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.
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”:
- 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 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.
(Photo : Mint)
