In the dreams of people holding bitcoins and other cryptocurrencies, one day our money will be beyond the watchful eye of governments. We’ll no longer be beholden to banks and other intermediaries to safeguard and move our money at great cost.

The world’s poorest, who don’t have the option of a bank account or credit cards, will have access to ready money. Cryptocurrencies could even erase national borders and reduce economic disparities between countries.

In the wildest fantasies of cryptocurrency aficionados, they might even deprive governments of the power to make war using your taxes.

The internet’s early pioneers promised the same kind of democracy and equality of information. And, to a degree that has happened, as the rise of social media shows.

But the underlying assumption that once power was wrested from the elite, ordinary people would use it to make the world a better place was basically faulty.

Socially useless speculation

Information is now more democratic. But at the same time, the internet has created a world where some of the worst human behavior – hatred, paranoia, lying, harassment, abuse and theft – occurs on a scale unimaginable in a more regimented information environment.

The same kind of nastiness already holds true for cryptocurrencies, and it will grow worse as their use spreads. But the potential for damage is far worse.

For all the laudatory talk about the virtues of Bitcoin & Company, the fact is no one does real-world transactions in cryptocurrencies, except drug dealers and terrorists. Its role in economic life is as a socially useless speculative investment.

All of this was in evidence over the last few days and should be giving everyone a big pause for thought, although there is little sign that it has.

Virtual tokens, virtual regulation

It starts with a new financial mechanism called initial coin offerings, which mimic initial public offerings, except that the startup companies conducting them don’t issue stock but virtual tokens -- basically mini-cryptocurrencies – unique to the issuing company or its network.

If the startup’s business or network proves viable, the tokens will increase in value, just like a share price would.

ICOs have become a big hit in the financial world over the last several months, with some $1.8 billion raised so far this year.

Open gallery view Technicians repairing bitcoin mining machines at a mining facility operated by Bitmain Technologies Ltd. in Ordos, Inner Mongolia, China, on Friday, Aug. 11, 2017. Credit: Qilai Shen, Bloomberg

If an ICO so closely approximates an IPO, why do an ICO at all?

The answer is that the market is entirely unregulated. The issuer doesn’t have to abide by any rules over disclosure, self-dealing and the like. That saves him a lot of money and headache, but it leaves the investor defenseless.

As you might expect, this regulatory jungle combined with all the money involved has attracted dubious players and criminals. By one estimate, 10% of the ICO capital raised was looted in one way or another.

Even when there is no outright fraud, the risk-reward ratio is huge and in the absence of regulated disclosure, the market is for ICOs is more akin to gambling than investing.

Brother, can you spare a bitcoin that buys nothing

On Monday China’s central bank deemed ICOs illegal and ordered all fundraising activity to be halted immediately. No surprise here. The ICO market in China is huge and has attracted a lot of shady operators. Although the U.S. has also cracked down on ICOs, China’s move was the strongest regulatory challenge so far to the burgeoning ICO market.

The cryptocurrency market tanked in response to the new ban. Bitcoin lost over 11% in the 24-hours that followed, Ethereum and Litecoin had plunged almost 20%, and Ripple nosedived 14%. EOS and Qtum, lost almost 40%.

Why should the Chinese move provoke such a reaction? The ICO market accounts for only a tiny portion of the $150 billion market cap of the world’s cryptocurrencies. Moreover, it is a new and problematic phenomenon, so a regulatory crackdown should, if anything, have been welcome.

The fact that China’s decision was not welcome goes to the heart of the whole cryptocurrency phenomenon.

Bitcoin and its peers aren’t money in the usual sense we think of it. With their wild fluctuations in value, like the one we saw this week, they don’t serve as a store of value like money in the bank. Nor can you buy ordinary things like a pizza, washing machine or package tour with them: they are not a unit of exchange.

Maybe one day people will use cryptocurrencies to buy things, but it’s not clear why they should bother. In wealthy economies, people have ready access to cash, checks and credit cards. Yes, there are transaction costs and inefficiencies, but that is the price we pay to have money we can rely on. In poor economies, where they don’t, access to the technology cryptocurrencies require is nonexistent.

In lieu of any utility, cryptocurrencies’ value depends on what the market thinks they are worth. That requires some action to give holders cause for hope or disappointment – and give speculators a chance to make profits along the way on the volatility. ICOs were a key part of the action.

More regulatory crackdowns on ICO and cryptocurrencies will make them less attractive to speculators and to dreamers who think the only way bitcoin can go over the long run is higher and higher. But the fact is the market is learned that the jig is finally up.