(Not an actual photo from the hearing)
TLDR;
Last week’s congressional hearing on crypto marked a big shift in sentiment: The committee seemed more open to crypto and actually wanted to learn more. Here are some key takeaways from it:
Crypto is seen as a threat: The word ‘risk’ was used 89 times. It is seen as a risk not only to consumers who might lose their shirt, but also to established institutions and the sovereignty of the US dollar as the global reserve currency.
Crypto is seen as an opportunity: Faster payments, instantaneous settlements, and lower transaction fees for remittances were cited as top opportunities for cryptocurrencies. Crypto can further strengthen America’s position as a tech leader as long as we don’t stifle the innovation.
Financial systems need to compete on features, not on history: Internet enabled dollars allow us to “compete on features not just a a post World War II monetary system.”
Web 3.0 is about digital ownership: Web 1.0 = read only, Web 2.0 = write and interact, Web 3.0 = ability to own the actual network.
Scrutiny on big tech, especially Meta: Crypto is positioned as providing freedom from big tech. There was a whole series of questions on Meta’s Novi project.
Regulation is coming: Not a question of if, but when and how. For example, required insurance on stablecoin issuers, and uniformity and standardized minimum protections for consumers.
Environmental impact: Current proof of work consumes tons of energy via all the computations needed, and there are hopes new consensus mechanisms like proof of stake, etc can reduce that.
Crypto is open 24/7: Unlike typical financial markets, that have overnight / weekend / holiday risk, one of the innovative properties of cryptocurrency markets are 24/7 risk monitoring.
Stay tuned for tomorrow’s (Dec 14th) hearing “Stablecoins: How do they work, how are they used, and what are their risks?" which sounds like it will be more contentious.
Up until recently, the crypto space has been a microcosm of parenting. Parents (government) feel frustrated because they lack control and understanding of one of their younger kids (Crypto) and keep comparing them to the older kid (traditional financial system). The older kid keeps complaining to the parents that life isn’t fair and that the younger kid isn’t following the rules.
Last Wednesday’s landmark congressional hearing felt like a turning point. For once, there was a collaborative tone and it was actually informative. It was a shift from ‘get off my lawn!’ to ‘let’s chat on the porch’. For example, the hearing opened with the statement that most people on the panel “don’t understand crypto enough to have a serious debate” and they were gathered there to listen, learn, and ask questions. Where 6 top crypto execs (Circle, FTX, Bitfury, Paxos, Stellar Development and Coinbase) gave a crash course in crypto by answering questions on its potential and risks. It also marked a turning point in my mind from ‘this is a fad’ to ‘this is growing too big to ignore.’
It’s not hard to see why it’s too big to ignore: “Much like the adoption curve of the internet in the 1990s, we are seeing dramatic advancements in crypto participation. There are more than 220 million crypto holders globally. And around 16% of Americans have invested in, traded or used cryptocurrency. Total crypto market capitalization at the end of the third quarter was over $2 trillion, up from 800 billion, as of the end of 2020 Coinbase’s platform is powering the crypto economy.”
I listened to most of the 4 hour session (ok maybe just half…) so you don't have to. Watch this supercut for other highlights. Here are more details on some of the themes I mentioned in the TLDR above.
Crypto is seen as a threat:
Money is power, and the US dollar is the top reserve currency of the world. Crypto and specifically stablecoins (crypto pegged to the value of another asset) is seen as a real threat to change that. Brian Brooks, CEO of Bitfurry, had an interesting point:
“Dollars as a share of the European Central Bank, the Japanese Central Bank, et cetera, has shrunk from 80 plus percent to more like 60 plus percent in a short amount of time. What that tells me is that in the future with the rise of China and other major economies, the US dollar can’t take its primacy for granted.”
Another threat is that people are purely speculating in crypto as a ‘get rich quick’ scheme reinforced by the 🚀 🌕 memes, with little understanding of what they are investing in. Jeremey Allaire, CEO of stablecoin company Circle had this to say:
“I would agree with the fact that there are passer buys and then there are people who are actively building and who are very close to the technical innovation and I think like investments in technology companies, or in other businesses that we see in the stock market, you have people who are investing, because they think it's a business or a product that might go up, they may not understand the details of a given pharmaceutical company's science, but they believe that perhaps it's an area of innovation and they want to invest in it. And so I do agree that there is that distinction, but I think, it's certainly incumbent in all of the industry participants to ensure that there's great amount of disclosure, financial literacy around these products.”
A common narrative on crypto is it is used for nefarious activities, which there is no denying. There are many sensational stories like Bitcoin’s being widely used with Silk Road to buy and sell drugs, or hackers demand Bitcoin for ransom payments. You know what else is used for nefarious activities? Cash ::🎤 drop::
But Crypto is also seen as an opportunity:
Crypto can create an open internet model for all people in the world, it's potentially easier, cheaper, creates an open market, it's transparent, and ultimately less friction in the marketplace.
Crypto can further establish America as a superpower. However, if the government stifle innovation and over-regulates, Crypto will grow overseas rather than in the US. See England’s Red Flag Act, which required 3 people to use a car, including one person to walk in front of the car with a red flag...wtf. And Skype, which was banned early on in many countries (not for its bad UI, but for regulatory reasons).
From a politician POV, there seems to be bipartisan support, with value for both sides. For democrats, this means serving the unbanked, as well as people of color. “18% of all Americans and 40% of black adults and 50% of adults without a high school degree are unbanked or underbanked. For republicans, crypto can be a great narrative for free markets, small government, and innovation.
Brace yourselves, regulation is coming:
The biggest question mark is how do your regulate and enforce laws on something that is decentralized? Well we have to keep in mind not everything is truly decentralized. Even a recent AWS outage took out some decentralized exchanges. Coinbase is a great example of ‘centralized finance’ aka CeFI. Having a company that is running things conveniently gives the government a ‘throat to choke’. We should expect a base line of protections for customers coming down the pipeline, and more regulation on stablecoins and decentralized exchanges.
Web 3.0 is about ownership:
To understand where this is headed, it’s important to understand where we came from.
Web 1.0: Who remembers the early days of dial up and surfing the web? Firing up AOL and having access to endless digital articles, some basic chat , and messaging boards. That was about it. More interesting experiences (like Doom!) required installing software. That was Web 1.0.
Web 2.0: This was when things got interesting. You could actually run an entire app in your browser, without installing anything. You could actually interact with the web and make things happen. This was also the start of centralization of the internet and the rise of big tech co’s like FB, Twitter, Google.
Web 3.0: The promise of Web 3.0 is decentralization and ownership. Trust can be spread across this open network and unnecessary friction and middlemen can be removed. I’ll write more about examples of this and how decentralized finance can be the first big consumer application of crypto that everyone can benefit from. Another quote from Mr. Brooks
“What makes web 3.0 different is the ability to own the actual network. And that’s what crypto assets themselves represent, is an ownership stake in an underlying network. So, when you hear people talk about, for example, layer-1 tokens, what they mean is, this is your reward for providing the ledger maintenance services, the computing power to the network, that on web 1.0 and two was done by Google, right? So, now people in my hometown of Pueblo, Colorado can actually own the Ethereum network, but they can’t own the internet, that’s owned by Google and a few other companies. That’s what the project of crypto is all about, is allowing people to directly own the networks that have native assets that are supporting it. And that’s the nature of decentralization where the token holders are the people who control the asset, not Google. So, the concept is that you have application layer tokens, and you have protocol layer tokens. So, if I’m an owner of Bitcoin, let’s say that I’m a miner of Bitcoin, somebody who actually creates Bitcoin. The Bitcoin is the reward I receive for doing the work to keep the network operational. And that allows me to own a piece of the Bitcoin blockchain. Or take Ethereum, which is easier to understand, the Ether token represents an ownership stake in the network. But on top of that network are all kinds of apps that get built on the network, much like the apps on your phone depend on the underlying network existing that lets the phone operate.”
That’s all for now, curious to see how the Stablecoin hearing contrasts to this. Will share more thoughts on that and other things I learn along the way