Regulating the unregulated cryptocurrency market – Harvard Gazette


Is cryptocurrency the future of global banking and commerce, or a fragmented payment and investment vehicle favored by crooks and speculators, criminal organizations, and any person or entity excluded from Western banking systems, like North Korea?

The jury is still out. One thing that is clear, however, is that the cryptocurrency market continues to grow as its popularity has become more mainstream since 2019. Even many once-skeptical institutional investors have returned after seeing some of the mind-boggling returns. In January 2019, a Bitcoin traded at $ 3,441; this week it hit $ 43,136.

But this success can come at a price. Calls to curb the industry are at their peak. This month, China, one of the world’s largest digital currency markets, banned all crypto-related transactions. It banned their trading in 2019. The US Treasury announced this week that it would sanction a cryptocurrency exchange for the first time for facilitating ransomware payments. New tax and trade rules for the industry are included in legislation that Congress must vote on by the end of the week. The United States Securities and Exchange Commission is also pushing for stricter enforcement. SEC Chairman Gary Gensler said cryptocurrency is an asset class “prone to fraud, scams and abuse” and investors lack sufficient regulatory protection against them. swarms that engage in crypto-finance, issuance, trading, and lending.

Scott Duke Kominers ’09, AM ’10, Ph.D. ’11, is the MBA Class of 1960 Associate Professor of Business Administration at Harvard Business School and an affiliate faculty of the Harvard Department of Economics and the Harvard Center of Mathematical Sciences and Applications. He advises crypto companies and projects, including Facebook’s digital wallet and payments system, and owns cryptocurrency and other crypto assets. The interview has been edited for clarity and length.

GAZETTE: There are thousands of different cryptocurrencies, but no consensus on the exact number. The range is between 5,000 and 12,000, valued at around $ 2,000 billion. What does the landscape look like today?

KOMINERS: These numbers seem huge, but there are actually many, many more than that, as many crypto products are not currencies and many cryptocurrencies are too small to be part of traditional exchanges. Many crypto products are actually just tokens. Sometimes these are representative of ownership in decentralized, autonomous organizations, which are organizations that share governance rights and come back to a committee of participants by giving them tokens – much like shares. There are project-specific tokens used in specific online games or among individual communities. There are NFTs, which are unique, non-fungible tokens that have been used to represent ownership of things like digital artwork. Tons of these are hit daily at this point. So there is a very large landscape. The pure currency aspect is a huge market in itself, but a drop in the bucket of total crypto and blockchain technology applications today.

GAZETTE: What is the attraction for investors? Is it just the mind-blowing returns or is there more to it?

KOMINERS: Some people got interested in cryptocurrency because of the ROIs, no doubt. But there are also real and practical advantages in infrastructure and technology. You start to see countries ready to receive officially recognized crypto payments. And people are wondering if crypto technology can be used to provide government assistance. This is because when it works, cryptography is frictionless and thus creates a much more efficient way to transfer and share value between people. And, therefore, there is a real opportunity to use crypto for large scale payments, as well as in things like small business payment processing. In addition, there is a great opportunity to improve financial inclusion, by providing secure payment networks and cross-border transfers to places that do not otherwise have well-structured consumer financial systems.

So while some people are interested in the short to medium term investment opportunity, I think a lot of the investment that we have seen flowing in from the institutional and venture capital side is due to the fact that ‘there are real and valuable technologies that are being built on crypto backbones that can do things that we have never been able to do before in the markets.

GAZETTE: The SEC chairman called it an asset class “rife with fraud, scams and abuse.” Does this industry operate in a “Wild West” atmosphere without rules, as he suggested?

KOMINERS: I haven’t read Gensler’s entire remarks, so I can’t comment explicitly on their overall perspective, but I can comment on some of the individual things you mention. It is clear that this space needs a lot more consumer protection, and we are starting to see it. Right now, if a hacker gains access to your crypto wallet, they can empty it and you might have no recourse. But the new waves of wallet technology and crypto exchanges are seriously thinking about just what consumers expect from banking products and stock trading accounts. They are trying to create more security and protections at the consumer interface level.

And then, of course, you also need regulation to prevent financial crime and scams just like we have done in other areas of the financial services industry.

GAZETTE: Some lawmakers have pointed out that GameStop’s stock market frenzy in early 2021 was analogous to the crypto market, saying most ordinary investors have gotten carried away by the hype and do not fully understand the risks they are taking.

KOMINERS: In a sense, trading GameStop memes is very analogous to trading Dogecoin memes – part of the consumer confusion around the idea that financial assets could lose value. A lot of people have lost a lot of money in GameStop and Dogecoin starts and crashes. They were on this platform that felt like they were in a video game. And so, I think in those ways it’s analogous. But when you get to the pieces of technological infrastructure, it’s very different.

Cryptocurrency trading is now a lot like stock trading – you have a brokerage account in a stock exchange and you trade on your Robinhood platform or something like that. But a lot of these other apps where the infrastructure is very, very new and the platforms are very, very new, they’re not heavily protected.

Consumers and investors alike need to understand that these are high variance assets. I think we’ll see more regulation around messaging and communication, but then there are some fundamental questions as well. For example, one of the regulatory conversations is about stablecoins. These are crypto assets that hold nominally fixed values ​​because they are designed to be used only to move money from one place to another in a fixed denomination. They are generally backed by reserves in the same way that banks back their loans. But there are questions about how big the reserve should be. If everyone has simultaneously decided to want to divest themselves, do they have the reserves to support them? I expect to see regulations on this.

GAZETTE: Besides fighting regulations, what are the industry’s other challenges?

KOMINERS: The first is that some people are not currently paying taxes on their crypto income. A second is that many people who would like to pay taxes on their crypto have absolutely no idea how to do it. We don’t have clear categories for tax purposes of what all these different assets are, so it’s extremely complicated to figure out what direct income is? What is surplus value? When do they accumulate? It is therefore essential to organize the tax treatment of all these assets and then, of course, to regulate the payment of the tax.

The other thing is the environment: many of the most popular crypto-technologies today require huge amounts of energy to function. And so, we’re going to start to see government leadership and regulation lead to an evolution towards more environmentally sustainable versions of this technology.

Mining is the colloquial word that has been given to solve a very difficult crypto problem as a means of verifying transactions. Bitcoin and many other very old companies use technology where you have to prove that you have solved a very difficult math problem to establish which is the next block. And it is the resolution of these computational problems that takes all the energy. Newer blockchains use much less energy consuming means of validating transactions. And so, I guess the way we’re going to move away from really harmful cryptocurrency transactions is through continual improvements in technology, and through regulation and market forces that push towards much more efficient technologies.

GAZETTE: If new regulations are on the way, what would be the best or worst scenarios for the industry?

KOMINERS: I don’t think it’s a question of nothing against a lot. The real question is to what extent regulators understand that crypto is a different type of product and technological infrastructure than anything they have regulated before. The worst-case scenario would be to treat it as historical financial products or as historical technology platforms without thinking about the differences between crypto, both in terms of use cases and in terms of the underlying technology.

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