The Securities and Exchange Commission recently launched an offensive against the cryptocurrency world. Testimony before the Senate Banking Committee, President Gary GenslerGary GenslerCracking the code of crypto On The Money – Biden to Democrats: Come together Equilibrium / Sustainability – Presented by the American Petroleum Institute – Tracking Earth’s “Ultimate Record of Change” MORE announced that finding a way to curb the fraud, scams and abuse plaguing the “crypto-asset market” is high on the agency’s agenda. “Frankly, back then, it looks more like the Wild West,” Gensler concluded, “or the old world of“ buyer beware ”that existed before securities laws were enacted. Gensler is right to be concerned about the blockchain Wild West, but he underestimates the scale of the problem.
If we are to fix crypto, we need coordinated action from Congress, regulators, and the courts.
A dozen years have passed since Satoshi Nakamoto published his famous white paper describing a new form of virtual currency he called “bitcoin”. Bitcoin, as he described in his 2008 essay, is said to be a kind of utopian financial network, a democratic and decentralized monetary system stored on computers that would be managed and maintained by users themselves, with no role for governments. or the big banks. At a time when the financial crisis threatened to bring down Wall Street’s biggest institutions, bitcoin and its underlying technology, blockchain, appeared to be a promising step forward.
And indeed, in the years that followed, the blockchain ecosystem would explode. A single bitcoin is worth around $ 50,000 today, and the total bitcoin market cap currently stands at $ 900 billion. If you had invested $ 1,000 in bitcoin in 2011, you would have $ 45 million today. Other cryptocurrencies have followed bitcoin’s lead, with Ethereum, Litecoin, Dogecoin and many more receiving substantial investment and interest. Some of them had new and different functionality – Ethereum was good for smart contracts, Monero was good for anonymity, Tether was good for, well, pretending to be a dollar. Cryptocurrency exchanges have sprung up to serve the seemingly insatiable appetite of cryptocurrency investors for the latest initial coin offering.
As the blockchain ecosystem has grown, it has attracted increasing interest from institutional investors. JP Morgan launched a digital currency known as JPM Coin. Facebook offered to launch a digital currency before bringing it down under a storm of regulatory control. The NBA has created a blockchain-based collectible card known as the non-fungible token. And last month, El Salvador made bitcoin an official national currency.
But the unstoppable momentum of blockchain masks a darker truth. Blockchain poses enormous risks to society, yet falls through the cracks of our legal system. Real damage resulted. The problems are threefold.
The first is crime and fraud. It is well known that due to Bitcoin’s anonymous ledger, cryptocurrency has become the currency of choice for criminals and hackers. In 2013, the FBI shut down Silk Road, a huge dark web marketplace where users bought drugs, guns, and hitman services, and which used bitcoin as a form of payment. Criminal hacking networks have launched ransomware attacks against U.S. companies that crippled critical infrastructure and required bitcoin payments to unlock them. The growing value of cryptocurrencies has also made crypto exchanges attractive targets for hackers. When users saw their accounts at the Coinbase cryptocurrency exchange emptied by hackers, they were often told, to their dismay, that the illicit transactions are irreversible, and are not the responsibility of Coinbase.
The second problem is systemic stability. Cryptocurrencies have always been volatile. But as the blockchain has matured, it has become more closely tied to the rest of the economy. The industry is now worth trillions of dollars, and many people have locked up a large chunk of their savings in it. Concerns have been particularly high around stablecoins, cryptocurrencies designed to track the value of a real-world currency like the dollar, but which are often heavily mined and used in lending transactions. An external shock, like the hack of a major exchange or the discovery of an unknown bug in the code of a digital currency, could well send shockwaves that would reverberate outside the realms of the virtual world and into the world. real.
The third problem is the environment. Due to their decentralization, bitcoin and other cryptocurrencies require massive amounts of energy to maintain themselves, a process known as mining. A recent study estimated that bitcoin mining consumes 91 terawatt-hours of electricity per year, roughly the energy consumption of all of Finland. For a currency that is not widely used to buy anything, that is an incredible number.
These are major problems, but not irreparable.
We should start by focusing on the crypto custodians.
The blockchain ecosystem is only made possible by a set of actors who serve as an entry point for regular investors. Developers create cryptocurrencies. The miners maintain them. Exchanges allow consumers to buy them. All of these actors must be held to higher standards.
First, the SEC is expected to issue new rules requiring cryptocurrency developers to provide full information to investors before launching new digital coins. It should also require crypto exchanges to protect consumers’ accounts with the best cybersecurity procedures and reimburse them for losses if and when they occur. Congress could help by passing the infrastructure bill, which includes information provision requirements for crypto brokers.
The environmental problem is more pernicious but could be alleviated by imposing new taxes on mining farms.
Finally, the courts also have a role to play. Technology is changing rapidly. The legislation is moving slowly. In the meantime, the courts should use their powers to interpret decades-old laws to protect ordinary citizens from the damage caused by these complex new financial instruments.
If the branches of government work together, we can crack the crypto code.
William Magnuson is Associate Professor at Texas A&M Law School and author of Blockchain Democracy: Technology, Law and Crow RuleD (Cambridge University Press 2020)