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Gary Gensler is a former president of the Commodity Futures Trading Commission under the chairmanship of President Barack Obama, senior advisor to the MIT Media Lab Digital Currency Initiative and Senior Lecturer at the MIT Sloan School of Management, where he currently teaches several lessons on blockchain technology and crypto finance .
The following is an exclusive contribution for the 2018 year of CoinDesk under consideration.
After the unbridled rush of this year and so many failed projects, what could mean the money and finance, in 2019 and beyond, the innovative "Peer-to-Peer electronic cash system" of Satoshi Nakamoto?
Satoshi's innovation – the use of append-only timed registers, guaranteed by cryptography, between multiple parties, forming consensus on a shared ledger – must be taken seriously. The resulting data blockchains can form widely verifiable peer-to-peer databases.
For any possibility of a lasting role in the long evolution of money, however, blockchain applications and cryptographic resources must provide real economic results to users. And while it is crucial to bring the markets of encrypted finance within the public policy rules, the greatest challenge remains the seriousness of commercial use cases.
A lot of hype masked by facts will not do it.
What we learned
Blockchain technology and cryptographic tokens provide an alternative means of transferring value over the Internet without relying on a central intermediary. They promise the potential to reduce verification and network costs, ranging from censorship, privacy, reconciliation and settlement costs, to the costs of starting up and maintaining a network.
These characteristics bind blockchain technology and cryptocurrencies directly to the essential hydraulic systems of the financial sector, which has the fundamental role of efficiently moving, allocating and evaluating money and risk within an economy. It could reduce costs, risks and economic rents in the financial system, which accounts for 7.5% of US GDP.
To do so, however, blockchain technology faces its many technical and commercial challenges: scalability, efficiency, privacy, security, interoperability and governance. The reforms and regulations of the sector must also bring order to the markets surrounding this technology, especially for encrypted exchanges and initial coin offerings.
Meanwhile, the financial sector is mainly exploring blockchain private applications – without native tokens – based on software such as Hyperledger Fabric, R3 Corda or Quorum.
The value proposition of each use case must be strictly compared to the simple use of a traditional database. In particular, any token offering must address how it will sustainably reduce verification or network costs – how that encrypted resource benefits users more than simply using widely accepted fiat currencies. While money is only a social construct, its history tells us that there are enormous advantages of the network when a currency is widely used and accepted for all three roles of money – as a unit of account, medium of exchange and reserve of value .
In essence, how could a proposed blockchain technology project or an initial offer token ("ICO") be more than just a means to raise money from the public? In 2019 and beyond, venture capitalists, large incumbents and crypto investors will probably be more perceptive and rigorous in their investments and projects.
Public policy frameworks
Crypto financial markets can gain public confidence and reach their potential only within long-established public policy frameworks. As with any other technology, we must defend ourselves against illicit activities, such as tax evasion, money laundering, terrorist financing and the avoidance of sanctions.
We must promote fair and open competition while ensuring financial stability. We must protect investors and consumers.
While criminals have often exploited the existing financial system for money laundering, cryptocurrencies have given bad actors new ways to conduct old crimes. Obscure markets lead sales of illegal drugs and other smuggling using cryptocurrencies. State actors, such as Venezuela, Russia and Iran, have used cryptocurrencies to undermine US policies. Furthermore, cryptocurrencies add new challenges to global tax compliance.
What investor protection exists in cryptographic markets seems little more than an effort to keep up with the attention of law enforcement authorities and regulators.
Cryptographic exchanges
Most cryptographic exchanges are not registered. Manipulative behavior is not controlled and billions of dollars are stolen in customer tokens. With respect to traditional financial exchanges, they do not have intermediation through regulated financial intermediaries. In addition, according to the October Exchange of CryptoCompare, only 47% of exchanges impose strict know-your-customer requirements ("KYC").
Safeguards to date – the processing of cryptographic exchanges and digital wallet providers through money transmission laws in the same way as Western Union or MoneyGram – are unsatisfactory.
Cryptographic exchanges are trading venues and must be treated as such, with mandatory protections for investors. Frontal run and other manipulative behaviors must be banned. Exchanges must fully comply with anti-money laundering laws and seriously consider or take into consideration the possibility of interrupting their custody duties.
In 2019 and beyond, we will see a record of more exchanges in the United States: those that exchange ICO tokens will register as broker-dealers under the ATS rules and the new Bakkt Intercontinental Exchange will register and operate under the Commodities Exchange Act.
We will also probably see a decline in operating margins and a consolidation in over 200 cryptographic exchanges.
Initial offers of coins
Of the thousands of Ico to date, many have failed and investors have lost billions. A recent EY study reported that during the third quarter of 2018, 86% of the main ICOs in 2017 were trading below the quotation price and only 13% actually had a functioning product.
Filecoin, for example, has raised over $ 250 million in October 2017, but will not be published until mid-2019. Academic and market studies have also found the ICO market full of scams and scams.
The debates have raged around the world on how cryptocurrencies, and in particular ICOs, adapt to existing securities laws, commodities and derivatives. Many argue that the so-called "utility tokens" sold for future consumption are not investment contracts, but this is a false distinction.
With their own design, the ICO mix the economic characteristics of both consumption and investment. The reality of ICO tokens – their risks, the expectation of profits, the reliance on the efforts of others, the methods of marketing, the exchange of currencies, the limited supply and the formation of capital – they are attributes of investment offers.
In the United States, almost all Ico meet the Supreme Court "Howey Test" which defines an investment contract under the securities laws. As the poet James Whitcomb Riley wrote more than 100 years ago: "When I see a bird that walks like a duck and swims like a duck and cries like a duck, I call that duck a & # 39; duck. "
In 2019, it is likely that we will continue to see high failure rates of the ICO, while the total decline in funding. Regulatory authorities and courts will bring more clarity to the market through more enforcement cases and related private litigation.
Central banks
Central banks are studying blockchain technology and cryptographic markets with an eye on financial stability and another eye on what it means for the legal currencies they issue and monitor.
The Canadian project Jasper and the Singapore Ubin project are exploring the use of authorized blockchain applications to update payment systems.
Although strategic challenges are significant, some central banks are also considering the opportunity to allow the public access to central bank payment systems and digital reserves through the so-called "central bank digital currency" (CBDC). ). The revision of two countries – one strong and one in difficulty – is noteworthy. In Sweden, the use of Krona on paper has declined and Riksbank, the world's oldest central bank, is pursuing an e-Krona project to provide electronic central bank money directly to the public.
Venezuela, in the face of hyperinflation, economic instability and sanctions is promoting the public use of an alleged oil pledge, Petro, although there are reports that seriously question the legitimacy of the token.
2019 and beyond
So, while Satoshi Nakamoto's Bitcoin survived a decade of testing, the question remains: "What does it mean for 2019 and beyond?" Central intermediaries remain a real part of our economies. The financial sector is exploring authorized private blockchain applications rather than cryptocurrencies.
Will cases of use in the commercial economy be identified where the benefits of less verification and network costs are truly greater than the costs, challenges and complexity of blockchain technology? Will the smaller concepts prosper and provide a bridge for further development and acceptance?
I remain optimistic, especially with regard to authorized private blockchain applications.
What about open blockchain projects and cryptographic tokens? Will users find real economic value in native cryptographic tokens associated with these projects? With the breaking of the crypto markets, we could begin to find out.
As Warren Buffet famously wrote in his president's letter in 2002, after major losses at the Berkshire Hathaway: "After all, discover only those who swim naked when the tide goes out".
Image of the boat on the ground via Shutterstock
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