By William K. Black
June 18, 2018 Kansas City, MO
One of the prime myths that white-collar criminologists have to refute repeatedly is that blockchain makes fraud impossible. Blockchain, in some settings, is a costly means of making some frauds much more difficult. Blockchain is useless against the most important frauds. The primitive worship of blockchain as a supposed garlic capable of warding off evil breeds complacency, and complacency produces increased fraud and greatly extends the life of fraud.
The difference between making fraud impossible and (in a few specialized settings) ‘much more difficult’ brings to mind the critical difference explained in The Princess Bride between ‘dead’ and ‘mostly dead.’ Blockchain is useless in stopping, for example, any or the three epidemics of ‘control fraud’ that drove the 2008 financial crisis and the Great Recession. Lenders’ executives extorted appraisers to inflate appraised values of homes, creating a Gresham’s dynamic in which bad ethics tends to drive good ethics out of the markets and professions. The second fraud epidemic in loan origination was ‘liar’s’ loans, which were designed to aid lenders and their agents to inflate the incomes of borrowers. Note that both of these primary fraudulent loan origination schemes involve lenders deliberately seeking to provide false (inflated) data designed to inflate the market value of homes. The third fraud epidemic that drove the U.S. financial crisis was the fraudulent sale of these mortgages to the secondary market through false “reps and warranties” about loan underwriting – principally the fraudulently inflated appraisal values and borrowers’ incomes.
