Three things that can kill Crypto

After the June 2022 crypto market crash, with Bitcoin and Ethereum prices down nearly 75 percent and 82 percent, respectively, from their all-time highs, many market observers predicted the early death of the crypto industry. Opponents of crypto, including regulators and vested interests in the legacy financial system, used each route as evidence that crypto is a dangerous scam that needs to be more tightly regulated, if not outright banned. The predictions of imminent doom were premature. Bitcoin is up 37 percent and the price of Ether has doubled since the bottom in June. Prices will go up and prices will go down. Volatility will persist. This is not the point.

Although highly correlated with the simultaneous decline and recovery of the stock markets, the crypto market had some notable frauds and failures in the quarter among former major crypto funds and lenders that caused a domino effect across the industry, much like the collateral damage caused by the collapse of major hedge funds or banks in traditional financial markets.

Despite the turbulence, industry sentiment has remained remarkably strong, fueled by an evangelical fervor among “cryptonauts” in the crypto revolution’s underlying mission, utility and potential to address real-world issues, such as financial inclusion for the poor and unbanked, inflation caused by ongoing deficit spending and debt issuance, government surveillance and the potential for illegal asset seizures, and the oligopolistic dominance of the big banks in traditional financial markets.

Like any disruptive innovation, crypto is bound to have some ups and downs, false starts and dead ends. When newly invented bicycles, for example, became a popular and efficient alternative to either walking or traveling on horseback, government officials and media influencers of the time tried to safely ban them as dangerous nuisances to the public. In the end, and despite many crashes and broken bones along the way, the obvious mobility benefits overcame such opposition.

Bitcoin, Ethereum and some other cryptocurrencies represent a transformative innovation that has the potential to radically change the world of money, finance and much more. These possibilities are described elsewhere. Crypto deserves the chance to evolve and succeed, just as enlightened American politics enabled innovation in the Internet era. However, there are at least three major long-term risks that could leave this potential unrealized: the lack of consumer adoption, regulatory interference, and unforeseen technological innovation.

Lack of consumer adoption

What made the last technology revolution successful was the enormous consumer applicability of useful (if now annoying and sometimes groundbreaking) applications such as e-mail, web browsers, social media platforms and multifunction smartphones. Some lawmakers proposed taxing emails to compensate for lost postal service revenue, but wiser heads prevailed. Through the development of TCP/IP—an Internet protocol suite, or the “handshake” between otherwise unconnected computers around the world—what we now call the Internet migrated from a mysterious military, then university, research tool to a universal application that today is used by an estimated five billion people around the world. Similarly, 6.8 billion people now have access to smartphones of one kind or another.

But as of today, crypto remains mostly in the playpen of tech bros (and they are mostly bros). Only an estimated 300 million people (3.75 percent of the world’s population of eight billion) have used crypto. For crypto to thrive, the ranking needs to be made easier to use by people who don’t know how to navigate a command line or care about the math behind a cryptographic hash.

To this end, many of the products and innovations now coming out of the industry are aimed at demystifying crypto and making it more accessible to the “norms” outside of the highly technical world it has represented until now. Just as AOL moved access to the Internet from UNIX programmers to grandma and grandpa, crypto, DeFi (decentralized finance) and Web 3.0 must also make their inevitable migration to easy and widespread consumer use to succeed.

Regulatory interference

Government leaders as diverse and otherwise opposed as US SEC Chairman Gary Gensler, European Central Bank President Christine Lagarde, US Treasury Secretary Janet Yellen, former UK Prime Minister Boris Johnson and former US President Donald Trump have each condemned crypto as a fraud that requires significant regulation and state supervision, if not an outright ban on use. These criticisms always fail to mention that the amount of fraudulent and criminal transactions that happen with cash or via wire transfers dwarfs any such illegal use in crypto.

China has notoriously taken the lead here, banning for all practical purposes the use of Bitcoin in the formal economy while, via the People’s Bank of China, issuing a digital yuan that is ultimately controlled and overseen by the Chinese Communist Party. Whether issued by China, the US or the EU, government-sponsored central bank-issued digital currencies (CBDCs), while having many viable use cases, are also a potential tool for the surveillance state. If left unchecked, regulation will facilitate the government’s total information awareness (and ultimate control) of CBDCs and thus all aspects of citizens’ lives. Bitcoin and Ethereum provide alternatives to enable financial privacy and autonomy.

In the US, the US Treasury Department’s Office of Foreign Assets Control (OFAC) recently sanctioned the use of Tornado Cash, “a decentralized and non-custodial privacy solution built on Ethereum” that allows users to anonymize transactions they don’t want to have made. visible to anyone looking at the details publicly available on the transparent blockchain. There are many legitimate reasons for individuals and business users to keep the details of their financial transactions private. No one wants medical expenses, political or charitable contributions, supplier or customer data and other expenses visible to the whole world. Notably, this is the first time that OFAC’s economic crime sanctions (normally targeting terrorists, traffickers, criminal networks, and the like) have been deployed against lines of computer code rather than individuals or legal entities, and the legality will almost certainly be challenged.

A large-scale regulatory confrontation is imminent in the US, and it is entirely possible that regulations will eventually be issued that make the use of non-CBDC coins illegal or so burdened with regulations that they are of little practical use.

Unforeseen innovation

Lack of adoption and regulatory interference are well-known and often discussed risks for crypto. What is considered less often is pure technology risk. This means that the same relentless advances in technology that enabled secure distributed networks, applications for blockchain technology, and cryptographic keys may be their undoing. For example, advances in quantum computing may one day render the “unbreakable” cryptographic private keys that secure digital wallets vulnerable and thus obsolete. Unlike regular computer code, qubits – quantum bits – are non-binary (no, not that kind) and can be both 0 and 1 at the same time or oscillate between them. This could eventually allow calculations at a speed and complexity that are impossible today.

It is not for me to predict what these unforeseen innovations will be—I write as a strategist, not a technologist—but to remind us that technology advances and materializes in unpredictable, unexpected, and seemingly sudden ways. Anyone remember Nokia and Blackberry?

We are in the midst of a revolution that has the potential to transform everything from finance and economics to government and politics, and even democracy itself. What advocates see as potential benefits are the very things that are seen as threats and dangers by government regimes. Many revolutions launched with great zeal and enthusiasm are not ultimately successful and end up in the dustbin of history. The crypto revolution should be supported by anyone who cares about things like financial decentralization and the removal of control from “too big to fail” banks, transaction anonymity and immutability, the right to own one’s data, online privacy and individual sovereignty.

Only time will tell if crypto survives these inevitable challenges.

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