Cryptocurrencies, Public Goods & the State
Late last year, I and a colleague from HKS were meeting with a VC I’d gotten to know in San Francisco. As an opening salvo in the conversation, the VC asked us “aren’t you worried about a cryptocurrency making the US dollar obsolete?”
I replied that if that such a threat became likely, the federal government might simply make cryptocurrencies illegal. So no, I wasn’t that worried.
The entrepreneur was incredulous — how could the government possibly stand in the way of something so broad and valuable? And, logistically, how could they actually stop anyone? My colleague, who has a few years on me and has served in senior government roles, chuckled. He remarked that the private ownership of gold bullion had been illegal in his lifetime.
My colleague’s point highlights a blind spot for the larger cryptocurrency (and possibly, the broader blockchain) community. In the excitement surrounding the rapid rise of cryptocurrencies and other blockchain technologies, the focus on decentralization, disintermediation and private benefit has come at the expense of a conversation about the enormous “public goods” the present financial system offers and the power of the state — on behalf of citizens — to protect the provision of said goods.
If cryptocurrencies are going to become important, the community backing them needs to spend time thinking about what systems need emerge around the technology that will provide at least some of the critical public goods created by the status quo. This is not a defense of the current financial and banking system. The status quo comes at great cost — high rents paid to financial intermediary institutions along with other various and protected oligarchies. However, it also provides benefits in the form of public goods. It generates and sustains core functions of the broader state and economy such as tools to capture tax revenues, prevent money laundering and terrorism financing, capacity to control the money supply, protect consumers and investors, and ensure market integrity and even (a degree of) financial stability.
In a world of cryptocurrencies, who will provide these public goods? This question arose in a conversation with Gary Gensler, the former Chair of the Commodity Futures Trading Commission in the Obama administration and current Senior Lecturer at MIT during a talk he gave at digital HKS here at the Harvard Kennedy School. Gensler identified some of the key features, challenges, and potential priorities for blockchain governance, and in one part of the discussion, he zoomed in on issue areas where public policy makers have urgent questions for cryptocurrency’s role:
- complying with the tax code;
- preventing money laundering;
- providing stability and market integrity;
- protecting consumers and investors.
There’s another way to read this list — as a catalogue of those public goods which, through hundreds of years of government, business, and democratic processes, we’ve agreed are priorities and values our finance and currency systems should reflect. But it is not clear if the current iterations of cryptocurrencies can provide the kind of integrity, laundering prevention, and tax compliance we’ve come to expect. Indeed, many of cryptocurrencies’ biggest advocates celebrate the fact that they will not.
When I talk to cryptocurrency and blockchain advocates, they usually tell me that the decentralized ledger will prevent excessive intrusion by government by making transactions anonymous and prevent excessive rents from going to financial institutions by dis-intermediating transactions. My counter is that people might like the concept of anonymity, and they may even hate their bank, but they like a functioning society and (relatively) stable financial markets a lot more. In fact, we’re usually willing to sacrifice some anonymity, or create governance systems (warrants) that impinge on them in exchange for public goods like law and order. Anonymity may be a concern for high net-worth individuals and money launderers, but I’ve yet to see evidence that the vast majority of the world’s citizens feel that absolute anonymity is an urgent issue to address. It’s true that the current financial system involves high rents paid to intermediary institutions — but one big reason is that society benefits from the market integrity, protection against laundering, and tax compliance that system provides. As consumers and citizens, at least some part of the rents we’re paying to the financial sector (and the decision to regulate that sector) reflect how much we value those public goods. I agree that the current system is imperfect (and the rents possibly too high), but if you dismantle the system to remove those costs, you are also dismantle the benefits.
When I talk to cryptocurrency advocates, they typically argue about privatebenefits but I want to hear more about the public benefits, either being created or sacrificed. That’s the conversation we need to focus on — because if we don’t, and cryptocurrencies take off, there is a real risk that national governments will respond in a way that’s both aggressive and counterproductive for all parties.
So far, governments have been relatively hands-off, and there aren’t signs of major legislative action on cryptocurrencies in the next few years. But part of that complacency has been tied to cryptocurrencies not yet threatening the status quo, and the growth trajectory we’re on could change that soon. If we can’t figure out how to ensure that cryptocurrencies create the public goods we expect of a financial and currency system, there’s a very real chance that governments won’t wait around; they’ll move to prohibition. Let me be very clear — I think this would be a terrible outcome for everyone involved. When government proscribes things that people like and find useful, it distorts behavior, can serve as an excuse to violate democratic norms in other areas, and wastes resources — and we’ve learned this through Prohibition and the War on Drugs. But unfettered financial markets without any consumer safety, investor protection, or integrity aren’t pretty either — and we should be very concerned about the equity implications of a new free-for-all.
I’m not calling for a cryptocurrency ban or suggesting it’s guaranteed to happen. Cryptocurrencies have incredible potential to transform not only the financial sector, but vast regions of life and public policy. But the blockchain community’s trumpeting of features they love without attention to the public goods that citizens actually value is dangerous for the future of this technology. We need to think critically about how to protect consumers in case these technologies become mainstream, so that we don’t have the same kinds of crises that have happened for taxi drivers that invested in medallions. We need to think about how cryptocurrencies will support the public funding and spending that benefits all of us, so that we aren’t just using collective dislike of the banking system to dismantle a system that provides us with important goods. Today, Gary Gensler is arguing that many cryptocurrencies are noncompliant securities and will be taken off the market, suggesting that the slumbering beast of government is finally awakening to police this space. We need to work hard to ensure that the beast focuses its work in the right direction: to use the advantages and efficiencies of blockchain technology to strengthen and protect the public goods that matter to all of us.