The Keys to Crypto's Future

The voices suggesting that the end is nigh for crypto, or even that regulators should seriously consider banning it, are becoming louder and more prominent. At the heart of these critiques is the view that blockchain technology was never useful for anything, other than illicit activity and profligate speculation inviting abuse by bad actors. Could this be true?

Consider the mortgage.

If you’ve ever bought or sold a house, you know how many stacks of paper must be sorted through at closing, with signature after signature. And how many other parties are involved in the transaction: brokers, mortgage companies, title insurance firms, deed-recording offices, local and state taxing authorities, banks, wire transfer rails. Think of how much time and money and uncertainty all that loads onto what is, ultimately, a direct transfer of one asset between two parties.

What if you programmed a home closing onto an Excel spreadsheet? All the relevant data in neat rows and columns; all the relevant payments flowing immediately to the right cells upon execution of a single command. Instant, final, simple. Such a spreadsheet could easily be created. We don’t do closings that way, because that spreadsheet would be powerless. Money flowing from the “buyer’s lender” column to the “seller’s broker” column goes nowhere in the real world. Each of the parties might have a copy of the same spreadsheet, but the real transactions happen in the messy and fragmented world outside.

A former student recently gave me the mortgage example when I asked about use cases for blockchain-based programmable stablecoins. A blockchain is, fundamentally, a magical spreadsheet in the sky, empowered to execute transactions with trust rather than merely describe them. Better still, many blockchains are flexible foundations that could encompass any kind of transaction one could imagine—from collaborative content moderation to empowering stateless refugees with legible identities. Thousands of startups have been formed around blockchain use cases. Thousands of established firms and hundreds of government agencies have launched blockchain-based projects as well, along with initiatives incorporating elements of blockchain within a shell of government control.

So yes, crypto—if by that one means the technology stack built around blockchains and digital assets—is assuredly good for many things. And part of what it’s good for is creating digital assets that have demonstrable scarcity and integrity, which means they can work like money and financial instruments.

This is, however, not the question we should be asking. Private cryptographically-secured digital cash was useful when David Chaum issued his paper on blind signatures in 1983 and launched Digicash in 1990. Hash-linked ledger chains were useful when Haber and Stornetta published their paper on digital time-stamping in 1991. On the other side, no one suggests pet rocks or Beanie Babies should be banned because their frenzied speculative booms were unrelated to any perceived utility. And we don’t believe hundred-dollar bills or expensive London flats should disappear because they are sometimes employed for money laundering.

There are really two questions that matter when it comes to blockchain and digital assets. First, will they be used in ways that are widely-adopted, sustainable, legal, and independent of short-term speculative allure? Just because we can create magic spreadsheets in the sky doesn’t make the mortgage use case viable in the real world. The best technology in theory isn’t always better in practice, and the best technology in practice doesn’t always overcome the forces of incumbency and intertia. Second, even if there are use cases that gain traction, do the benefits exceed their costs, as best we can account for them? Law and regulation are appropriately called upon to deter activities that some people, or some companies, demonstrably want to do, such as exploitative financial schemes or pollution.

Both of these are empirical questions. The first is easier to evaluate, because it relies on existence proofs in the world. Even so, each of the four criteria listed is subject to interpretation. As is the condition not mentioned: the time horizon for the experiment. There are good reasons to argue that we are still too early in the maturation of blockchain technology to demand success at scale; there are also good reasons to disagree.

The matter of costs and benefits is even thornier. There are those who view such utilitarian calculus as the gold standard; others find it ethically or practically dangerous. And even if one agrees to weigh the merits and harms of blockchain, doing so is devilishly difficult. To take just one example, how to evaluate the energy usage of proof-of-work mining? And once again, the temporal dimension matters: Are we summing costs and benefits today, or projecting over an increasingly uncertain future?

That such questions are difficult and contentious does not mean they are insoluble or unhelpful. Individuals, companies, and governments make decisions all the time under such conditions of uncertainty. Even more important, the landscape is not static. Technologies evolve. And governments act in ways designed to magnify benefits and minimize costs. Those suggesting we let crypto burn, rather than bring it under the financial regulatory tent, assert that scandals involving unregulated offshore actors like FTX prove that the con is the point. That gets things backwards. Crypto skeptic Paul Krugman is more on target in suggesting that regulation will reveal once and for all whether crypto has legitimate practical utility for financial markets. (He’s confident it doesn’t.)

It’s fair to say, at the close of 2022, that those—like me—who believe blockchain will be a significant foundational technology with large-scale adoption are appropriately on the defensive. The scale of malfeasance in global crypto trading markets, and the failures of touted projects such as the Helium wireless network or the TradeLens platform for global shipping to meet their promise, are strikes against our position. Yet at the same time, the resilience of decentralized finance and the successful completion of the Ethereum Merge (an extraordinary achievement in distributed software engineering) are indicators that blockchain-based decentralization is more than a throwaway slogan or pipe dream. As in prior crypto winters, many remarkably smart people around the world continue developing increasingly sophisticated and novel blockchain-based systems. They are diligently working to build the blockchain-based future out of sincere belief in its value. They might be deluding themselves, but I’m not ready to write them off yet.

So no, this is not the end of crypto. The crash and scandals of 2022 may produce a pivot toward more-careful assessment of the legitimate questions blockchain faces, and more serious efforts on the regulatory front, especially in the U.S. I hope so. Let’s double down on those debates. They will tell us more than continued fights about whether blockchain is good for anything.