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. According to the county’s most recent Comprehensive Annual Financial Report, these four systems had aggregate Net Pension Liabilities of over $3 billion. Much of these unfunded liabilities apply to the county school system, which is deeply underwater from an accrual accounting standpoint, reporting a net position of negative $1 billion.

The most challenged of Fairfax County’s four pension systems is also its largest. The Employee Retirement System (ERS) is only 70 percent funded. Further, it uses an assumed rate of investment return of 7.25 percent, which is above the 7 percent rate used by the state retirement system (VRS). ERS is investing $10 million in the Blockchain fund, with another $11 million coming from the county’s better-funded Police Officers Retirement Fund.

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, executive 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.

According to data from PitchBook, a financial data company, about $6 billion of venture capital has been invested in blockchain companies thus far. Although blockchain undoubtedly has a variety of uses, the flood of capital funding blockchain startups largely followed the runup in cryptocurrencies and may dry up now that the prices of bitcoin and its peers have retreated. After peaking at just under $20,000 in early 2018, bitcoin was recently trading between $3000 and $4000.

Some critics have raised doubts about the value of blockchain technology. Economist Nouriel Roubini offered an especially harsh assessment last October:

[T]here is no institution under the sun — bank, corporation, non-governmental organization, or government agency — that would put its balance sheet or register of transactions, trades, and interactions with clients and suppliers on public decentralized peer-to-peer permissionless ledgers. There is no good reason why such 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. They 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. All of which is to say, these are “blockchains” in name only. It is telling that all “decentralized” blockchains end up being centralized, permissioned databases when they are actually put into use. As such, blockchain has not even improved upon the standard electronic spreadsheet, which was invented in 1979.

Meanwhile, Deloitte, an auditing and consulting firm, identified multiple barriers to widespread blockchain adoption including the technology’s slow performance. While blockchain may well overcome these challenges, today’s blockchain startups being funded by Fairfax County retirees and taxpayers may not last long enough to benefit.

This is what happened with the first crop of e-commerce startups in the late 1990s. A large boom drew in voluminous venture capital. This was followed by a crash in 2000 that wiped out many so-called “dot-com” startups. Eventually, the industry grew to many times its late 20th-century size but the ultimate beneficiaries were not investors in the companies shuttered by the dot-com implosion.

Finally, the fact that $6 billion has already been invested in blockchain may be indicative of the fact that all the low-hanging fruit has been picked by previous venture capital investors. Those making new investments in blockchain startups are betting that they can add something new to an already-crowded sector and that their innovations will not be more effectively commercialized by existing players.

Of course, this analysis could prove wrong and the Fairfax County investments could skyrocket. 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 the pensions promised to government workers, and targeting a lower rate of return may be a more prudent alternative.