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Crypto’s dark role in the US opioid epidemic

Hello and welcome to this week’s edition of the FT’s Cryptofinance newsletter. This week we’re taking a look at another “crypto use case” . . . purchasing fentanyl.

After last year’s historic market crash and subsequent collapse of many high-profile companies, the crypto industry is in overdrive to convince sceptics that there are useful features to cryptocurrencies that demand mainstream adoption.

Critics of crypto’s use aren’t short of ammunition, pointing to its hefty carbon footprint, lack of basic consumer protection, corporate ransomware and the financing of North Korea’s nuclear weapons programme.

This week another target emerged. Blockchain analytics firm Elliptic published a study linking cryptocurrencies with the spread of fentanyl, a potent synthetic opioid and the leading cause of death for 18- to 45-year-olds in the US.

According to Elliptic, most fentanyl trafficked into the US is manufactured using chemical ingredients imported from Chinese suppliers, and 90 per cent of these suppliers accept cryptocurrency payments.

Elliptic’s research team received offers to supply large quantities of one particular chemical ingredient which is not used to manufacture any other product, and is a controlled substance in most countries. A “menu” of chemicals provided to the Elliptic team also included ingredients for methamphetamine and amphetamine.

“It’s hard to say how important crypto is to this type of activity but the fact that such a large proportion of these suppliers accept crypto suggests to me there is a significant demand to pay in crypto for these types of chemicals,” Tom Robinson, Elliptic’s chief scientist and co-founder, told me over the phone.

The fentanyl epidemic plaguing the US is hard to overstate. The illicit drug has replaced legally prescribed painkillers as the main cause of overdose in the country, and the death rate is equivalent to one American overdosing every five minutes.

Alongside Covid-19, the fentanyl epidemic has driven US life expectancy down to 76.4 years, a low not seen for the past 25 years.

Per Elliptic, the cryptocurrency wallets used by these companies have received a total sum of more than $27mn, enough to purchase ingredients that could produce fentanyl pills with a street value of roughly $54bn.

“The issue here is that a relatively small amount of cryptocurrency can purchase enough chemicals to produce vast amounts of fentanyl, and we know that fentanyl is killing millions of people . . . so the impact that crypto is potentially having here is extreme,” he added.

Moreover, the number of payments sent to Chinese suppliers of ingredients used to make fentanyl is skyrocketing. According to Elliptic, just one payment using crypto was made for these products in January 2021. By last month, the figure was more than 600.

Robinson told me he believed crypto was an “inherently neutral technology”, and that the same characteristics that made it prone to illicit use also made it a great tool for cross-border payments. “Extremely powerful technologies can be used for good and bad, that’s just the nature of them.”

But it adds another dynamic to America’s increasingly complicated relationship with crypto. On the one hand, markets regulators, the Department of Justice and the Treasury are trying to stamp out illicit crypto activity where they can: enforcement, criminal charges and sanctions.

Yet there are also plenty of crypto supporters in Washington, including Republican legislators Tom Emmer, Cynthia Lummis and Patrick McHenry. Democrats such as Maxine Waters, a member of the US House financial services committee, are less convinced.

Capitol Hill is a deeply divided place, as the protracted talks over the US debt ceiling have highlighted. It remains to be seen whether crypto’s link to America’s deadly opioid epidemic will change any minds.

What are your thoughts on the role of cryptocurrencies in the fentanyl epidemic? As always please share your thoughts with me via email at scott.chipolina@ft.com.

Weekly highlights

  • The run of bad crypto news continues: UK losses to crypto fraud increased by more than 40 per cent in the past year and surpassed £300mn for the first time in history, according to Britain’s fraud reporting agency Action Fraud. My colleague Siddharth Venkataramakrishnan has the story here.

  • Iosco, the umbrella group for global markets regulators, pushed national regulators to break up crypto companies intertwined with intractable conflicts of interest. Following the collapse of Sam Bankman-Fried’s FTX and criticisms over the transparency of Binance’s corporate structure, Iosco has pushed crypto conflicts of interest into the spotlight. My story with Laura Noonan here.

  • Terraform Labs co-founder and disgraced former crypto kingpin Do Kwon had his bail revoked in Montenegro. He was arrested earlier this year after the $40bn implosion of the terraUSD and luna tokens a year ago set off an international manhunt. He was arrested trying to leave Montenegro on a false passport.

  • Another regulatory update: the European Systemic Risk Board said in a report that regulators in the EU should introduce limits on leveraged bets across crypto markets in order to limit risks posed to financial stability in the broader economic system. The ESRB also said the creation and design of smart contracts — a foundational technology in decentralised finance — should be overseen by regulators.

  • Following in the footsteps of El Salvador, Bhutan — where the phrase “gross national happiness” was first coined to rival gross domestic product — is investing in bitcoin mining. Druk Holding & Investments, the state-owned commercial holding company, will start pitching to investors to raise up to half a billion dollars for a crypto mining business. My colleague Benjamin Parkin in New Delhi has the story here.

Soundbite of the week: DeSantis backs bitcoin

Ron DeSantis, controversial governor of Florida and new presidential candidate, is on team bitcoin.

During a Twitter Spaces session with Elon Musk this week (when it worked) the Republican many consider the biggest rival to Donald Trump, criticised the “current regime” for its stance on bitcoin.

“The current regime clearly has it out for bitcoin . . . and if it continues for another four years, they’ll probably end up killing it.”

Data mining: TUSD enters the big leagues

The stablecoin market in 2023 has been dominated by two companies, Tether and Circle, which have had very different fortunes.

Tether — the offshore, BVI-registered company which issues an eponymous token with roughly $80bn in circulating value — has gripped the stablecoin market with roughly 60 per cent of market share.

Circle, the US company with a host of state licences which issues the USDC token, has been more preoccupied with its token briefly de-pegging from the dollar and . . .*checks notes*: the banking industry destabilising crypto markets.

But there may be a new contender, TUSD, a stablecoin that first came to market in 2018. Very little is known about it. It was launched by a company called TrustToken, which announced in 2020 the ownership of the stablecoin will be moving to an “Asia-based consortium.” TrustToken was rebranded as Archblock last September.

TUSD has a market cap of roughly $2bn, so small compared with Tether’s $83bn, but was recently boosted by Binance’s decision to include it in a zero-fee trading offer to customers.

As of May 23, TUSD became the second-largest stablecoin by daily trading volume, outstripping Circle’s USDC, which has spent the past few months ceding ground to competitors.

Column chart of TUSD trading volume on centralised exchanges ($bn) showing TUSD trading volume has skyrocketed in recent months, overtaking Circle's USDC

Cryptofinance is edited by Philip Stafford. Please send any thoughts and feedback to cryptofinance@ft.com.

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