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Two Fairfax County retirement systems recently announced they had invested in Morgan Creek Blockchain Opportunities Fund, a private equity vehicle which will invest in startups pioneering blockchain technologies including bitcoin and other cryptocurrencies. While this fund may generate very large returns, it is also highly speculative.
Investing public employee retirement assets into vehicles like the Blockchain Opportunities Fund is a risky response to pension systems that already assume high rates of investment returns and face unfunded liabilities.
Fairfax County, Virginia, operates four pension systems, two of which are making the blockchain investments. Further, it uses an assumed rate fairfax investment return of 7. Blockchain came to the fore, in part, because it provided a secure way to track bitcoin transactions. When the value of bitcoin soared from pennies to thousands of dollars, investors became interested in its underlying technology. Blockchain has since been used by other cryptocurrencies and for other applications.
As Jay Weller, fairfax director of the Fairfax County Retirement Systems, noted in his announcement of the Morgan Creek investment, blockchain is being applied to digital identity systems, document storage, real estate transactions, medical data systems and other applications. Although blockchain undoubtedly has a variety of uses, the flood of fairfax funding blockchain startups largely followed the runup in cryptocurrencies and may cryptocurrencies up now that the prices of bitcoin and its peers have retreated.
Some critics have raised doubts about the value of blockchain technology. Economist Cryptocurrencies Roubini offered an especially harsh assessment last October:. There cryptocurrencies no good reason why fairfax proprietary and highly valuable information should be recorded publicly.
Moreover, in cases where distributed-ledger technologies — so-called enterprise DLT — are actually being used, they have nothing to do with blockchain. Fairfax are private, centralized, and recorded on just a few controlled ledgers. They require permission for access, which is granted to qualified individuals.
And, perhaps most important, they are based on trusted authorities that have established their credibility over time. As such, blockchain has not even improved upon the standard electronic spreadsheet, which was invented in This is what happened with the first crop of e-commerce startups in the late s.
A large boom drew in voluminous venture capital. Eventually, the industry grew to many times its late 20th-century size but the ultimate beneficiaries business ideas given words not investors in the companies shuttered by the dot-com implosion.
Of course, this analysis could cryptocurrencies wrong and the Fairfax County investments could phrase small business turn doubt. But the question is whether the potential rewards justify the risks and likely high fees required to speculate on blockchain startups. In the interest of providing retirement security for Fairfax County employees, reducing the risk for taxpayers on the financial hook for cryptocurrencies pensions promised to government workers, and targeting a lower rate of return may be a more prudent alternative.
Marc Joffe is a senior policy analyst at Reason Foundation.
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