Hi, it’s Ben from the Tony Blair Institute. It’s been a while, but normal service is set to resume. Some things have been in store, including the latest round of Progress Fellows, which should should all apply for. But expect some upcoming musings on the promise of deep tech, the fight against tech-nationalism and much more in the coming months (as well as accompanying DALL-E 2 imagery 🤯). First up though is a guest post from Jess Northend who is leading on Web3 work (on which I have just been in Tokyo speaking about) on what might be in store for crypto. Read on to find out whether you should buy the dip…
Over the past few months few areas of technology have moved faster than crypto. The huge crash has resulted in around $1 trillion being wiped from crypto’s overall market cap. The stablecoin Terra de-pegged from the US dollar, following warnings from those who have long warned about the risks of stablecoins. And regulatory moves around the world have dampened the libertarian fever that attracted many of crypto’s early adopters.
Given this, the hype around crypto is noticeably quieter, even amongst its most ardent supporters.
Yet many are quietly sitting on their holdings, awaiting a hoped-for surge, as inflationary pressures ramp up around the globe. Assuming the bounce back comes, what do the rest of us, who aren’t the regulators and crypto enthusiasts, need to know about this space?
1. New slang
For the novice or casual user, the crypto ecosystem the language can be alien—full of jargon and unfamiliar acronyms. HODL? Rekt? Even beyond the slang, the lexicon used to describe the different assets in this market is yet to be widely understood. The term ‘digital assets’ is still to be commonly defined across regulatory bodies internationally—does it include all virtual currencies that use DLTs, as the Lummis-Gillibrand bill in the US proposes? What about virtual currencies that do not use this technology? Does it include virtual currencies backed by traditional financial assets as well as those backed by digital assets with intrinsic value? This definition will have massive implications for how crypto is regulated and taxed.
Meanwhile, the debate is still live about how to class ‘unbacked cryptocurrencies’ like Bitcoin, ‘stablecoins’, ‘Central Bank Digital Currencies’ (CBDCs) and emerging forms like City Coins. Indeed, even the language relating to the underlying technology varies between ‘Distributed Ledger Technologies’ (DLTs) or ‘the blockchain’ (in reality, the blockchain is one example of broader DLTs). These definitions matter in figuring out how we regulate this landscape, but it also matters for citizens. While dabbling in crypto is now mainstream, the variety of crypto-related retail financial products are increasing in number and complexity, and as people navigate this new financial landscape, a clear language is sorely needed to ensure consumers are protected appropriately. For example, regulatory regimes vary drastically depending on whether an asset is defined as a commodity or a security.
2. The People’s Republic v Bitcoin Maximalism
Across the world, there are now three paths available for the management of crypto; a primary point of divergence is the role of these new asset forms in financial markets. China’s decision to effectively ban crypto-mining and exchange sits at one extreme while, on the other, countries such as El Salvador and the Central African Republic are adopting ‘Bitcoin Maximalism’ at scale, giving the cryptocurrency status as a full legal tender. (It’s worth noting, many citizens in El Salvador have abandoned Bitcoin – downloading the country’s new digital wallet to get an initial $30 sign-up incentive, before abandoning it. It also looks likely that the country could default on its sovereign debt in 2023). Many other governments are now trying to find a pragmatic solution between these two extremes – regulating certain use cases of the technology, including exposure within mainstream financial services. We’re about to see even more pronounced splits in the way crypto is adopted and regulated across the globe.
3. It’s all energy
The crypto industry’s emissions rate is attracting increasing attention and concern. The EU sought (unsuccessfully) to ban the most energy-intensive forms of crypto mining, while China has banned mining outright within the country. Yet, these kinds of interventions don’t solve the problem, with crypto miners choosing to move to geographies with less regulatory oversight and cheaper energy, rather than shut down or fundamentally change their operations. Governments should better enable the use of low-energy mining protocols, support other energy efficiency measures, increase the use of clean-energy in crypto mining, and address carbon offsets. We’ll be publishing more work on this over the coming weeks.
4. Making stablecoins stable
In theory, stablecoins are designed to be relatively stable. But, as the crash of Terra, an algorithmic stablecoin, has highlighted in recent weeks, this is not necessarily the case. The currency lost its peg to the dollar and, as of mid-May 2022, could be purchased for $0.58. Tether, the world’s largest stablecoin, also dropped below $1. Governments are trying to move quickly to respond. The UK Government already had plans afoot to bring stablecoins under the existing regulatory umbrella, while EU lawmakers tussle over whether to force stablecoin issuers to operate beneath a maximum transaction cap, or instead leave oversight to the European Banking Authority. In the US, the multiple regulators operating in this space mean that progress has been slow. Yet, stablecoin risk is moving up the political agenda, and the heat is on for policymakers to quickly bring this form of crypto-asset under a regulatory umbrella – thereby favouring stability over crypto’s ideals of decentralisation, freedom and permissionless use.
5. What new, socially valuable stuff can we actually do with DLTs?
Beyond all the crypto hype sits the most important question: what can we actually do more effectively using the Distributed Ledger Technologies (such as blockchains) that underpin crypto? These technologies aim to create a secure, tamper-proof log of transactions and activity. Proponents float the idea of using DLTs in registering land transactions, logging educational and professional attainment, and in supporting the back end for financial transactions.
Yet critics argue that DLTs – and their application to crypto – are a technology in search of a problem.
The takeaway from all this? There is pro-social opportunity to use the technology behind crypto to make transactions and record keeping more efficient, in managing supply chains and in financial services, for example, but innovators and policy makers will need to work hard to find which applications of the technology to get excited about - and those that instead deserve heavy regulatory scrutiny.
One thing is clear – the crypto hope that a decentralised technology will lead to decentralised markets, and a new economic model that operates beyond governments, is slipping away.
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For more on all things crypto, take a look at our full paper ‘Asset to Risk', which gives an overview of how policy should adapt to the opportunities and challenges presented by crypto.