May 2021 was tough for crypto, especially for bitcoin, which dropped 40% since its peak in March. Besides the wild volatility fueled by a crypto friend turned foe (and friend again?), we saw a Nobel laureate claiming that crypto is a Ponzi scheme supported by a mix of “technobabble” and “libertarian derp.” We also learned about another China’s nationwide crackdown on crypto mining, and the month ended with a call for banning cryptocurrencies to fight ransomware. Time to kill the beast? Not so fast.
First, bans tend to be ineffective at best and counterproductive at worst. From Prohibition to the “War on Drugs,” history is full of examples of bans that couldn’t be properly enforced and ended up creating perverse incentives that led to more, not fewer, problems. Slow down with the torches, then!
Marcelo M. Prates, a CoinDesk columnist, is a central bank lawyer and researcher. This essay also appeared in today's edition of The Node newsletter. Subscribe here.
Second, it’s unfair to paint cryptocurrencies as a source of evil and crime. After all, bitcoin is why we’re here talking about monetary alternatives, from stablecoins to central-bank digital currencies (CBDC). Crypto is proving that, with technology, different monetary arrangements are possible: Money doesn’t have to come only from the government or be limited to a sovereign territory anymore.
Cryptocurrencies and the monetary competition they bring should be welcomed, as they create incentives against monetary incompetence. Governments and central banks will think twice before engaging in monetary mischief if they know that credible crypto alternatives are readily available to anyone affected by poor monetary management.
More than that, Bitcoin’s proposal to transfer digital assets safely through the blockchain has inspired many to reassess how financial market infrastructures work to trade securities and settle payments. Even central banks, which are conservative institutions, started toying with and exploring the possibilities of blockchain and distributed ledger technology to process payments after bitcoin. Bitcoin’s influence on how we think about the modern monetary and financial systems cannot be understated.
When it comes to cross-border payments, bitcoin’s model offers by far the best solution. A bitcoin in a Canadian wallet can be transferred to an Argentinian wallet and then to a Kenyan wallet seamlessly and in no time because bitcoin isn’t attached to a jurisdiction or backed by any sovereign currency. As I’ve said in another column, the level of coordination required from governments to get a similar result with sovereign currencies may not come quickly, if ever.
Finally, even the claims that crypto is a nightmare for those fighting crime should be tempered. As few places take crypto for payment, crypto holders have to exchange their coins for some sovereign currency whenever they want to make everyday payments or traditional investments. With that, authorities can know how much money is flowing in and out of crypto and who is taking part in these transactions.
Except for fraud, like using stolen personal information or account credentials, crypto holders have two options when converting to or from sovereign currency. They can use an intermediary, like PayPal or Coinbase, which will collect information about the sender and the receiver of the crypto and the sovereign money. Or they can find someone willing to make the conversion directly, thus avoiding intermediaries and records.
To avoid identification, they’ll have to use good old cash instead of a bank transfer. From a law-enforcement perspective, therefore, the problem will be the combination of “unhosted wallets” with bags of banknotes, not crypto itself. If no cash were available, this unidentified transaction wouldn’t be possible.
Miners are intermediaries
The positive assessment doesn’t mean that crypto is a perfect solution – far from that. Take Bitcoin and its promise of a monetary system that doesn’t require trusted central counterparties to work, just computational power and advanced mathematics. Payments using bitcoins are processed and settled in a decentralized way through computerized nodes and miners solving mathematical problems.
But “decentralized” doesn’t mean “disintermediated,” as these miners are nothing but intermediaries operating between the payer and the payee to complete and record each bitcoin transaction. Sorry, Satoshi, but bitcoin isn’t peer-to-peer: it’s peer-to-miner-to-peer. If you want a true peer-to-peer type of money, try cash instead.
Similarly, saying that Bitcoin allows monetary transactions to happen without the need for a trusted third party doesn’t mean that the persons behind the computers used to keep copies of the blockchain records (nodes), make the payments system function (miners), or design Bitcoin’s software (developers) are irrelevant. Who these people are and how many of them take part in the network still matters.
Consider, for example, the perils of a “51% attack.” If a person or group seizes more than 50% of the computing resources used to process and settle transactions, they can control how the cryptocurrency works from that point on – and even create and process fraudulent transactions.
Even without an attack or fraud, the people operating the cryptocurrency infrastructure and where the operations are happening also matter. Who controls the underlying software code of the cryptocurrency and how changes to the code are made can either build or erode trust in the cryptocurrency.
Sure, code developers have to convince a majority of nodes and miners to download and install each version of updated software for the change to be implemented. But if both developers and miners represent small groups of persons, decentralization and the need for consensus becomes just a mirage.
To wit, look at the news that some personalities established a “Bitcoin Mining Council” to promote their view on how Bitcoin should function. Despite the apparent good environmental intentions, a self-proclaimed “council” is a sign of centralization that goes against Bitcoin’s original proposition.
The conversation about crypto shouldn’t turn into a face-off between right and wrong or good and bad. Cryptocurrencies, like bitcoin, have shortcomings but aren’t a useless innovation or a public menace. A reasoned debate can lead governments to better understand when and how to regulate crypto and help the public avoid giving in to sirens’ songs and being scammed.