Tim Congdon highlights the challenges facing statisticians as opaque transactions erode trust in official data

How does the rapid growth of cryptocurrencies fit into national accounts? At first glance, this might seem like a purely technical question, of interest only to public accountants, statisticians, and macroeconomists. Yet cryptocurrencies raise fundamental questions about how we define output, income, and growth at a time of widespread financial innovation and uncertainty.

Consider how GDP, for example, is actually calculated. The answer lies in the concept of triangulation: after the fact (or ex post), national expenditure must equal both national output and income. Put simply, what a country spends must match what it produces and what its citizens earn.

National output is often labeled “gross value added,” a term with a reassuringly positive ring to it. In practice, the data that make up GDP are pieced together by hundreds of statisticians drawing on numerous sources.

Sceptics may question how reliable this exercise can truly be, and indeed, much of it is conceptually debatable. After all, some economic activities hardly qualify as “value added” in any meaningful sense. The amount of income derived by criminals, for example, is notoriously hard to pin down, and their output is negligible at best. But they do spend what they earn. Consequently, while triangulation may aspire to scientific precision, the reality is that income, output, and expenditure cannot always be made to align neatly.

National-income accountants know their estimates are never perfectly accurate, since the criminal underworld and the grey economy – where informality prevails – inevitably slip through the cracks. Still, as long as these sectors remain stable relative to the formal economy, growth figures are broadly reliable. That is why the public can trust statistics agencies to report national growth rates with decimal-point accuracy.

But where does the crypto “industry” fit into this picture? Consider Binance, the world’s largest crypto exchange. With revenues of $16.8 billion in 2024, it employs thousands of people around the world whose salaries and bonuses are counted as part of their countries’ national income. Meanwhile, the global crypto market is valued at $4 trillion, surpassing the United Kingdom’s GDP and forcing policymakers to grapple with its place in the economy.

The challenge lies in determining how the industry’s activities should be reflected in national accounts. As Keynesian textbooks explain, national expenditure consists of consumption, investment, stock-building, government spending, and net exports. Into which of these categories does cryptocurrency spending belong? How, exactly, are cryptocurrencies to be consumed? And if they cannot be consumed, what kind of expenditure are they?

Investors in Bitcoin, Ethereum, Tether, and others – including Donald Trump’s meme coin $TRUMP – insist that cryptocurrencies, along with other forms of fintech, represent an investment in “the future.” But it is far from clear that they contribute enough to national output to justify treating them as an investment, or, in the jargon of macroeconomists, gross domestic fixed capital formation. Crypto mining, for example, does not necessarily generate meaningful value-added despite consuming vast amounts of electricity.

The subject has even reached the United Nations, where national-income-accounting standards are developed and agreed upon. Amusing as it may sound, some economists have seriously proposed that the electricity consumed by crypto mining be treated as “capital formation.” Others might suggest that newly minted Bitcoins could be classified as inventory, and thus as stock-building. For now, the debate remains far from settled.

Conditions for crypto

Cryptocurrencies tend to flourish in two environments. The first is failed states, where no single authority maintains effective control, or where law and order have collapsed altogether. In stable countries, currencies are issued by a central bank and derive their value from the government’s guarantee that they will be accepted as legal tender. Failed states, by contrast, often lack both a functioning central bank and a government capable of enforcing such rules.

The other environment in which cryptocurrencies flourish are regimes under which corruption is shrugged off as a trivial matter. Members of Trump’s family, and of Middle East special envoy Steve Witkoff’s family, secured a $2 billion investment in their startup crypto firm World Liberty Financial from the United Arab Emirates while Witkoff and Trump agreed to allow sales of advanced AI chips to the UAE despite national security concerns.

One reason why such deals get made is tied to cryptocurrencies’ opacity. While ownership is recorded on a distributed ledger, or blockchain, the real identities behind the digital addresses usually remain hidden. This makes money laundering – and non-disclosure – much easier, because police and tax authorities, as well as government ethics watchdogs, cannot readily match transactions to individuals.

Since 2015, the US Internal Revenue Service has had investigative powers that provide it with considerable insight into cryptocurrency ownership. But tax authorities in most other countries lack the IRS’s resources and expertise, and even in the United States, the agency’s capabilities are likely to be significantly diminished if the Trump administration goes ahead with plans to slash the IRS budget and sharply reduce the number of enforcement agents it employs.

To be sure, money laundering is hardly the only reason to use cryptocurrencies. People in failed states who wish to safeguard their savings are likely to lack access to trustworthy financial institutions, making cryptocurrencies an appealing substitute.

But such examples are negligible compared with the scale of international money laundering, much of which involves criminals from failed states moving funds through disreputable financial institutions in countries like Panama and Lebanon, or through dubious organizations in Singapore, Luxembourg, and Malta. These funds ultimately find their way into more established institutions in the US, Switzerland, the UK, and beyond.

Domestic money laundering, by contrast, is more mundane. As the Harvard University economist Kenneth Rogoff observed in his 2016 book The Curse of Cash, much of it does not involve cryptocurrencies at all but instead relies on cash transfers between individuals. While the sums are relatively modest, the widespread circulation of high-denomination banknotes in many countries has long made them the medium of choice in the criminal underworld and the broader shadow economy.

Cryptocurrencies offer an alternative to transactions in high-denomination notes. Rogoff puts the size of the “informal economy” at $20 trillion – a startling figure, given that the International Monetary Fund estimates total global GDP at $115 trillion. Although Rogoff’s estimate has been the subject of some debate, it is beyond dispute that the triangulation method used by national-income accountants in advanced economies cannot be applied to informal sectors. Consequently, Rogoff warns that statistics agencies are, to some degree, relying on educated guesses when compiling national accounts.

To be sure, a large share of cryptocurrency trading is conducted by law-abiding individuals with nothing more nefarious in mind than financial speculation. A few may even strike it rich, much like gamblers at the racetrack or in casinos. But it is impossible to ignore the fact that Binance’s founder, Changpeng Zhao, served four months in a US prison in 2024 after pleading guilty to money laundering.

As the BBC reported, prosecutors sought a three-year sentence, while the judge overseeing the case observed that Zhao had put “Binance’s growth and profits over compliance with US laws and regulations.” Then-US Treasury Secretary Janet Yellen was even more blunt, declaring that Binance’s “willful failures allowed money to flow to terrorists, cybercriminals, and child abusers.”

The broader lesson is clear: buying cryptocurrencies is not an investment in innovation. Instead, it is a bet on the growth of money laundering and shadow economies worldwide.

How crypto destroys value

Venezuela illustrates how state failure and international crime often go hand in hand. Following years of economic mismanagement and political chaos that cut per-capita income by more than 70% and fueled mass emigration, the country has become a major hub for organised crime. These conditions have triggered the current conflict between the US and Venezuela, with the Trump administration accusing President Nicolás Maduro of being “one of the most powerful drug traffickers in the world” and offering $50 million for information leading to his arrest.

Unsurprisingly, cryptocurrencies have become a lifeline for Venezuelans. While the bolívar remains the official currency, relentless depreciation, caused by disastrous monetary policies, together with government crackdowns on black-market dollars, has pushed retailers to accept crypto payments through platforms like Binance and Airtm.

On the surface, this may seem like a welcome adaptation. In reality, crypto has also provided Maduro and his cronies with an effective tool to circumvent US sanctions. Maduro may even have encouraged crypto’s spread across what remains of Venezuela’s formal economy precisely because it doubles as a back channel for laundering his regime’s illicit proceeds.

This underscores the challenges facing national-income accountants in the UK, the US, and elsewhere. In macroeconomic theory, national income, expenditure, and output are, ex post, identical. While the triangulation method is intended to provide a single consistent measure of economic activity, statisticians still wrestle with messy data and the persistent gap between theory and reality. But cryptocurrencies appear to be the point where theory and reality part company. Issuers and traders do not constitute a true industry. They produce little of genuine value. Worse, by enabling money laundering, they are actively destroying value.

The task of measuring economic activity has always been complicated by what happens outside formal channels. I recall a remark by an economist at the Bank of England in the 1980s: “Statistical discrepancy is the largest creditor in the economy.” As the crypto market continues to boom, that quip rings prophetic.

Tim Congdon is Founder and Chair of the Institute of International Monetary Research. (c) 2025 Project Syndicate. Used here with permission.