The Promise of Cryptocurrency | Jack Solowey | Ep. 45

[Music] [Music] Jack Solway is a policy Analyst at the KO Institute Center for monetary and financial Alternatives or CMFA where he focuses on the regulation of cryptocurrencies decentralized finance and financial technology his writing has appeared in Real Clear markets coindesk the new York daily news and other outlets and he holds uh JD from New York University School of Law And a ba in history from the University of Pennsylvania and he joins us today to talk about cryptocurrency and its potential to contribute to human progress how are you jack doing well Chelsea how are you good to be with you today very well and excited to learn more about this topic so let's start with the big picture we've all heard of cryptocurrency at this point but what precisely is it and how does it work so it's a really important question Chelsea and I think sometimes it could get glossed over in conversations about crypto that tend to look at the Buzzy headlines regarding you know the the prices of this novel type of asset or financial instrument but at core crypto describes an application of a class of Technology know as blockchain technology or sometimes web 3 and blockchain Technology leverages cryptography and Game Theory to create highly uh tamper resistant public digital ledgers um that can serve as a foundation for an open internet um with sort of a a ground truth that's accessible by folks all over the world and cryptocurrency uh describes an application of this class of technology that leverages this advance of a distributed Ledger that's open and accessible to folks all over the world and also is highly secure highly resistant to tampering uh in its best form to basically replace sort of the traditional uh balance sheets at centralized financial institutions like Banks and brokerages with this open distributed Ledger um so in the the same way that you might have an account with a bank um that shows your balance uh that's replaced with uh a blockchain where your individualized account shows your balance in a particular cryptocurrency um but different than a bank is not managed by a centralized intermediary but rather is run on computers all over the world that are incentivized to maintain this database and also check each other's work to make sure it remains uh verifiable and what are some of the potential benefits of cryptocurrency Technology particularly in poor countries such as uh Vietnam you were mentioning in a pre podcast conversation we had absolutely so I I hasten to note sort of at the outset of conversations like this that because crypto as we were saying is a class of technology and it's not a monolith and that's relatively young you know a lot of the uh a lot of the benefits in this space I tend to speak speak of as uh potential benefits however um we do already in the real world see just sort of empirically uh use cases uh around the world where folks have taken to crypto to solve some of their real world problems now I don't you know I focus on policy so uh my role is to think about how uh regulators and policy makers can best approach this technological innovation and to me it's really about you know the benefits are really what the market determines the benefits are and how folks employ it in in their daily lives but we do see some really interesting data in terms of how it does get applied so uh you mentioned um Vietnam as one example of a country uh where crypto has taken on sort of an interesting role so the uh blockchain analytics firm chainalysis publishes an annual uh survey of the leading countries for crypto adoption and Vietnam actually uh leads that list uh over a couple of years and one of the interesting sort of corollaries is that Vietnam also uh sort of performs towards the bottom of the list on measures of access to traditional financial institutions so it's estimated that uh 69% of the Vietnamese population in Vietnam uh lack access to traditional Banks and so there you know uh correlation is not necessarily causation but I think it's a reasonable inference to look at the uh state of its existing traditional banking system and its high relatively High rate of crypto adoption to see that this decentralized financial technology actually is serving a use and filling a need that is not otherwise being served by more traditional types of solutions that's really interesting um what do you think of this idea that crypto currency can be a hedge against inflation that some people bring up and of particular use to people in countries with unsound monetary policy so ultimately this is an empirical claim that will have to be evaluated and re-evaluated over time um there was some think think initially that um cryptocurrency could be an inflation hedge because uh sort of the while there's different cryptocurrencies out there and they have different determinants of the size of the money supply there was some thinking that either because that money supply um increases at a fixed rate or has sort of an ultimate cap in the case of Bitcoin where um according to the protocol there only will ever be 21 million Bitcoin minted um we're still on our way there there's still more Bitcoin uh left to be minted but there was some thinking that maybe these Alternatives might provide an inflation hedge and um while it's important to sort of know what time period you're talking about know what um comparison you're using um by my light the idea for example that Bitcoin specifically would be an inflation hedge Visa the US dollar just hasn't borne out empirically or at least hasn't borne out yet um with that said there are places around the world where we've seen both National currency depreciation um and relatively High crypto adoption um or cases where we've seen sort of spikes in crypto adoption around National currency depreciation events um and so countries that sort of uh have some exemplify some of this relationship include turkey Nigeria Kenya Argentina um and Venezuela although there's sort of a a lack of good data for some of their statistics on things like um purchasing power parody per capita so those are always taken with a grain of salt and there's different I I hasten to add that there's different causes for sort of the monetary conditions in each of these countries and there also could be different confounding factors for the rate of crypto adoption but nonetheless they're sort of interesting places to look at where you have some national currency deficiencies at least at some periods as well as interest in crypto now one thing that's uh worth noting in this conversation is that there are different type not only are there different um crypto tokens there's also different types of crypto tokens what I mean by that a lot of folks are familiar with tokens like Bitcoin and ether where the price is determined by supply and demand um however there's another class of crypto token known as stable coins which are designed to be pegged to the value of another asset um which includes Fiat currencies like the US dollar and there's different mechanisms that stable coins use to achieve that Peg there are what are known as algorithmic stable coins which sort of use two digital assets from the same issuer and an engineered or programmed exchange rate between the two to try to uh balance the forces of supply and demand to keep uh to keep the price of uh the assets stable and in line with one US dollar those um have historically uh been somewhat volatile um folks might be familiar with the dep pegging of Tera uh uh that kicked off what some folks are referring to as crypto winter but there are other types of uh stable coins um including both crypted stable coins as well as Fiat asset backed stable coins um so in a sense stable coins have actually been growing in popularity in some of the same countries we were just mentioning that have had National currency depreciation issues and it's a way to access the US dollar so um that's sort of an interesting application of the technology and one that's not quite the same as the argument that crypto currencies with um supply and demand determined prices will be inflation Hedges but it's at least one application of the technology um that Ser that does appear to be serving some folks uh in some countries that makes sense uh what about the potential benefits some people claim that cryptocurrency has regarding its potential or the potential of blockchain technology in general to combat censorship or resist authoritarianism so I think this is a really important question and it gets to the idea we were talking about at the top of the conversation that cryptocurrency is one application of an underlying Suite of Technology um and to understand the potential and the power of blockchain technology to uh resist authoritarian overreach in certain circumstances I think it's helpful to look at the tactics uh that are used by the totalitarian regime in George Orwell's 1984 I'm sure a lot of folks are familiar with that work um and in that story control was a matter uh often of changing and deleting the historical record um the thinking being if there was no evidence of a free Society uh the idea of freedom or Liberty could be extinguished in people's minds and uh then if the if the idea were to Die the it would die in reality as well that was sort of the goal of Big Brother's Ministry of Truth um and as we know uh totalitarian regimes Are Not Mere fiction they exist tragically in the real world um outlawing things like freedom of speech shutting down dissident Publications and so I'm really proud to say um that the KO Institute recently awarded the Milton fredman prize for advancing Liberty to Jimmy lie um who was the founder of the pro-democracy Apple Daily newspaper in Hong Kong Jimmy was an advocate uh is an advocate for civil and economic Liberties an outspoken critic of the Chinese Communist Party um and so there there's actually an interesting intersection with blockchain technology and Jimmy's story um when the central government in Beijing applied the Draconian National Security Law to Hong Kong and um raided the Apple Daily offices arrested me and ultimately froze the papers bank account uh there were folks there were Civic and cyber activists that were able to um maintain a record of the app of thousands of Apple Daily um newspaper articles on the blockchain using a specific blockchain called arweave and one way to think about this and one way that rwe describes itself is basically as a distributed hard drive um where instead of sort of centralized Sur servers the storage space is um distributed around the world um to thousands of computers on the network and that um is one example where blockchain technology sort of thwarted the orwellian authoritarian ambition that's a great example um do you have any other examples or stories that you can relate about the potential of blockchain Technology to resist censorship or authoritarianism because I think it's a very important potential application absolutely so you know it in general it gets to some of the core capabilities of this class of Technology um which at you know at root is a matter of maintaining a secure and distributed record um and it uses a number of different um sort of mechanisms to get there um and I think it's worth discussing some of them because they sort of speak to the um the way in which the technology is decentralized and I think there are some inherent sort of philosophical um consistencies between the idea of decentralization and Liberty and on the other side of the coin between centralization and authoritarianism um what's so interesting about blockchain technology is that it incentivizes folks um to solve a a co uh coordinated action problem um there's a specific problem in Game Theory known as the Byzantine generals problem and it's basically how do you um solve this uh coordinated action problem where not every uh participant is necessarily going to be trustworthy and um major crypto blockchains and crypto protocols um empirically have been able to accomplish this so the Bitcoin protocol uses a concept known as proof of work um which basically requires a certain investment of resources in the network um to be able to participate in running the network and um earning Bitcoin as a result of that participation um the ethereum blockchain recently transitioned to another mechanism called proof of stake which instead of computing resources involves sort of anteing up your crypto Holdings um potentially to gain more or where you sort of don't contribute as an honest actor in the system you could see them um get taken away and you know I I know this is a bit of a digression into the technical weeds but I think what the important takeaway here is that uh these Technologies can solve through voluntary cooperation um a form of action coordination problem without the need for State coercion and I think generally that is a way in which um it sort of stands against um sort of Notions of state power and coercion that can become um overreaching and oppressive um and to sort of bring things down to earth I will just offer a couple more examples of how this secure recordkeeping system um can be used for humanitarian purposes so um just like apple Daily's article were uploaded to a blockchain to be stored um we also see projects um one through the the group and the the company filecoin where they are um recording genocide Survivor testimony um similarly this is a way to Bear witness to um you know human rights abuses throughout history and record um record people's stories and make sure that um they just can't be raced by regimes for whom their stories are inconvenient so we've talked about some of the potential benefits of crypto but now let's talk about some of the challenges or potential drawbacks of cryptocurrency you talked about how it can help people to resist unjust censorship in some cases but what about the critique that crypto can be used to break just laws as well and commit the kind of crimes that we all agree are bad like you know hiring an assassin to murder someone how big of a threat is that with crypto and is crypto unfairly singled out in your view with regards to its potential to fund crime absolutely so like all Technologies like all financial instruments uh crypto can be abused used by Bad actors um it is a real you know it is a problem um but just as it is for other Technologies and other financial instruments um I think it's important to be cleare eyed about that problem that means neither minimizing it nor exaggerating it um so yes there are crimes um and not just sort of technical violations but things like um you know funding terrorist activity um committing trafficking around the world be it of humans be it of drugs um folks May uh take issue with the idea of drug prohibition but you know there's also you know other forms of trafficking that could be enabled um by the use of this financial technology um and similarly uh sanctions evasion so so that does happen I think it's however important to keep in perspective sort of what the rate of it is in the crypto ecosystem and how that compares to to the Baseline of more traditional financial instruments um so it's worth noting that even high estimates of crypto related illicit Finance activity would make it an order of magnitude smaller than the un's estimate of for example total Global money laundering each year um and you know there are law enforcement agencies in the US that actually acknowledge that the relatively small role of crypto in crime when compared to traditional um Financial uh Technologies and tools so the treasury Department in their National moneya laundering risk assessment uh last year said that crypto's use in moneya laundering although growing is far below that of fiat currency or more traditional methods um secretary Janet Yellen testified before Congress that while they're closely monitoring the risk of sanctions evasion through crypto they hadn't seen um significant sanctions evasion through crypto so far and also uh treasury's National terrorist financing risk assessment found that while it's true terrorists have employed crypto um that use in their view appears to be limited compared to other Financial products and services um and I think it's worth noting here that so folks uh Bad actors um could you know might employ crypto for what they perceive as some of the uh privacy preserving potential some of the ability to trans transact without financial institutions um that require things like know your customer rules um and while you know that that's definitely in the background um we shouldn't inflate the risk because as I said um you know proportionally um the traditional financial instruments that tend to transact through either either regulated institutions or just conducted with things like cash um show higher rates of illicit Finance than crypto so this conversation relates strongly to financial privacy can you speak to the relationship between crypto and financial privacy absolutely um and this is a really interesting one so I think there is um something of a misunderstanding at times of the sort of privacy preserving properties of certain crypto blockchains so um to take Bitcoin as an example um it is pseudonymous meaning individuals accounts do not necess uh do not divulge their personal information um up front however um it's not Anonymous so there is a linkage between um at least on the Bitcoin blockchain between um one's account Holdings and their financial transaction history on the Bitcoin blockchain um so there can be uses um by crypto and blockchain analytics firms of those open immutable public blockchains for um for crime fighting purposes for financial surveillance purposes um but there also are other Technologies in the crypto ecosystem that can take privacy a step further Beyond sort of initial sudon imity um those include privacy enhancing and enabling Technologies known as mixers and tumblers um one way I sort of think about uh a mixer is imagine a bunch of folks in trench coats each holding sort of a a sort of Briefcase full of cash and they all walk into say Grand Central Station through revolving doors and they uh hand off their briefcases to one another and then they all exit and it's unclear where the fun originated and where the funds went to now the Technologies don't always work as um flawlessly depending on sort of the amount of liquidity that is being exchanged uh through the Tumblr and the amount that one is trying to for lack of a better word sort of obfuscate through the tumbler um or the mixer but sort of a basic idea there's also other types of crypto tokens and blockchains that try to build in privacy from the ground up so um things like zcash um employ tools like uh sort of a Leading Edge cryptography idea known as zero knowledge proofs to try to enhance privacy um and not just rely on pseudonymity which can actually through forensics and analytics um sometimes lead back to someone um another common critique is that cryptocurrency technology is bad for the environment and I know this is somewhat outside your policy area so we won't treat this um in depth but just briefly what do you make of that critique and do you think this might be another case of cryptocurrency being somewhat unfairly singled out compared to other Technologies so it's a it's an important question because this is one of the critiques that's often leveled at crypto but I think what's important to understand about this critique is it often assumes off the bat that crypto is somehow not worth its footprint and I think that is sort of can be emblematic of bias um and sometimes the arguments can get circular so it's sort of like well why is crypto um sort of not a desirable technology for whatever reason well there's the environmental impact well okay so what about the environmental impact well crypto is sort of not a worthwhile technology so its footprint isn't isn't worth it and to be fair that not that's not the argument that everyone makes but it's worth just sort of keeping in mind the next time you hear uh things like it um it's also worth distinguishing here between uh sort of the two mechanisms underlying major blockchains that I was speaking about a few minutes ago you have proof of work which underly uh which helps secure the Bitcoin Network um and because it's compute intensive it's also electricity intensive so that's where a lot of the um critique that it has sort of a disproportionate or outsized environmental impact comes in however uh as we were also talking about a moment ago there's also a different mechanism and alternative to what's known as proof of work called proof of stake and um that's been implemented by the ethereum blockchain the second biggest Network by market cap um in the crypto ecosystem and it's uh proof of stake when compared to um ethereum's original proof of work mechanism um estimates have it that it reduces uh energy consumption and carbon footprint by over 99% um so some of the critique needs to adapt to the changing nature of the technology but I also think it's important to keep in mind sort of the way in which the uh the critique begins with the assumption that the technology is not worthwhile and from my perspective that's not really the role of policy makers I think Pol the role of policy makers is to address downside risks but it's not really to assess the benefits that's something I think is should be left to consumers in the market um I will also note that so you got in uh you mentioned what I think is the important idea of sort of uh crypto being singled out or sort of unfairly characterized on this environmental head and I think regardless of one's preferred Environmental Policy it probably should apply uniformally so the idea that sort of specific Industries should come in for special treatment um just doesn't totally make sense to me as even just a baseline Environmental Policy matter if there's uniform standards uh they should apply universally and should not be singling out uh one specific class of technology I think that that is something that hopefully everyone can agree on um another issue that some people have with cryptocurrency uh to bring this back to a sort of international focus is that El Salvador's controversial leader na UK who's often called a dictator or a strong man really likes Bitcoin what do you make of the idea of a country using Bitcoin as legal tender or any cryptocurrency is legal tender yeah no it's a great question and I think I will uh I'll actually address the second question first because I think it can give us a lens into understanding the first one about the experience in El Salvador specifically so uh my colleague Nick Anthony at K CMFA makes the important point that legal tender status and what it means at least in the United States is commonly misunderstood um and other folks in the crypto policy space like Jerry breedo at the at coin Center and Jake travinsky at the blockchain association um also note that it's a common misconception that because something is legal tender in the US that means that every Merchant is required to accept it that's actually not true legally um if you ask both the Federal Reserve um and the treasury Department who plainly State on their websites that there's no federal statute mandating that a private business um or an individual or or an organization must accept currency or coins as payment for goods and services um I think folks sometimes bring in the idea that legal tender at least in the US in including Federal Reserve notes um must be accepted as a medium for tax payment and discharging debts um and they conflate that with the idea that they must be accepted for payment um for goods and services and while I think there's sort of an interesting interpretation argument there um from the fed's perspective From treasury's perspective um they just they don't interpret things that way um and so because legal tender status um does doesn't mean that something is automatically must be uh accepted by Merchants um the idea of making any cryptocurrency legal tender in the US doesn't actually accomplish much even if one's goal for whatever reason is to see maximum crypto adoption um because it wouldn't have the desired effect legally and also I think this brings up an important Liberty question because um I you know I think it's inconsistent with uh at least the ethos of uh the crypto ecosystem to want to mandate that any Merchant must accept payment in crypto I think it should be up to the merchants whether they find this me uh this type of instrument to be something that they want to accept um as a means of payment and I think you know the market should decide you know whether this is um a useful medium of exchange and so that sort of takes us to the El Salvador question and there what's interesting is that um there's now two forms of legal tender in El Salvador there's both the US dollar and now as you alluded to bitcoin and while um what's interesting is that actually of the two Bitcoin is the only one that's known as forced legal tender so there it actually is the case that Merchants are legally required to accept payment in Bitcoin and as we were just discussing um that raises real Liberty problems because forcing a merchant to accept any type of means of payment just isn't consistent with um a political philosophy that doesn't want to see coercion doesn't want to see the state telling folks how they're supposed to engage uh in transactions and I think it's also worth noting that um you know using tools of state power to force the adoption of Technology doesn't even necessarily work in the long run um in El Salvador they basically um gave folks a signup bonus to download the state uh approved um Bitcoin wallet application um and folks initially so it it came with a $30 signup bonus which was a significant chunk of change um based on um per capita annual income in El Salvador so um folks did download the app to get the $30 bonus um but after the bonus was spent we um according to a study by the University of Chicago um and granted it what it is a year old but um it's one of the better data analyses available at the moment at least um after folks spent their signup bonus only 20% of folks continued to actually use the app and similarly not withstanding the law at the time uh of this study it was found that Merchants only 20% of um large-sized Merchants were even accepting Bitcoin notwithstanding what the law said so there there's limits to how far state power can go and trying to force technology on people so cryptocurrency adoption is not the kind of change that you believe can be mandated in a top- down way effectively exactly exactly and nor should it um folks um what's exciting about crypto is it's a decentralized technology it can Empower users all over the world to sort of take control of their financial lives without relying on traditional centralized intermediaries and it would be to me a contradiction in terms to then use a centralized power to then force that on people so now that we've discussed both some of the potential benefits of cryptocurrency and some of the uh potential objections to the technology let's get into what you mostly do which is policy how should policy makers respond to the rise of cryptocurrency uh to let people realize the potential gains from the technology yeah well I think you said it well um policy makers should allow folks to realize the potential gains from cryptocurrency and to me that's a matter of being neutral and open to the benefits not sort of um taking a stance or an opinion in advance that it's the role of policy makers to either um promote or discourage the use of this technology uh policy should be risk-based so there are sort of traditional risks in um Financial regulation um things like information asymmetries things like Agency problems and intermediary risks where you know is is a middleman going to affect a transaction as they're expected to are they going to uh appropriate customer funds that they're custody so there are sort of traditional risks that policy makers should be concerned with however the idea that um it's sort of a question whether policy makers should be for it or again it and then they should uh and if the answer is the latter that um it's their role to try to extrap it from the US um I think is just a there's faulty premises there and even the the questions being asked um I will also note and I think this might come as a surprise to some folks that um the for the arguable reg regulatory hostility um that the US has demonstrated towards crypto is not Universal around the world um places like the EU UK Japan UAE um have either developed or in the process of developing um regulatory legal approaches to cryptocurrency that try to resolve um regulatory uncertainty that's been plaguing um developers and users in the US and that doesn't mean that their answers are perfect but it's a far cry from what's frankly been discussed or at least you've seen the the words being mouthed as recently as a few months ago in the US of potential uh bans on digital assets and so it's a very different approach to say okay this is a class of Technology it's here um how do we approach this in a rational way from how do we consider um policies and tools to potentially ban this or make it exceedingly difficult to access if cryptocurrency is overregulation what could be uh the possible impact of that for the average person um an ordinary American what's the potential loss there sure so surveys indicate that about one six to oneth of Americans have interacted with crypto in some capacity so the impact on the average American today may be indirect though I think the big threat is the potential opportunity cost in forgoing the potential benefits in the future if um our policies fail to adapt and basically make the US an uncommonly inhospitable jurisdiction for crypto both because of outright loss of access to the potential gains from this class of Technology as well as the lack of competitive pressure that this uh that these Innovations can put on existing and traditional institutions to improve and enhance uh their own products and services um so you know I think you know it's a potential loss in the future and but to sort of bring things down to concrete terms um especially for the Americans that are using crypto today it can be a useful tool for sending um faster and cheaper payments that settle in real time uh it could be a tool for sending uh remittances cross border globally um it's a that's a really valuable solution um that in need that um is otherwise uh not addressed or not sufficiently addressed by existing tools um there's also I think one interesting lens into this problem is uh looking at what some policy makers view as a problem which is the use of vpns or virtual private networks to overcome some of the Geo fencing safeguards that certain crypto projects and exchanges user around the world because um they think there's too much compliance risk in the US and uh and they try to keep us customers off of their exchanges but the very fact that us uh consumers are looking to use technical workarounds to access this technology means that they for various purposes uh desire it and uh consumer protections are ostensibly uh passed in the name of consumers so think it should be up to them to decide whether they are allowed access to to these Technologies and these financial instruments so you're saying that governments should be neutral toward these Technologies not uh go into regulating them with any assumptions about the worth of the Technologies but um in practice what has been the approach that Regulators have been pursuing absolutely so in the US I think there's two big problems um with how Regulators have been approaching this space one is uh regulatory ambiguity so for example a space that I and my colleague Jennifer schul focus on a lot is um the interaction between existing Securities laws and regulations and the crypto ecosystem and securities laws in the US um at the federal level are almost 100 years old with the Securities Act of 1933 and the exchange Act of 1934 um so it's not hard to sort of conceptualize how technologies that began as Paper Stock certificates and are now being uh replaced potentially with uh tokenization over uh decentralized Global networks could pose challenges to existing Frameworks and you know that's not to say that the law has never adapted to new technology and in fact um in the 1990s we saw the emergence of new Communications Technologies and protocols that um were being used in the security space for example and at the time at least SEC actually went about a fairly rational rulemaking process to adapt laws to the new technology introducing something known as reg ATS or the regulation of what are known as alternative trading systems and so uh laws and rules can keep up with technology if Regulators are willing to make those changes unfortunately in the US um we haven't seen SEC been willing to sort of take the same rational approach to new technology here um we've seen a bit of um what I honestly view as gaslighting at times where the agency can ask projects to register uh say their exchanges under existing laws and the projects say okay great let's do it and then SEC says well we're not really sure how to register your project and then a little bit later they get uh they face enforcement actions for not registering their exchanges so that's really not a tenable status quo and it's just not a rational approach to um innovation in financial markets so that's that's regulatory uncertainty um another component is regulation by enforcement and um too much regulatory discretion so we did touch on this with SEC um instead of making new rules launching enforcement actions but this is a real problem because it doesn't allow Market participants to know what their obligations are upfront um and sort of uh Penal izing projects when the rules are not clear is again just not a rational policy response to Innovation so we've been keeping this pretty big picture but uh to get more specific as of the time of this recording what are some of the current policy initiatives around regulating this technology what are some of the concerns people are currently uh wrangling with and what are some proposals that you're working on uh recently that relate to this absolutely so um there is work being done uh in Congress right now to address um stable coins which we were talking about um uh earlier in our conversation as well as this idea of crypto Market structure so the US has sort of a uh unique position in that we have two Capital markets Regulators in the US we have the Securities and Exchange Commission SEC and the commodity Futures Trading commission the cftc um and it's sort of an accident of History why we have these two Regulators but um they present sort of interesting questions uh when it comes to the crypto ecosystem because there is this perenial question of whether crypto tokens ought to be treated as Commodities or as Securities um and so my colleague Jennifer schul and I think it's important to resolve some of the regulatory uncertainty that we were just talking about um so we propose a clear legal test for whether crypto tokens should be considered Securities or Commodities and we hone in on the uh idea of decentralization that's really the Innovation at the heart of cryptocurrency that we've been talking about during our conversation um and what's interesting about decentralization for example in the Securities context is that it actually addresses some of the traditional risks that Securities regulation grew up to mitigate um what are known as managerial risks basically are the issuers of an instrument going to have information that market participants don't have and could they uh use that information to gain an edge over Market participants so our Securities laws have grown up to address things like insider trading and information symmetries um through disclosures um but when you have a a fully decentralized crypto token project the idea that you have a managerial body at the heart of the project with that information um uh it's just not the case anymore when when a project truly is decentralized um and there is no managerial body but rather um a software protocol that operates um through clients on nodes operating on thousands of computers all over the world based on code and uh the self-execution of code instead of a managerial body and their discretion so we look to this core Innovation to try to answer the question of when uh a project is um a crypto security or a crypto commodity so at a high level crypto Securities are those that are centralized crypto Commodities are those that are decentralized um now an interesting wrinkle here um that has uh genuinely sort of confounded folks and posed a problem for traditional Regulators is that crypto tokens Can Begin life as um centralized projects um however they can evolve over time to more decentralized projects so um we propose a test for when the threshold of decentral ization is met um to sort of preview it it's the question of whether um you have that managerial body who's promising performance without which the token would not exist or its benefits would not materialize um if a project is on the way there but is not there yet we provide sort of our proposal would provide for some sort of simple Common Sense disclosures um that could address the traditional information asymmetries that are sort of uh residual in a decentralizing project now because this is the human progress podcast we usually try to end on a positive note so say Regulators listen to you heed all of your policy advice and they really get this right and they manage to not overregulation shell what kind of gains could people see sure so in addition to the potential benefits through um you know just making the US a more hospitable place for this Innovation allowing um access to um faster cheaper payment methods um I also think there's the potential for a a more decentralized internet and financial system more broadly so there's this idea of decentralized Finance or Defi and there's a lot of really interesting um developments and applications in the space things like um loans that could be issued permissionless so in the same way that you put a dollar in a vending machine to get a can of soda and the vending machine is basically programmed to give you the product once you once you put in your dollar um you can have lending protocols that once you put in the uh designated crypto collateral you could take out a loan in crypto um without sort of some of the traditional um gatekeeping by financial institutions and that's just one example of this broader ecosystem and it's sort of not for pundits necessarily to opine on what that ecosystem ultimately will look like I would like to see um entrepreneurs developers and consumers themselves deciding what that world looks like um and so at least in the defi space um Regulators should not be imposing mandates that either um are counterproductive because they're requiring um additional intermediation that is actually being um sort of uh overcome by defi or or simply subjecting them to rules that are impossible to comply with thank you so much Jack this has been fascinating thank you [Music] Chelsea

Channel: Human Progress

Views: 248

Keywords: Innovation, Human Progress, progress, Libertarianism, Freedom, Milton Freedman, Liberty, Free Market, Jordan Peterson, Steven Pinker, Matt Ridley, Liberal Democracy, Artificial Intelligence, Future, Optimism

Id: HtSVTBkSLmw

Length: 50min 17sec (3017 seconds)

Published: Fri Nov 03 2023