The US Committee on Banking, Housing, and Urban Affairs (aka the Senate Banking Committee) today holds an important hearing called ‘Cryptocurrencies: What are they good for?’ – and while some list world-changing benefits of using cryptoassets like bitcoin (BTC) or ethereum (ETH), a witness argues that much of what we “know” about cryptos is incorrect.
Watch the hearing here:
The witnesses are Angela Walch, Professor of Law at St. Mary’s University School of Law and a Research Associate at the UCL Centre for Blockchain Technologies; Jerry Brito, Executive Director at crypto lobbyist Coin Center; and Marta Belcher, Chair at the Filecoin Foundation, the company behind Filecoin (FIL).
Among these three, Walch’s testimony stresses the “idealistic rather than realistic understanding” of the crypto financial system, saying that it’s vital that policy makers have a realistic one.
“I consider [that] flaws in academic, industry, and public understanding of cryptocurrencies […] can taint policy and risk decisions. […] Many of the “facts” that we “know” about crypto systems are simply wrong, and making decisions based on idealized versions of crypto systems instead of the realities embeds risk in every decision that is made.”
Walch provided a list of “problematic” terms that are still being used in making “highly consequential decisions”:
- enables direct transfers of value
- embodies philosophies that can’t be changed.
One of her focus points is governance within crypto. Given the existence of developers, miners, and other parties within the crypto systems, it’s still a matter of debate how much power any related group exactly has.
“You may have heard that in crypto systems, you don’t have to trust humans and their fallible, corrupt natures – you just have to trust math. If I have one message for the Committee today, it is that this statement is just inaccurate,” Walch wrote.
She claims that cryptoeconomic systems are subject to human flaws and corruption, be it in how the software is coded, or miners colluding to exploit the network.
Furthermore, developers have no obligation to take care of the code for the benefit of those who rely on it, nor duty “not to exploit their privileged positions for their own benefit.”
With large companies like Square funding several Bitcoin developers, it will be important to acknowledge the conflicts of interest as well, she noted.
Proponents argue that crypto systems provide an alternative means of governance and economic freedom outside of existing institutions, and given that authoritarian regimes have used control over the payment system to crack down on dissent, “this concern is not invalid.”
However, per Walch, proponents also use terms like “censorship-resistant” and “permissionless,” but she “believe[s] that crypto proponents are overstating (perhaps innocently) the censorship-resistance of existing systems, and that they may not provide as much freedom as some hope, given the power of miners in the system to manipulate the ordering of transactions or delay them.”
Proponents claim that the costs of financial transactions are lower than in the traditional financial system, and that “more people are able to participate in finance and better themselves because they do not have to pass through gates like accredited investor evaluations.” But in her opinion, costs are lower largely because crypto systems are currently generally unregulated. Traditional financial institutions could lower their costs if they had fewer regulatory costs, Walch argues.
The crypto financial system is characterized by experimental governance, so it’s “important to consider the consequences of real-time experimentation on the governance of multibillion-dollar systems with increasing linkages to the traditional financial system,” she added.
Given the practical use cases of digital assets, the crypto space continues to develop in a way that “it will soon be fair to describe it as an alternative full-fledged financial system, if it is not already.” Additionally, mainstream financial media like Bloomberg and CNBC now regularly discuss crypto, and “the trajectory is definitely towards ever-increasing integration of crypto into the traditional financial system.”
But, per Walch, currently, cryptocurrencies and other digital assets pose “significant risks” that grow as they spread throughout the traditional financial system and as more people invest. Whatever kind of issue happens with a crypto, such as BTC and ETH, it could drag down the rest of the digital market, and could ripple through all the financial products tied to that cryptocurrency, all investors, as well as companies that provide services and products related to that cryptocurrency.
“More research into these systems is desperately needed, and it is unfortunate that we seem to have again put the cart before the horse by building massive systems atop poorly understood infrastructures,” Walch said.
Her witnessing colleagues, however, used many of the terms from Walch’s list.
Belcher’s answer to the hearing title’s question is that cryptocurrency can be the foundation for a better Internet, “an alternative to big tech that puts people in control of their own data, protects user privacy and security, and permanently preserves humanity’s most important information.”
It allows instant and secure monetary value transfer globally, and it creates the ability to program money. This ability — to instantly, automatically send microtransactions across the world — can create economic incentives that enable entirely new technologies, she said.
Brito’s testimony expands on this, saying that cryptocurrency technologies have a wide range of use cases that “extend far beyond the cloistered circles of Silicon Valley and Wall Street,” while “cryptocurrencies’ technological innovations allow a much broader range of unique applications than traditional sovereign currencies could never provide.”
Among crypto applications that he finds will be helpful to society, if allowed to grow, he included:
- direct digital payment – removing the need to rely on any single trusted third party to make a transaction; there is no way to combine direct exchange and digital exchange using a traditional sovereign currency;
- secure store of value – cryptocurrencies empower users to take control of their finances;
- microtransactions and metering: Removing the middleman can reduce the cost to send a transaction, meaning that transactions that may have not made economic sense due to the fees imposed by third parties in the past may now be feasible, unlocking a range of possibilities, including microtransactions (the ability to transfer just a few cents or fractions of a cent), and metered microtransactions that allow users to purchase access to a service for an unspecified amount of time;
- smart contracts – cryptocurrencies are a kind of programmable money; they include scripting capabilities that allow for more complex transactions to occur;
- extra-monetary applications – cryptocurrencies and the open blockchain networks that underpin them have uses that primarily have little to do with “money” at all; for example, a blockchain token can hypothetically represent anything that can be digitized.
“Allowing this technology to flourish can also help maintain the position of the United States as the home to global innovation,” said Brito. For that to happen, the ideal regulatory environment that both fosters innovation and adequately protects consumers must be considered. Brito finds that the regulatory regime in the US “goes in the right direction.”
While there are illicit uses of cryptocurrency, “the solution to that is not to throw out the baby with the bath water,” he wrote. Rather, a policy environment that “preserves for tinkerers and innovators the greatest possible space to develop new and better applications of cryptocurrency technologies will ensure that society gets the most value possible.”
All in all: no surprises, and nothing either alarming or amazing, from the perspective of someone like me (pro-#bitcoin, friend of liberty, pragmatic in orientation, academic).
I hope Senators pay attention to these statements; they’ll be better lawmakers for it if they do. 7/n
— Andrew M. Bailey (@resistancemoney) July 27, 2021
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