While highly correlated with the simultaneous decline and recovery of the equity markets, the crypto market had some notable frauds and failures in the quarter among previously large crypto funds and lenders that caused a domino effect across the industry, much like the collateral damage caused by the collapse of large hedge funds or banks in traditional financial markets.
Notwithstanding the turbulence, sentiment in the industry has remained remarkably strong, buoyed by an evangelical zeal among “cryptonauts” in the underlying mission, utility, and potential of the crypto revolution to address real-world issues, such as financial inclusion for the poor and unbanked, inflation caused by runaway deficit spending and debt issuance, government surveillance and the potential for illegal asset seizures, and the oligopolistic dominance of the big banks in traditional financial markets.
Like any disruptive innovation, crypto is bound to have some ups and downs, false starts, and dead ends. When newly invented bicycles, for example, became a popular and efficient alternative to either walking or traveling by horseback, government officials and the era’s media influencers sought to outlaw them as dangerous nuisances to public safely. Eventually, and despite many crashes and broken bones along the way, the obvious mobility benefits overcame such resistance.
Bitcoin, Ethereum, and some other cryptocurrencies represent a transformative innovation that has potential to radically alter the worlds of money, finance, and much more. These opportunities have been detailed elsewhere. Crypto deserves the chance to develop and succeed, just as enlightened U.S. policy enabled innovation in the Internet era. However, there are at least three major, long-term risks that could leave this potential unrealized: the lack of consumer adoption, regulatory interference, and unforeseen technological innovation.
Lack of Consumer Adoption
What made the last technology revolution successful was the vast consumer applicability of useful (if now annoying and sometimes baneful) applications such as email, web browsers, social media platforms, and multifunction smartphones. Some legislators proposed taxing emails to make up for lost postal service revenue, but wiser heads prevailed. Through the development of TCP/IP—an Internet protocol suite, or the “handshake” between otherwise unconnected computers around the world—what we now call the Internet migrated from an arcane military, then university, research tool to a universal application that today is used by an estimated five billion people around the world. Similarly, 6.8 billion people now have access to smartphones of one kind or another.
However, as of today, crypto remains largely in the playpen of tech bros (and they’re mostly bros). Only an estimated 300 million people (3.75 percent of the world’s population of eight billion) have used crypto. For crypto to thrive, it must be made easier to use by the rank and file of individuals who don’t know how to navigate a command line prompt or care about the math behind a cryptographic hash.
To this end, many of the products and innovations now coming out of the industry are targeted at demystifying crypto and making it more accessible to the “normies” outside the highly technical world it has represented heretofore. Just as AOL moved access to the Internet from UNIX-programmers to grandma and grandpa, so too must crypto, DeFi (decentralized finance), and Web 3.0 make their inevitable migration to simple and widespread consumer use in order to succeed.
Government leaders as diverse and otherwise opposed to one another as U.S. SEC Chairman Gary Gensler, European Central Bank President Christine Lagarde, U.S. Treasury Secretary Janet Yellen, former UK Prime Minister Boris Johnson, and former U.S. President Donald Trump each have denounced crypto as a scam that needs substantial regulation and governmental oversight, if not outright prohibition on use. These criticisms always fail to mention that the amount of fraudulent and criminal transactions that occur with cash or across bank wires dwarfs any such illicit use in crypto.
China has notoriously taken the lead here, banning for all practical purposes the use of Bitcoin in the formal economy, while, via the People’s Bank of china, simultaneously issuing a digital yuan that is, ultimately, controlled and monitored by the Chinese Communist Party. Whether issued by China, the United States, or the European Union, government-sponsored, central bank-issued digital currencies (CBDCs), while having many viable use cases, are also a potential tool of the surveillance state. If not checked, regulation will facilitate governments’ total informational awareness (and ultimate control) of CBDCs and, thus, every aspect of their citizens’ lives. Bitcoin and Ethereum provide alternatives to enable financial privacy and autonomy.
In the United States, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) recently sanctioned use of Tornado Cash, “a decentralized and non-custodial privacy solution built on Ethereum” that allows users to anonymize transactions that they don’t want made visible to anyone who looks at the details publicly available on the transparent blockchain. There are many legitimate reasons for individuals and business users to keep the details of their financial transactions private. No one wants their medical expenses, political or charitable contributions, supplier or customer data, and other spending visible to the entire world. Notably, this is the first time that OFAC’s financial crimes sanctions (normally targeting terrorists, traffickers, criminal networks, and the like) have been deployed against lines of computer code rather than individuals or legal entities, and its legality will almost certainly be challenged.
A wide-ranging regulatory confrontation is imminent in the United States, and it is entirely possible that regulations are eventually issued that renders use of non-CBDC coins illegal or so burdened by regulation as to make them of little practical use.
Lack of adoption and regulatory interference are well-known and oft-discussed risks for crypto. What is less frequently considered is pure technology risk. This is to say, the same relentless advances in technology that enabled secure distributed networks, applications for blockchain technology, and cryptographic keys may be their undoing. For example, advances in quantum computing may one day make the “unbreakable” cryptographic private keys that secure digital wallets vulnerable and thus obsolete. Unlike normal computer code, qubits—quantum bits—are nonbinary (no, not that kind) and can be both 0 and 1 at the same time or oscillate between them. This may eventually allow computations at a speed and complexity impossible today.
It’s not for me to predict what these unforeseen innovations will be—I write as a strategist not as a technologist—but to remind us that technology advances and materializes in unpredictable, unexpected, and seemingly sudden ways. Anyone remember Nokia and Blackberry?
We are in the middle of a revolution that has potential to transform everything from finance and economics to government and politics, and even democracy itself. What advocates see as potential benefits are the very things viewed as threats and dangers by government regimes. Many revolutions launched with great zeal and enthusiasm are not ultimately successful and end up in the dustbin of history. The crypto revolution should be supported by anyone who cares about things like financial decentralization and wresting control from “too big to fail” banks, transaction anonymity and immutability, the right to ownership of one’s data, online privacy, and individual sovereignty.
Only time will tell whether crypto survives these inevitable challenges.
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