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How crypto failed Black investors

The American financial system has long fallen short for Black communities. Crypto is just another iteration.

A drawing of a bitcoin logo with a bigger bitcoin shadow looming behind it.
The crypto crash might have been particularly painful for Black investors.
iStock/Getty Images Plus
Emily Stewart covers business and economics for Vox and writes the newsletter The Big Squeeze, examining the ways ordinary people are being squeezed under capitalism. Before joining Vox, she worked for TheStreet.

Crypto was sold as a sort of lifeline to Black communities, as a way to build wealth outside of the mainstream financial system that many people, understandably, mistrust. The crypto complex told the story of a potential for riches, a way for people left out of more traditional financial apparatuses to get in, bombarding the Black population with marketing and ads featuring celebrities such as LeBron James and Spike Lee. The industry made it clear: If you didn’t get in, well, you might just be missing out. Many Black investors picked up what marketers were putting down, investing in cryptocurrency at higher rates than their white counterparts — especially Black investors under 40.

Now, cryptocurrencies are trading well below their 2021 highs. Many NFTs have plummeted in value and are essentially worthless. Some high-profile projects and companies in the space have imploded, and it’s not clear what, if anything, customers who put their money into those entities will get back. All is not totally lost. Investors who got into cryptocurrencies such as bitcoin and ethereum in the early days are still ahead (assuming they haven’t lost the coins or had them scammed away). Crypto often goes through boom and bust cycles, and it’s unlikely the ecosystem is dead.

Still, Black investors were not generally among that early group to dive into crypto, as the Atlantic’s Annie Lowrey notes. Instead, many of them got in late, and some appear to have bought high and sold low. According to a recent LendingTree survey, Black crypto investors were likelier than white crypto investors to say that they had borrowed money to make their investment and that they had sold their crypto for less than it was worth. In other words, some Black investors have been left holding the bag.

“The idea that crypto is somehow providing an avenue that’s easier than other forms doesn’t pan out. It’s not as democratizing and welcoming as suggested,” said Algernon Austin, director of race and economic justice at the Center for Economic and Policy Research, who has spoken out in the past about the risks of crypto to Black communities. “The crypto industry is concerned about the crypto industry, it’s not concerned about Black wealth.”

It’s a familiar tale throughout America’s history, explained Mehrsa Baradaran, a law professor at the University of California Irvine and author of multiple books on financial inequality and the racial wealth gap. She drew parallels to housing contract sales offered to Black communities in the wake of the New Deal in the 1950s and ’60s and to subprime home loans prior to the global financial crisis disproportionately made to communities of color. In both instances, Black consumers were targeted with predatory financial products existing somewhat on the margins.

Most notably, she pointed to the Freedman’s Savings and Trust Company, more colloquially known as the Freedman’s Bank, a private savings bank established by Congress in the wake of the Civil War meant to help formerly enslaved people establish financial stability. The endeavor lasted for nine years and ended in disaster — its funds were mishandled, and eventually, the bank collapsed. Many depositors never saw their money again.

“You have the perfect conditions that led to the Freedman’s Bank, that led to the subprime crisis, that led to the contract sales after the New Deal, which is that capitalism is undergoing some shift and something is wrong and the government needs to handle it, but instead, they leave out certain people and then some terrible, exploitative incentive gets born, and someone is always going to step into that,” Baradaran said.

In the 19th century, that took the shape of a bank that squandered Black people’s money and sowed skepticism of the financial system that persists today. In the 21st century, it was a pitch to build wealth through a new, largely unregulated technology that would later see the bottom substantially fall out. “It is a looting of people’s money,” Baradaran said.

To back up a bit — or, rather, a lot, to after the Civil War — the US Congress established the Freedman’s Bank in 1865. It was meant to serve as a savings institution for formerly enslaved people and their families, and deposits were supposed to be invested in “stocks, bonds, Treasury notes, or other securities of the United States.” Other loans weren’t initially intended to be made.

As Baradaran explained in her 2017 book, The Color of Money: Black Banks and the Racial Wealth Gap, a bank wasn’t exactly an ideal solution — giving formerly enslaved people land would have been better. “Blacks had not asked for the bank, but land grants having been foreclosed on by violence and southern retrenchment, the bank was a stand-in,” she wrote. “The reformers promised the Black community that the bank was the preferred and proper means by which they would achieve land ownership on their own.”

A view of the building that used to be the Freedman’s Bank.
A view of the Department of Justice building (formerly the Freedman’s Savings and Trust Company Bank) on the left and the Riggs Bank building at right on Pennsylvania Avenue NW on November 14, 1888, in Washington, DC.
Frances Benjamin Johnson/Library of Congress/Getty Images

The Freedman’s Bank opened in New York in April of 1865 and over the course of a few years built up 19 branches. Eventually, the bank hit 37 branches and had tens of thousands of depositors. People were allowed to open accounts with as little as 5 cents, and most deposits were under $60. The bank struggled financially, and in 1867, its headquarters were moved to Washington, DC, and a new group of bankers, politicians, and businessmen took the wheel. Congress changed the bank’s charter to let the people now running the show invest in real estate and railroads, and they started to make risky bets. When financial panic hit in 1873, it took an enormous toll on the Freedman’s Bank, and the value of its investments plunged. There was a run on several branches, meaning many depositors tried to get their money out all at once, and by the time Congress sent regulators to take a look under the hood at what was going on, it was largely too late.

In 1874, abolitionist and writer Frederick Douglass was brought in to run the bank, but he quickly realized it was “the black man’s cow, but the white man’s milk.” Less than two months later, he described the situation as being “married to a corpse” and recommended Congress shutter the bank, which it did in June of that year. The bank’s assets were not backed by the federal government — a fact many customers had not realized — and many customers’ deposits were gone.

In The Souls of Black Folk, W.E.B. Du Bois wrote that “not even ten additional years of slavery could have done so much to throttle the thrift of the freedmen as the mismanagement and bankruptcy of the series of savings banks chartered by the Nation for their special aid.”

“What should have happened in 1865 is that the treasonous Southerners should have lost their land because they had fought for the right to maintain slavery, and the people who for hundreds of years had grown the land should have gotten it,” Baradaran said in an interview. Instead, they got a poorly run bank, their money was squandered on irresponsible investments, and they were left with nothing.

The incident contributed to an ongoing mistrust of banks among Black communities. And in the modern day, it’s also hard not to see the parallels between the Freedman’s Bank and the most recent crypto implosion, where once again upstart institutions meant to be a new avenue for people to build wealth have gone bottoms-up or, at the very least, are teetering. “This is what you see with bitcoin, you get the scammers and the hucksters and the fraud, people who come in and say, ‘Look, we’re going to exploit people’s genuine desire to build wealth in a fucked-up system,’” Baradaran said.

When the mainstream system doesn’t work — and it really doesn’t for many Black Americans — it’s natural to look elsewhere for something that does. That’s where the appeal of something like crypto resides. People are told it’s a way to establish financial independence and freedom and get away from the institutions that have wronged them in the past. It’s a prospect that’s easy to want to believe in.

“It’s important to recognize that the Black population has more economic hardship and economic insecurity than the white population or the US population overall on average. You have more poverty, higher rates of debt, higher rates of insecurity, unstable work hours, unaffordable housing, there are a number of financial stresses in the lives of many African Americans,” Austin said. “So when you’re worrying how you’re going to pay your bills regularly and how you’re going to get ahead and someone shows up and says, ‘I have the solution, and this will help you pay all your bills and help you pay your kids’ college and the house that you’ve always dreamed about,’ that’s pretty enticing.”

Charlotte Principato, financial services analyst at polling firm Morning Consult, said Black Americans “show through their higher ownership of cryptocurrency than adults of other races or ethnicities that they are open to alternative forms of payment and investment outside the sphere of traditional finance” and that it’s “not surprising” that they’re interested in alternative assets given that the mainstream system has not served them well. “It makes sense that they would try to stake their claim and find success,” she said. “It is unfortunate that it is that way with such a speculative asset.”

In conversations with crypto proponents over the years, I’ve heard time and time again that it is specifically good for communities of color, that it’s solving a problem for the unbanked, meaning people without banking access, and the underbanked, people who have banking accounts but often rely on other financial services, such as payday loans and check-cashing services, in the day to day.

It’s an argument that’s nice to believe. It’s also one that often falls apart: With potential upside risk comes a lot of the downside risk we’re seeing today.

For one thing, it’s rare to hear people who work on financial inclusion more broadly offer up crypto as a solution. They’re much likelier to push for postal banking and public banking and advocate for more credit unions. It’s hard to see how a hyper-capitalist, unregulated system would avoid the mistakes our already-capitalist, sometimes lightly regulated system already entails. And to state the obvious here, the crypto industry is here to make money. Businesses in the space aren’t generally doing business out of the goodness of their hearts.

“The marketing campaign is not out of generosity or philanthropy, that’s the business model, the business model requires getting as many people as possible so then prices go up,” Austin said. “It’s not an investment that’s built on providing any goods or service, so once you understand that, you understand you’re really resting on herd mentality, only then you have to go with the herd and then make sure to jump away before it goes off the cliff.”

Many investors — including many Black investors — did not jump away soon enough.

To be sure, the crypto industry has not completely imploded, though many big names in the arena have. There are plenty of people who still say they believe it is an avenue for building wealth. Charlene Fadirepo, a regulator turned bitcoin activist, told me she thinks the 2022 market crash was an “incredible teachable moment” for crypto investors to become safe, smart, and confident. “To be honest, traditional banking doesn’t have a great track record dealing with Black consumers,” she said, an assertion that is hard to dispute. She still believes bitcoin, specifically, has an appeal in offering “financial autonomy,” though she’s somewhat dubious of other cryptocurrencies. “There are fundamentals that promote bitcoin as a long-term investment ... that is not the case for all cryptocurrencies,” she said.

Fadirepo recalled a recent class she was teaching on crypto in South Carolina where a Black woman in the class said she had lost $3,000 when Celsius, a now-bankrupt crypto lender, failed. The woman didn’t want people to feel bad for her, Fadirepo said, but wanted people to realize they need to protect their crypto by storing it in a “cold storage wallet,” meaning not on a third-party platform and not connected to the internet. “I could have talked for hours, but that one anecdote shifted the conversation in the room,” she said. “I see a bright side here, and that bright side is just encouraging a level of investor discipline and a real need to be informed.”

That people sometimes just need to learn lessons from their mistakes is something you hear often in investing; there’s a line of thought that loss is sometimes just an opportunity to do better moving forward. While often delivered with the best of intentions, the sentiment can feel hollow. Many times, investors aren’t clear on the rules of the game they’re playing, and the people they’re playing against — or the people who are running the game — aren’t forthcoming about what’s going on in the background. Placing the blame on the losers, especially when they’re set up to lose, happens time and time again.

“It’s the double whammy of not only is your money stolen, but as far as anyone knows, it’s your fault, you should have known better,” Baradaran said. “It’s shocking how similar those arguments end up.”

There’s no denying the American financial system is in many ways stacked against Black investors and consumers. And the best way to address that might be to try to fix the system instead of creating new avenues or endeavors, whether the Freedman’s Bank or some crypto project, which have many of the same failings but without the guardrails.

“If the system’s broken, let’s fix it, instead of saying, ‘Look, the system’s broken, let’s create this other system,’” Baradaran said, comparing it to deciding to go live on Mars because Earth is too screwed up. “It’s losing all the lessons that we had to learn the hard way in this financial system, which is that you need trust, you have to have trust. And if we allow fraud without regulation, there will always be fraud.”

Fraud and mistrust are what have led many Black consumers to faulty offers and products over and over again. The latest iteration is crypto, but it probably won’t be the last.

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