Crypto is Not Innovation

TL/DR: Crypto’s innovation to date has been avoidance of existing regulatory authority and legal construct. Other than that, it is no different than existing financial markets. And that difference is eroding with bankruptcies from FTX, Celsius, Voyager, and BlockFi that are harming retail customers. The regulators are coming.

What is Innovation?

Computers: A machine that adds number faster than using your fingers. It’s an innovation and useful if you want to watch the British people make cakes while waiting for the dentist.

Indoor Plumbing: A method to eliminate having to throw your poop out the window. A true innovation which is very helpful, and a major relief for people using sidewalks.

Blockchain and crypto: A way of keeping track of transactions where the responsibility of tracking said transactions can be shared. It’s not an innovation.

Let’s take this apart piece by piece by looking at all of the “innovation” claimed by crypto.

Claim: Unlike tradfi, there is no central authority in crypto and the system is “trustless”.

False.

1.    In tradfi there is also no central authority. In the US I can choose from some 4,000+ banks, or innumerable hedge funds, annuities, asset managers, etc., or my own mattress to keep my money. I can also choose to keep my funds in any of 180 currencies ranging from Albanian lek to Zimbabwean dollars.

2.    In crypto I am merely swapping my trust in some set of the above banks/currencies for some other set of companies/individuals who provide the data storage and servers to maintain a blockchain of transactions in some currency with funny name like Bitcoin or Shiba Inu. I am still trusting someone.

3.    The systems in this respect are identical. (If I were to go all math geeky I would say the two categories are isomorphic, although not probably not monic or epic, although maybe someone else more geeky than I can opine on that.)

Claim: Unlike tradfi, crypto transactions are public.

False.

1.    There are plenty of public transactions, such as, the aptly named, public stock market.

2.    There’s a great deal of information publicly available about crypto transactions, but this can also be obfuscated using mixers or other methods. So I’m not sure what “public” means here. Is there a list of transactions everyone can see? Yes. Is it useful transparency that is missing in tradfi? Not that I know of, but maybe if you are the police looking for stolen money and don't want to go to the trouble of international warrants?

3.    Why do I want my transactions to be public?

Claim: Unlike tradfi, crypto transactions and contracts are immutable.

False.

1.    Last time I sent money to my mother-in-law she got the money and I no longer had it. Seems pretty immutable to me.

2.    There are mechanisms to make blockchain contracts modifiable. (I am hesitant to call a program a “smart contract”.) There are “diamonds” in Ethereum, moving modifiable code off-chain, and, at the most drastic, hard forking a protocol to a new version to reverse transactions or change code as was done after the infamous DAO hack.

Claim: Unlike tradfi, crypto lets me invest in new things like NFTs or stake my funds for returns.

False.

1.    You want to take risk and invest in weird stuff? Tradfi derivatives and exotic options and swaps for you. Invest in the future price of seashells from the seashore? Sure, somebody will take your bet.

2.    Do you want to invest in something where the value is completely made up? You can put your money into a startup company. Or buy stock in GameStop where the price had nothing to do with the value of the company.

3.    Do you want put your money somewhere will it will be lent out for interest to someone else? That’s called a bank account.

4.    Do you want to own a piece of art? You can, just, well, buy art. You can even buy fractional interest in art. Do you want to not have to take possession of the art and have it stored somewhere? That totally exists.

Claim: Unlike tradfi, crypto lets me send money across borders.

False.

1.    You can send money around the world today. All digital.

Claim: Fine, whatever, but tradfi puts all kinds of shackles on me. I don’t want to pay taxes on my transactions; my cash isn’t something I want reported to the government; I want to send money to people who are sanctioned by my government; my transaction would be considered illegal by my country; I want to offer financial products that are not covered by laws around disclosures or customer protection.

True.

1.    Crypto lets you do all of those things.

2.    Until, inevitably, it doesn’t. Kraken just got fined for not obeying money laundering sanctions. Tornado and https://www.linkedin.com/redir/general-malware-page?url=Blender%2eio were sanctioned by OFAC earlier this year. The bankruptcies of Celsius, Voyager, FTX, and BlockFi have brought regulatory and government scrutiny and will undoubtedly result in regulation specifically aimed at crypto.

The innovation in crypto has been to invent a parallel banking system that is not regulated. That’s held true because those who profit from it have made arguments that tokens are not stocks and that blockchain is not a shared database. And those who have not profited have not been a large, politically connected group.

Now that there is harm aplenty, the parallel banking system will be transformed into the existing banking system. For both systems there’s plenty of harm still to go around. But any regulatory distinctions between the two will be erased.