Crypto appears to be on the verge of mainstream acceptance. The price of Bitcoin, the original (and still most prominent) cryptocurrency, hit an all-time high recently, while the Securities and Exchange Commission has loosened rules that make it much easier to invest in crypto. Donald Trump is vowing to make the United States “the crypto capital of the planet,” and a new Republican-sponsored Senate bill demands that the Fed invest billions in bitcoin. Even Kamala Harris is reportedly more open than President Biden to crypto’s potential.
All of this might suggest that the crypto world is finally putting its scandals and unsavory reputation as the playground of crooks and financial charlatans behind it. Perhaps it will finally sweep aside stodgy banks and put power back in the hands of users, delivering benefits such as easier access to basic financial products and services, more competition and improved resilience.
Or perhaps not. Politicians’ newfound love of crypto probably has more to do with a cynical bid for young voter support and Silicon Valley cash than a maturing of a financially perilous set of assets. If anything, crypto today presents even greater risks to its investors and to our financial institutions than it did before. The fact that the Republican Party is publicly celebrating crypto to American voters could only make matters worse.
I am not a perennial crypto naysayer. Having written a book about digital currencies, I can tell you that Bitcoin has remarkable creative concepts and innovative technology behind it. Bitcoin and other such cryptocurrencies are in principle decentralized — which means they are not issued or managed by any institution or agency. Because the digital transactions of records are maintained on a worldwide network of computers, cryptocurrencies are in principle secure, invulnerable to manipulation by a small group and resilient to failure. As such, they should theoretically displace the need for trusted intermediaries such as commercial banks, which often use their power to limit competition and restrict broad access to financial products and services.
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SKIP ADVERTISEMENTUnfortunately, some of these benefits have fallen by the wayside as cryptocurrencies gained in popularity and speculative forces in search of quick profits took hold. One major paradox of crypto is that there is now enormous centralization in this unregulated ecosystem. Apparently unwilling to put their full faith in a trustless technology, most users rely on cryptocurrency exchanges to hold their crypto assets and to trade them. The fraud perpetrated by Sam Bankman-Fried’s FTX, in which its executives treated investor funds like a personal piggy bank, highlights this vulnerability. And the government’s charges that Binance, the world’s largest cryptocurrency exchange, engaged in money laundering and other forms of malfeasance show how the problems of concentrated market power can pervert the noble aims of crypto visionaries.
Sign up for the Opinion Today newsletter Get expert analysis of the news and a guide to the big ideas shaping the world every weekday morning. Get it sent to your inbox.Despite the problems illustrated by FTX and Binance, regulation is scant and centralization remains pervasive. The process by which transactions are validated and recorded on the Bitcoin digital ledgers is controlled by a handful of major consortiums that deploy their computing power to enable this process and reap the rewards. And in other parts of the crypto world, true democracy goes only so far. Large stakeholders have been accused of trying to manipulate rules, which are based on majority voting power, in ways that favor their interests over those of smaller players.
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