Crypto Goes to War
By Whitman Knapp
There is no joy to be found in any corner of the Russian invasion of the Ukraine. One unintended beneficiary, however, might be crypto. However, this raises the crucial question, will crypto win the battle but lose the war?
The war in the Ukraine has brought crypto into the public spotlight as never before. It is being correctly seen as a means of supporting the humanitarian needs of the Ukrainian people and the equipment needs of the Ukrainian military. But, it has also been spotlighted as a means of avoiding sanctions placed on Russia.
The war against the Ukraine forced the public to come to a modest understanding of the nature and function of crypto. Underpinning the new digital age, cryptocurrency came to the public’s attention in 2009, with the creation of the computer driven decentralized cryptocurrency, bitcoin, designed by the pseudonymous developer Satoshi Nakamoto. It is now understood that while crypto provides anonymity for the holder of a cryptocurrency, all cryptocurrency is registered on a public computer ledger which can be accessed and seen by any interested party and traced wherever it goes. It is now understood that to be fully useful as either humanitarian or military aid, crypto must be converted into fiat currency. The moment crypto moves from a blockchain account to a fiat account its owner loses anonymity and can be identified and illegal funds seized.
In the enthusiasm and excitement over the “fortunes” which have been largely created in the crypto world (to be clear, these “fortunes” have been created in the digital crypto world, not the real world of fiat money) hard core backers of crypto may downplay it, but they are aware that to be successful and to gain enterprise adoption, cryptocurrencies must gain significantly greater scale. While there is great fascination and hype around cryptocurrency, it is still a niche product (cryptocurrencies represent, at most, 1% of global assets) wildly touted by its backers, but not ready for enterprise use.
There is a basic dilemma at the heart of crypto. It is supposed to be decentralized and driven by computer code, freeing its holders from the suffocating grasp of governments and centralized institutions that dominate the dreaded, rent-seeking banking world. Regulation is anathema to true believers in crypto. In the real-world, however, enterprise adoption of crypto will never take place without appropriate guard rails around crypto.
The crypto world is at a critical juncture given Russia’s war on the Ukraine. It can be allowed to support the sanction busters and further its image as a means of money laundering, providing escape routes for money generated by illegal activities, or it can join the necessary effort to create an enterprise-ready, legal and regulatory framework for the adoption of cryptocurrency by the global economy at large. Exchanges, on ramps, stablecoin providers, in short, all actors in the cryptocurrency world, will have to join in the effort to provide the appropriate legal and regulatory framework. This does not mean trying to shoehorn crypto into existing frameworks. It requires new and forward-thinking measures which can be effectively shaped only by the active, positive engagement of the crypto industry. After many years of discussion, significant efforts are now underway in Europe with the UK, the EU and Switzerland providing new thinking. With the White House’s Executive Order on cryptocurrency, the effort to provide constructive regulation has been launched in the US. Perhaps a bit late and a bit cumbersome but with the help of groups, such as the Global DCA in Chicago driving a private sector response, progress will come sooner than later.
The crypto world’s response to this effort will determine whether or not crypto will win the battle but lose the war.
[Ed. Note: If you missed Whit’s earlier interview and articles, they can be found here (the interview), here (Whit’s primer) and here (updates).]
We welcome your comments below.
Whit’s remarks are spot on, for the most part. But towards the end, he says there should be a ‘necessary effort to create an enterprise-ready, legal and regulatory framework for the adoption of cryptocurrency by the global economy at large.’ Why ‘necessary’? What problems or deficiencies in the existing financial system do crypto and DeFi address? I participated yesterday in a Brookings Panel (BPEA) session on these issues, discussing a paper that I think is the best treatment so far. But that question was put and not answered. And the lobbying power against regulation is growing so fast that Gary Gorton, one of the best commentators on the 2008 financial crisis and the sequel, argued that we won’t see any significant regulation until crypto turns up at the heart of the next financial crisis – which he guesses will come within a decade. I hope he’s wrong, and in Europe we are working on it. I say ‘we’ because I am co-chair of a (pretentiously named, sorry) ‘High-Level Expert Group on Crypto and DeFi’ charged with delivering a report to the European Systemic Risk Board in June. The Financial Stability Board just published a report discussing the systemic stability implications of crypto and DeFi. IOSCO too. So there is a lot going on, including the President’s Executive Order. But crypto may be growing faster than we can handle – until it stops…
Richard, I would be very interested in seeing the Brookings Panel paper. There is such a tsunami of information, much of it disinformation, cycling on this topic. My basic belief is that we need to bring what I call the “aspirational” world of crypto together with the real world where enterprises work. The existing financial system, particularly the payments system is still riddled with significant inefficiencies and costs. The world of crypto and DeFi have the outlines of tech which some day could be harnessed for the real world. Much work to do, particularly putting up the guard rails required to keep JQ public from getting completely screwed again by the smart money as it did in the 2008 crisis. Europe is well ahead of us here in the colonies in trying to bring order to the chaos surrounding this world at the moment. The White House EO was at least open to new thinking in dealing with these issues.
I look forward to the European Systemic Risk Board report. We need all the input we can get on this incredibly complex issue.