[AUDIENCE] My question is, what if the United States
and the European Union ban exchanges,
like [they did with] gambling sites
and the pyramid scams in China?
What is the solution to that? Thank you.
[ANDREAS] That is a great question. What is the solution
to [various] pyramid schemes and Ponzi schemes…
that are occurring on a daily basis throughout
this ecosystem of cryptocurrencies?
First of all, it is naïve to think that pyramid schemes only
happen in cryptocurrencies and unregulated markets,
or even that regulation stops pyramid schemes.
The word “Ponzi” comes from a fund by [Charles Ponzi
in the early 1920s], in what was a regulated market.
Not as regulated as today, but a regulated market.
If you get ‘Madoffed,’ that is because you were rich
enough to be able to buy into his Ponzi scheme fund,
in a thoroughly regulated market.
He [was] one of the few people who went to jail because
he committed the cardinal [sin] of stealing from the rich.
Do not do that. [Laughter] You can defraud
a million people out of their mortgages,
but do not steal from the rich, because you might
actually end up in jail, probably a very nice jail.
You know, not the kind of jail you would
send someone to for smoking a joint.
But how do we deal with pyramid and Ponzi schemes?
They happen and they will continue to happen.
They will happen in regulated markets and unregulated
markets. They will happen more in unregulated markets,
not because the regulators are stopping [them],
but because they are restricting entrance [into] the
market [across the board] enough that it is difficult…
to generate the liquidity needed for Ponzi
schemes, [along with a lot of “legitimate” activity].
You can still list Herbalife on the stock exchange,
[for some reason] no one is touching that.
If you can appeal to a worldwide audience of investors,
then you can accelerate your pyramid scheme.
As a result, that is exactly what is happening.
There is only one way to stop investors from making
stupid [choices]: they [need] to make stupid mistakes.
[They need to] lose money, [learn], be more cautious
[next time], make more stupid mistakes, lose money…
and become even more cautious.
You cannot teach someone [while they believe] they
are making a return they have never seen in their life.
They are making a return never seen in their life,
from a website that “guarantees profits 10% a week,”
because they are sitting on the upper levels
of a pyramid that will surely collapse,
leaving 90% of people [involved] with nothing.
You cannot convince them [to leave it, until it may be
too late]. How do I know this? Because I try, every day.
If I call out the scam on Twitter, I am hailed as a hero-
No, I am not. I get viciously attacked by
every participant of that pyramid scheme.
“How dare you side with the banks?!
I thought you were one of the good guys.”
“How dare you call (insert latest Ponzi here) a scam?
People [still say] bitcoin is a scam [too].”
“When did you start taking money from the banks?”
These people are extremely resistant to learning
that lesson. They will not learn it if you tell them.
They will only learn it experientially.
Experientially learning: the latest in education.
With investors, they [must] lose money.
Why is [the average] American less susceptible to
pyramid schemes than your average Chinese investor?
Be careful how you answer that question.
The reason is really simple.
Americans have invested in pyramid schemes since
the early 1900s; they got burned again and again.
[Eventually] this lesson is passed down generationally.
I remember a day when I first came back [to] school.
My fellow school members were playing
a game called Egyptian pyramid.
They drew a big triangle on the blackboard and said,
“You are here. Recruit two people each below you…
and take [half of their] lunch money; give half
of your lunch money to the person above you.”
“You recruit two people and they recruit two people, etc.”
[Because I was a kid], I looked at that and thought,
‘This is amazing. We could all make so much money!’
[Laughter] ‘Half of my friends are
already buying lunch like they are kings.’
I went home and told my dad about this
amazing new thing I discovered at school.
“What they were teaching” us.
Not the teachers, but everybody else.
The Egyptian pyramid.
He sat me down, explained why it’s
a scam, what happens when it ends,
and how many of those kids [would] get into
very serious trouble when the pyramid collapses.
Why [did he tell me this]? Because he had
been scammed with a pyramid in his youth.
His father had been scammed with a pyramid
in his youth. So we can learn and tell our children.
The only way to learn that mistake is to lose money.
The reason investors are [usually] more sophisticated
in the United States and many Western nations,
is because they have had a hundred years of practice.
Nothing else. There is nothing inherently better
about the regulatory system [in the United States].
Arguably, the Chinese regulatory system is more
effective because they actually shoot [corrupt bankers].
[Laughter] And then they bill their family for the bullet.
They do, they execute hundreds of them.
Maybe that is a regulatory system I could get behind-
Nevermind. For a moment I forgot I’m a pacifist.
Anyway, the point is, you cannot teach
these skills unless you use experience.
The biggest mistake is to teach investors that they
do not need to make smart choices themselves;
[to teach them] that if they make
bad choices, they will be bailed out.
[to teach them] that if they allow someone else to
vet, authorize, or rate the value of an investment,
[to teach them] to outsource the decision-making and
risk to someone else, and everything will be okay.
Of course, everything will not be okay.
Giving that power to someone else
immediately [tempts] corruption.
The people who are vetting, authorizing, rating,
and deciding which investments are safe…
[become] the people you need to corrupt
in order to introduce your pyramid scheme.
They are fallible. They cannot operate at the speed of
the market. Centralized decision-making does not scale.
[Free] markets do.
Instead, you need to tell investors ‘caveat emptor,’
“buyer beware.” There are scams out there.
We [may] not catch them until they have done
enormous damage. You will lose your money.
The stock market Is a pyramid scheme.
The bond market is a pyramid scheme.
The automobile loan market is a pyramid scheme.
The student loan market is one of the biggest
pyramid schemes we have ever built. It will crash,
as will many of the altcoins and ICOs.
The only way to help investors is to let them make
that mistake, lose money, and take full responsibility.
Yes, punish the people who did it afterwards,
but you can’t save people from their own stupidity.
[Often] when you try, you make them stupider. [Laughter]