHA-256 functions developed by the US National Security Agency (NSA).
I hope that over time, the crypto sector – like the Wild West of yore – will develop in a more useful direction, harnessing the creative, entrepreneurial talent of its community to develop products that are socially useful. Following the recent turmoil and amid the crypto winter, I hope that useful innovations will emerge that do help to democratize finance and the sector’s other self-professed goals, just as useful innovation emerged after the Dot-com bust. But markets and technology don’t always achieve fairer outcomes all on their own. Regulation and public enterprise have often been needed to prevent fraud, theft and other harms; and to iron out inequality in the public interest. New activity should be subject to rules created by public institutions accountable to society. What those rules will look like should be for all of us to decide.
Jon Frost is Head of Economics for the Americas at the Bank for International Settlements (BIS). He leads a team of economists and analysts who do policy-oriented research and support central bank cooperation on macroeconomic policy, financial stability and digital innovation at the BIS Americas Office in Mexico City. Previously, Jon worked in the BIS Innovation and the Digital Economy unit in Basel, Switzerland, at the Financial Stability Board, the Dutch central bank, VU University in Amsterdam and in the private sector in Germany. He has published research on fintech, big tech, central bank digital currencies, crypto, stablecoins, climate tech, capital flows, macroprudential policy and economic inequality. Jon is a US national, from Seattle. He holds a PhD in economics from the University of Groningen, an MA from the University of Munich and a BA/BS from the University of Washington.
The views expressed here are solely those of the author and do not necessarily reflect those of the BIS. With thanks to my parents, Joe and Joyce Frost, and to Aleta and Bern Vetter, Frank and Mary Frost, Kate Frost Fink and my late cousin Rebecca Frost Schultz for their input. With thanks to Andreas Adriano, Carel van den Berg, Ross Buckley, Carlos Cantú, Stijn Claessens, Dante Disparte, Sebastian Doerr, Louise Egan, Jill Forde, Leonardo Gambacorta, Rod Garratt, Garrick Hileman, Linda Jeng, Andrew Manasseh, Lee Reiners, Hyun Song Shin, Lana Swartz, Kathryn White, Peter Wierts and Carolyn Wilkins for helpful comments.
