Source: The New York Times
Original title: Don't get fooled again by crypto
By Eswar Prasad
Compiled by: BitpushNews Scott Liu
Cryptocurrencies appear to be on the verge of mainstream acceptance. Bitcoin — the oldest and still the most well-known cryptocurrency — has recently hit an all-time high, and the U.S. Securities and Exchange Commission (SEC) SEC ) has also relaxed rules to make investing in cryptocurrencies easier. Donald Trump has vowed to make the United States the " crypto capital of the world , " and a new Republican-sponsored Senate bill calls for the Federal Reserve to invest billions of dollars in Bitcoin. Reports suggest Kamala Harris is even more bullish on the potential of cryptocurrencies than President Biden.
All of this seems to indicate that the cryptocurrency world is finally beginning to shake off its scandal-ridden past and its reputation as a playground for financial scammers. Perhaps cryptocurrencies will eventually replace the traditional banking system, returning power to users, bringing more convenient financial products and services, more market competition, and greater system resilience.
However, this may not be the case. Politicians’ embrace of cryptocurrencies may have more to do with winning over young voters and Silicon Valley money than with bringing cryptocurrencies to maturity. In fact, cryptocurrencies today may be more risky for their investors and our financial system than ever before. And the Republican Party’s public promotion of cryptocurrencies to American voters may only complicate the situation.
I am not anti-cryptocurrency. As an author of books on digital currencies, I can tell you that there are many great creative concepts and innovative technologies behind Bitcoin. Bitcoin and other similar cryptocurrencies are in principle decentralized - meaning that they are not controlled by any institution or organization. Because digital transaction records are stored on a global network of computers, cryptocurrencies are in principle secure, not susceptible to manipulation by a few people, and extremely resistant to risk. Therefore, in theory, they can replace intermediaries like commercial banks, which often use their power to limit competition and hinder the public's broad access to financial products and services.
Unfortunately, as cryptocurrencies have grown in popularity and speculative forces have taken over, some of these benefits have been cast aside. One of the main paradoxes of cryptocurrencies is that there is now a huge amount of centralization in this unregulated ecosystem. Most users are clearly unwilling to fully trust this untrustworthy technology, and they rely on cryptocurrency exchanges to hold crypto assets and trade them. The fraud of Sam Bankman-Fried and otherFTX executives, who used investors' funds as personal piggy banks, highlighted this vulnerability. And the government's charges against Binance, the world's largest cryptocurrency exchange, for money laundering and other forms of wrongdoing, show how centralized market forces have distorted the original noble goals of cryptocurrencies.
Despite the obvious problems exposed by the FTX and Binance incidents, regulation remains scarce and centralization is still prevalent. The process of verifying and recording transactions on the Bitcoin digital ledger is controlled by a few major consortiums, who benefit from deploying computing power to support this process. In other parts of the cryptocurrency world, there are limits to true democratic processes. Some large cryptocurrency holders have been accused of trying to manipulate the rules of voting rights to favor their own interests and ignore the interests of smaller players.
Furthermore, it is already clear that risks could spread from decentralized finance to traditional finance and vice versa. Take stablecoins, for example, a very popular type of cryptocurrency whose value is pegged to the U.S. dollar, making them more suitable for payments than other more volatile digital currencies. Stablecoins are often backed by easily traded securities, such as U.S. Treasuries. If there are a large number of redemption requests, stablecoin issuers may be forced to sell large amounts of such securities, causing problems in these markets. The collapse of Silicon Valley Bank last year also caused problems for a large stablecoin issuer that had deposits with the bank.
Bitcoin, in particular, has essentially become a purely speculative financial asset whose value seems to be based solely on its scarcity rather than the actual utility it provides. Its wild price swings (particularly evident in the wild price movements of the past few days), high transaction fees, and slow processing speeds have rendered it useless as a means of payment.
But thanks to the SEC’s loosening of restrictions, retail investors, even non-professionals with small deposits, can now easily include cryptocurrencies in their portfolios through products offered by mainstream investment management companies. The endorsement by politicians further legitimizes cryptocurrencies as an asset class. This only exposes these investors to risks that they may not fully understand and that could cause them financial losses.
This is not to deny the progress that has been made in the cryptocurrency space. Other cryptocurrencies such as Ethereum have become increasingly popular because they are far more energy-efficient than Bitcoin and can process large numbers of transactions quickly and cheaply. And the blockchain technology at the heart of cryptocurrencies has been applied through smart contracts, which can complete various transactions without the need for intermediaries, using only code.
Ironically, some of the biggest beneficiaries of blockchain technology are the very traditional banks and financial institutions that cryptocurrencies were intended to replace. In these institutions, blockchain technology is gradually being accepted because it can reduce costs and make it easier to provide basic banking products and services through digital channels, even to low-income households that were previously considered unprofitable. Major banking alliances are also using this technology to settle payments between members more quickly and efficiently. Even some central banks are using this technology in experiments, trying to issue digital currencies and improve the efficiency and reduce costs of cross-border payments.
At the very least, the rise of decentralized finance has revealed significant inefficiencies in traditional finance and demonstrated how technology can help circumvent them. However, cryptocurrencies themselves run the risk of becoming a place for speculation and fraud.
While we should leave room for such innovation, we need to find a better balance between risks and benefits and develop a clear regulatory framework to mitigate risks to consumers and investors and limit spillovers to traditional financial markets.
Although decentralized finance has many advantages on the surface, it actually introduces the fragility of traditional finance and brings many new risks in the absence of corresponding supervision. Although we should be open to innovations that can improve access and efficiency of financial markets, users, investors and regulators should be wary of false promises and politicians' hype.
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