Source: The New York Times
Original Title: Don’t get fooled again by crypto
Author: Eswar Prasad
Translation: BitpushNews Scott Liu
Cryptocurrencies seem poised for mainstream acceptance. Bitcoin—the first and still the most well-known cryptocurrency—recently reached an all-time high, while the U.S. Securities and Exchange Commission (SEC) has relaxed related regulations, making it easier to invest in cryptocurrencies. Donald Trump has vowed to make the U.S. the “global capital of cryptocurrency,” and a new Senate bill sponsored by the Republican Party calls for the Federal Reserve to invest billions of dollars in Bitcoin. Reports suggest that Kamala Harris is even more optimistic about the potential of cryptocurrencies than President Biden.
All of this suggests that the world of cryptocurrencies is finally beginning to shed its scandal-ridden past and move away from its reputation as a haven for financial fraudsters. Perhaps cryptocurrencies will ultimately replace traditional banking systems, returning power to users, providing more convenient financial products and services, fostering greater market competition, and enhancing systemic resilience.
However, this may not be the case. Politicians’ affection for cryptocurrencies may be more about courting young voters and Silicon Valley funding than about maturing the cryptocurrency space. In fact, cryptocurrencies today may pose greater risks to their investors and our financial system than ever before. The Republican Party’s public endorsement of cryptocurrencies may complicate matters further for American voters.
I do not inherently oppose cryptocurrencies. As an author of a book on digital currencies, I can attest that there are many remarkable concepts and innovative technologies behind Bitcoin. In principle, Bitcoin and other similar cryptocurrencies are decentralized—meaning they are not controlled by any institution or organization. Since digital transaction records are stored on a global computer network, cryptocurrencies are theoretically secure, less susceptible to manipulation by a few individuals, and have strong risk resistance. Thus, they could theoretically replace intermediaries like commercial banks, which often use their power to limit competition and hinder public access to financial products and services.
Unfortunately, with the rise in popularity of cryptocurrencies and the speculative forces at play, some of their benefits have been cast aside. A major paradox of cryptocurrencies is that within this unregulated ecosystem, there exists significant centralization. Most users are evidently unwilling to fully trust this unreliable technology; they rely on cryptocurrency exchanges to hold and trade their crypto assets. Sam Bankman-Fried and other executives from FTX treated investors’ funds as their personal piggy banks, highlighting this vulnerability. Furthermore, the allegations against Binance, the largest cryptocurrency exchange globally—including money laundering and other forms of illicit activity—demonstrate how centralized market power has distorted the original noble goals of cryptocurrencies.
Despite the evident issues exposed by the FTX and Binance incidents—namely, a lack of regulation and persistent centralization—the verification and record-keeping processes for transactions on Bitcoin’s digital ledger are controlled by a handful of major consortiums. They support this process through deployed computing power and profit from it. In other parts of the cryptocurrency world, true democratic processes are also limited. Some large cryptocurrency holders have been accused of attempting to manipulate voting rights rules to benefit their interests, disregarding those of smaller players.
Moreover, it has become clear that risks may 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 dollar, making it more suitable for payments than other more volatile digital currencies. Stablecoins are typically backed by easily tradable securities (such as U.S. Treasury bonds). If there are a large number of redemption requests, the issuer of the stablecoin may be forced to sell a significant amount of these securities, potentially causing issues in those markets. The collapse of Silicon Valley Bank last year also troubled a major stablecoin issuer that had deposits at that bank.
Particularly, Bitcoin has essentially become a purely speculative financial asset, its value seemingly reliant solely on its scarcity rather than any actual utility it provides. Its extreme price volatility (especially evident in the recent dramatic price fluctuations), high transaction fees, and slow processing speeds have rendered its original purpose as a medium of payment ineffective.
Yet, due to the SEC’s relaxed restrictions, retail investors—even those with limited funds and no professional background—can now easily incorporate cryptocurrencies into their investment portfolios through products offered by mainstream investment management firms. The endorsement from politicians further legitimizes cryptocurrencies as an asset class. This will only expose these investors to risks they may not fully understand, potentially resulting in economic losses.
This is not to deny the progress made in the cryptocurrency space. Other cryptocurrencies, like Ethereum, are becoming increasingly popular due to their far greater energy efficiency and ability to process large volumes of transactions quickly and cheaply. Moreover, the blockchain technology at the core of cryptocurrencies has been applied through smart contracts, which can facilitate various transactions without intermediaries, relying solely on code.
Ironically, some of the biggest beneficiaries of blockchain technology are the traditional banks and financial institutions that cryptocurrencies originally intended to replace. Within these institutions, blockchain technology is gradually being embraced because it can reduce costs and provide basic banking products and services more easily through digital channels, even for low-income households previously deemed unprofitable. Major banking alliances are also leveraging this technology for faster and more efficient payment settlements among members. Even some central banks are experimenting with this technology, attempting to issue digital currencies and improve the efficiency and reduce the costs of cross-border payments.
At the very least, the rise of decentralized finance reveals significant inefficiencies in traditional finance and demonstrates how technology can help bypass these shortcomings. However, cryptocurrencies themselves carry the risk of becoming venues for speculation and fraud.
While we should allow space for such innovations, we need to find a better balance between risks and rewards and establish clear regulatory frameworks to mitigate risks to consumers and investors and limit spillover effects on traditional financial markets.
Although decentralized finance appears to offer numerous advantages on the surface, it actually introduces the vulnerabilities of traditional finance while bringing many new risks in the absence of appropriate regulation. While we should remain open to innovations that can enhance access to and efficiency in financial markets, users, investors, and regulators must be vigilant against false promises and the hype of politicians.
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Original Link:
https://www.nytimes.com/2024/08/09/opinion/crypto-2024-election.html
Note: All articles from Bitpush represent the author’s views and do not constitute investment advice.
FTX
Cryptocurrency
Kamala Harris
Decentralization
Donald Trump
Regulation
U.S. Election
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