The Dark Role of Crypto in the US Opioid Epidemic

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Hello and welcome to this week’s edition of the FT Cryptofinance newsletter. This week we take a look at another “use case for cryptocurrencies”. . . buying fentanyl.

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

Critics of cryptocurrency use aren’t short on ammunition, pointing to its heavy carbon footprint, lack of basic consumer protection, corporate ransomware, and funding for North Korea’s nuclear weapons program.

This week, another goal has emerged. Blockchain analytics firm Elliptic has released a study linking cryptocurrencies to the spread of fentanyl, a potent synthetic opioid and the leading cause of death for 18-45 year olds in the United States.

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

Elliptic’s research team has received offers to supply large quantities of a particular chemical ingredient that is not used to make any other product and is a controlled substance in most countries. A chemical “menu” provided to the Elliptic team also included ingredients for methamphetamines and amphetamines.

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

THE fentanyl epidemic plaguing the United States it’s hard to overstate. The illicit drug has replaced prescribed painkillers as the leading cause of overdoses in the country, and the death rate is equivalent to an American overdose every five minutes.

Together with Covid-19, the fentanyl epidemic has reduced life expectancy in the United States to 76.4 years, a low not seen in the past 25 years.

According to Elliptic, the cryptocurrency wallets used by these companies have received a combined sum of more than $27 million, enough to buy ingredients that could make fentanyl pills with a market value of around $54 billion.

“The problem here is that a relatively small amount of cryptocurrency can purchase enough chemicals to make large quantities of fentanyl, and we know that fentanyl is killing millions of people … so the impact cryptocurrencies are potentially having here is extreme “, he added.

Additionally, the number of payments sent to Chinese suppliers of ingredients used to make fentanyl is skyrocketing. According to Elliptic, only one cryptocurrency payment was made for these products in January 2021. By last month, the figure was over 600.

Robinson told me he believed cryptography 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 better or for worse, that’s just their nature.”

But it adds another dynamic to America’s increasingly complicated relationship with cryptocurrencies. On the one hand, market regulators, the Justice Department, and the Treasury are trying to crack down on illicit cryptographic activity where they can: enforcement, criminal charges, and penalties.

Yet there are also plenty of crypto advocates in Washington, including Republican lawmakers Tom Emmer, Cynthia Lummis, and Patrick McHenry. Democrats like Maxine Waters, a member of the US House Financial Services Committee, are less convinced.

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

What do you think about the role of cryptocurrencies in the fentanyl epidemic? As always, share your thoughts with me via email at scott.chipolina@ft.com.

Weekly highlights

• The race for bad news on cryptocurrencies continues: UK losses from crypto fraud have risen by more than 40% in the past year and have exceeded £300 million for the first time in history, according to the British news agency. fraud reporting Action Fraud. My colleague Siddharth Venkataramakrishnan has the story Here.

• Iosco, the umbrella group for global markets regulators, has been pushing national regulators to unwind crypto firms entangled with intractable conflicts of interest. Following the collapse of Sam Bankman-Fried’s FTX and criticism of the transparency of Binance’s corporate structure, Iosco has put a spotlight on cryptographic conflicts of interest. My story with Laura Noonan Here.

• Terraform Labs co-founder and disgraced former cryptocurrency king Do Kwon has had his bail revoked in Montenegro. He has been arrested earlier this year after the $40 billion implosion of the terraUSD and luna tokens a year ago, an international manhunt has begun. He was arrested while trying to leave Montenegro on a false passport.

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

• Following in El Salvador’s footsteps, 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 offering investors to raise up to half a billion dollars for a cryptocurrency mining business. My colleague Benjamin Parkin in New Delhi has the story Here.

Bite of the week: DeSantis backs bitcoin

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

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

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

Data mining: TUSD enters the big leagues

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

Tether, the BVI-registered offshore company that issues a token of the same name with a circulation value of around $80 billion, has captured the stablecoin market with around 60% market share.

Circle, the state-licensed U.S. company that issues the USDC token, was most concerned about its brief de-pegging from the dollar and . . .*check notes*: The banking sector is destabilizing the cryptocurrency markets.

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

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

As of May 23, TUSD has become the second stablecoin by daily trading volume, overtaking Circle’s USDC, which has lagged behind its competition in recent months.

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