Today, the Senate Banking Committee (also known as the Senate Banking Committee) will hold a critical public hearing titled ‘Cryptocurrencies: What are they good for?’ as part of its ongoing investigation into cryptocurrencies.
While some argue that using cryptoassets such as bitcoin (BTC) or ethereum (ETH) will change the world, a witness asserts that much of what we “know” about cryptocurrencies is incorrect.
Angela Walch, Professor of Law at St. Mary’s University School of Law and Research Associate at the University College London Centre for Blockchain Technologies; Jerry Brito, Executive Director of crypto lobbying group Coin Center; and Marta Belcher, Chair of the Filecoin Foundation, which was instrumental in establishing and promoting the cryptocurrency Filecoin (FIL).
Among the three, Walch’s testimony emphasizes the importance of having a “idealistic rather than realistic understanding” of the crypto financial system, stating that policymakers must have a “idealistic rather than realistic understanding” of the crypto financial system.
“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”:
- immutable
- decentralized
- trustless
- secure
- tamper-proof
- disintermediated
- open/transparent
- neutral
- enables direct transfers of value
- embodies philosophies that can’t be changed.
One of her primary interests is the governance of the cryptocurrency industry. There is still some debate about the exact amount of power that developers, miners, and other parties have in the crypto-systems, despite the fact that there are many of them.
“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 asserts that cryptoeconomic systems are vulnerable to human error and corruption, whether due to flaws in the software’s coding or collusion among miners in order to exploit the network.
Furthermore, developers are under no obligation to maintain the code for the benefit of those who rely on it, nor are they under any obligation “not to take advantage of their privileged positions for their own gain.”
With large corporations such as Square investing in a number of Bitcoin developers, it will be critical to recognize and address potential conflicts of interest, according to her.
Supporters argue that cryptocurrency systems provide an alternative means of governance and economic freedom outside of existing institutions, and given the fact that authoritarian regimes have used control over the payment system to suppress dissent, “this concern is not unfounded.”
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.” However, she believes that costs are lower in part because cryptographic systems are currently unregulated in most jurisdictions. Walch contends that traditional financial institutions could reduce their costs if they were subjected to fewer regulatory requirements.
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.”
However, according to Walch, cryptocurrencies and other digital assets currently pose “significant risks,” which are expected to grow in importance as they spread throughout the traditional financial system and as more people invest in them.
Whatever the nature of the problem with a cryptocurrency, such as Bitcoin or Ethereum, it has the potential to bring the entire digital market crashing down with it, as well as all of the financial products tied to that cryptocurrency, all investors, and 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.
Other opinions
Her witnessing colleagues, on the other hand, used many of the terms from Walch’s list in their testimony.
As a response to the question posed in the title of the hearing, Belcher believes that cryptocurrency can serve as 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 mankind’s most important information.”
It enables the instantaneous and secure transfer of monetary value throughout the world, as well as the ability to program money.
According to her, the ability to instantly and automatically send microtransactions around the world can create economic incentives that allow for the development of entirely new technologies.
This is further elaborated in Brito’s testimony, which states 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 for a much broader range of unique applications than traditional sovereign currencies could ever provide.”
Among the crypto applications that he believes will be beneficial to society if allowed to develop further are:
- Direct digital payment – eliminates the need for a single trusted third party to conduct a transaction; there is no way to combine direct and digital exchange using a traditional sovereign currency;
- Cryptocurrencies act as a secure store of value, allowing users to regain control of their finances;
- Microtransactions and metering: By eliminating the middleman, the cost of sending a transaction can be reduced. This means that transactions that previously did not make economic sense due to fees imposed by third parties may now be feasible, enabling a variety of possibilities, including microtransactions (the ability to transfer a few cents or fractions of a cent) and metered microtransactions;
- smart contracts – cryptocurrencies are a type of programmable money; they incorporate scripting capabilities that enable the execution of more complex transactions;
- Extra-monetary applications – cryptocurrencies and the open blockchain networks that support them are primarily used for purposes unrelated to “money”; for example, a blockchain token could theoretically 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. To accomplish this, the ideal regulatory environment must be considered, one that fosters innovation while adequately protecting consumers. Brito believes that the US regulatory regime is “on the right track.”
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
