There are few analogies between the hearings in the U.S. Senate and no rule fighting, but what happened on October 11, 2018, in the Senate Committee on Banking, Housing, and Urban Development, was very much like a spectacular sporting event.
The senators acted as arbitrators in the thematic duel “Exploring the Cryptocurrency and Blockchain Ecosystem.” Two opposing sides with diametrically opposite views on the problem were in different corners of the ring. On the defending side of the crypto industry was Peter Van Valkenburgh, director of research at the Coin Center, a balanced and unemotional speaker. The opponent was the eccentric "Doctor Doom," professor of economics at New York University Nouriel Roubini known for his irreconcilable attitude to the digital industry and a series of violent tweets on this topic, where he actually beat supporters of cryptocurrency and blockchain. Nouriel Roubini has earned a reputation as an expert in economics, mainly due to the prediction of the collapse of the real estate market in 2008.
Chairman Mike Crapo, senator from Idaho, opened the meeting with a statement about the uniqueness of Bitcoin’s status as the first digital asset in history, but also highlighted the negative aspects of the virtual currency, including high volatility and regulatory issues.
Sherrod Brown from Ohio supported his colleague with a strong observation that despite the tenth anniversary of the existence of Bitcoin, the crypto space is still replete with fraudulent schemes, while there are no tangible benefits from virtual currencies.
Arguments of the Parties
The Senate Committee heard the experts.
"Doctor Doom" prepared a somewhat confusing report of almost 37 pages. In addition to the mass of derogatory terms (it is likely that the senators first heard such a definition as a “shitcoin”), Rubini operated on several theses, repeating them like a mantra. He argued that crypto assets simply crumble after a sharp price decline compared to the end of 2017, 80 percent of ICOs are nothing but scams, and digital coins will never be a valuable currency because they cannot serve as a means of payment or preservation of value.
“Instead, 99.9 percent all cryptocurrencies have no backing whatsoever of any sort and have no intrinsic value of any sort; and even the so called “stable coins” have only partial backing at best with true U.S. dollars reserves or, like Tether, most likely no backing at all as there has never been a proper audit of their accounts,” said Nouriel Roubini.
The statement about the priority of centralized payment systems over blockchain dominated. “Doctor Doom” repeated several times that the Bitcoin network's throughput is only five transactions per second, while Visa can process up to 25,000. Other attacks were that only criminals and terrorists use Bitcoin for transactions, and mining is generally a “is a huge harm to the environment.” And the revolution that is taking place in the field of financial services has nothing to do with blockchain.
Finally, the distributed ledgers also received their series of hits. According to the professor, this is nothing more than average databases, and they have nothing to do with blockchain.
Peter Van Valkenburgh
Immediately after the insane accusations of Roubini, the presentation of Peter Van Valkenburgh seemed very balanced. The crypto defender decided not to overload the senators and devoted most of his time to explain what Bitcoin is, what it actually does, and why it is revolutionary. “Unlike cash, which only works face-to-face, Bitcoin is the world's first globally accessible public money. Is it perfect? No. Neither was email when it was invented in 1972,” said Van Valkenburgh.
“The mere fact that it works without trusted intermediaries is amazing. It’s a computer science breakthrough, and it will be as significant for freedom, prosperity, and human flourishing, as the birth of the Internet.” Further on, Van Valkenburgh said that Bitcoin should be accepted, as its infrastructure is becoming more powerful and that blockchain may not be ready to answer all the questions raised, but this is "our best hope."
The whole sphere of human interactions is permeated by state or corporate checkpoints. Just as the Internet had removed such checkpoints from the communication sphere, the prospect of blockchain is to do away with the centralized points of failure that are inherent today in many aspects of interaction, for example, in cash transaction systems.
Giant private corporations are becoming increasingly vulnerable from a security point of view as banks and personal databases are subject to the risks of hacker attacks. The development of IoT makes such problems even more serious. According to Van Valkenburgh, no global infrastructure should be fully centralized and have a single vulnerable node. To eliminate such risks, a “gradual decentralization” policy is needed.
Questions for the Experts
Mike Crapo was the first to ask about the prospects for cryptographic markets in the near future and about the necessary conditions for their stabilization.
Van Valkenburgh: Volatility is raging due to the markets having a hard time with finding a level, a fair price for something very new and disruptive. Institutional money has already brought some sense of stability, however, as it’s been beneficial to have Commodity Futures Trading Commission (CFTC) regulated crypto derivatives enter the market, but it would be even better if the SEC allows the trading of crypto-based exchange-traded funds. Having a nationally chartered bank for crypto custody would bring even more rationality to the market.
Roubini: Cryptocurrencies are neither decentralized, nor scalable, nor secure. The arguments are widespread oligopolies, low transaction throughput, lack of investor protection.
Michael Crapo pressed on, asking what prevents the more rapid development of applications of decentralized computing technologies.
Van Valkenburgh: Emails first appeared in 1972 and took a couple of decades before going mainstream.
Roubini: No government or bank would want to use a public blockchain, because it is too risky. The idea of decentralization is never going to fly.
Senator Brown asked if there are blockchain based applications for global use, and asked him to describe the portrait of a typical crypto investor.
Roubini: Blockchain is a useless technology. Payment systems such as Paypal, the Chinese WeChat Pay, and African M-PESA are the real revolutions. Cryptosystems are only losing users and transactions. The Internet had a billion users after a decade in existence, while cryptocurrencies command the following of just 22 million.
Van Valkenburgh: A typical crypto investor is a tech-savvy person, but this is not the most important question for today. The main question is how to protect crypto investors. The FinCEN (financial crime-fighting unit) is doing a lot in this direction. There is a lack of a federal licensing system. The government is obliged to fix the problem as soon as possible.
Senator John Kennedy from Louisiana asked for evidence that the world has become more advanced after the emergence of blockchain and digital currencies.
Van Valkenburgh: In Afghanistan, a country where women are not serviced by banks and do not have personal funds that are not controlled by male relatives, it was only thanks to cryptocurrencies that the financial independence of women became possible.
Roubini: There is nothing good in blockchain or cryptocurrencies. Bitcoin is far from a decentralized payment system with a throughput of five transactions per second. And the concentration of miners in Russia, China, Georgia, and Belarus harbors the threat of the oligopolistic domination of these countries and further blackmailing of the United States.
Van Valkenburgh: Payment systems such as WeChat Pay are overly centralized and dependent on the state. All personal data is under the control of the government and is under constant threat. This is a tool for totalitarianism.
Senator Doug Jones of Alabama was concerned about how criminals and rogue countries could use blockchain-based decentralization of community platforms for their own purposes.
Van Valkenburgh: Every decent technology, especially in the early stages of development, is exploited by shadowy individuals. In fact, I think if criminals aren’t using your technology, your technology is not worth anything. U.S. law enforcement agencies already have enough skills to track suspicious transactions based on open registries.
Roubini: Anonymity is evil.
Senator Elizabeth Warren (Massachusetts) asked how the theft of a total of $1.1 billion became possible in the first half of 2018, and whether it was possible to prevent fraud on the part of 80 percent of the projects at the initial sale of tokens.
Van Valkenburgh: Most of the stolen funds were in obscure altcoins owned by foreign exchanges, which were not able to expand their security systems sufficiently. As for the ICOs, reliable protection against fraud can be achieved through the identification of primary tokens with securities and the appropriate observance of all the rules for handling securities.
Chris Van Hollen from Maryland directly addressed Roubini with a question about the general state and immediate prospects for the development of the U.S. economy.
Roubini: There are few reasons for optimism, as the growth of the U.S. economy will stop by 2020.
At the end of the hearings, Senator Catherine Cortez Masto asked if there were any provisions in the Bitcoin protocol that allowed for tracking payments in the shadow economy, such as human trafficking, drug trafficking, or money laundering.
Van Valkenburgh: The responsibility for this lies with the developers of the blockchain platforms and law enforcement agencies. But police activities will not yield results unless a globally ratified set of rules is established. A common approach and a “know your customer” (KYC) policy are needed.
Roubini: No corporation or government would want to be on a public ledger. This is all nonsense. There will be no successful applications for blockchain technology.
At this, Chairman Mike Crapo suggested that the senators postpone the hearing and prepare new questions for the experts during the week after a deeper dive into the topic under discussion.
In general, the behavior and arguments of Peter Van Valkenburgh, director of research at the Coin Center, were met more favorably than the wordy, emotional escapades of "Doctor Doom."
To be continued . . .