I like to joke that every time crypto hits a bump in the road, its enthusiasts invent new jargon to breathe life into their often-maligned solution to the future of money. There’s no shortage of specialized terminology–cryptocurrency itself, stablecoins, exchanges, wallets, ICOs, STOs––but in a dozen years of fits and starts, we’re starting to see a more mature industry relying on a more savvy audience to take products to the mainstream.
A key thing to remember: Bitcoin, the original crypto product, was born out of the 2008-2009 financial crisis. I won’t recap the volatile events that led smart, computer-savvy (generally male and young) geeks to imagine a better currency and tool for freedom. But a lot of it can be traced to that month of March in 2008 that led to the near-collapse of the banking system.
Despite its checkered past, there’s renewed momentum, along with yet another new acronym to encompass a variety of digital-currency initiatives. Today’s word is DeFi. It stands for decentralized finance, best described as a collection of initiatives to re-create traditional financial instruments, notably lending, in a decentralized architecture, outside of institutions and the control of governments. (A recent Techonomy Tech+ roundtable discussed many important crypto developments.)
People often say the greatest tech innovations emerge from crises. Crypto may be the place to watch this time. The current economic environment, not unlike those dark days of 2008-2009, is a prime breeding ground for a new conversation about digital assets. Here are some of the reasons why:
The Pandemic Itself
The Covid-19 virus let us wrap our collective heads around the concept of digital money. Venmo, Paypal, mobile phone payments, and contactless payments were all lifelines that many started using for the first time. Consumer sentiment during the pandemic has favored the use of digital money, albeit in non-crypto forms. Even the U.S. government relied in part on digital payments to disperse pandemic relief. The notion of a national digital currency was floated during the pandemic. While it didn’t make it into the final stimulus package, it was a harbinger. (Meanwhile, China is already actively working on a national crypto-currency, which it started testing in the real world in April.)
The Feds are Printing their way of Debt
Pre-1973, the dollar was pegged to the value of gold. Today the Federal Reserve has no constraints on its capacity to create new dollars. It has had its fingers on the print button almost continuously during Covid-19, hoping to bail us out of a grave economic crisis. According to USA Today, the Fed this year alone will have purchased $3.5 trillion in government securities with newly printed dollars. The short term goal is to avoid a recession. But the long term implication is a generation that will inherit unprecedented debt. One of the strongest arguments for cryptocurrencies like Bitcoin and Etherium is that they are generally capped at a finite amount, making them a good hedge against unbridled money printing.
The “FinCen Files” Shine a Light On Money’s Lack of Transparency
This week, BuzzFeed published the FinCen Files which, it says, offer a “never-before-seen picture of corruption and complicity” at major financial institutions involved in money laundering. Buzzfeed obtained more than 2,500 documents, mostly SARS (Suspicious Activity Reports) that banks are required to file if a transaction looks fishy. Buzzfeed shared the documents with a group of investigative journalists who’ve made some findings public. When tracking terrorist groups, drug cartels, oligarchs, or child trafficking rings, banks submit the SARS, but that’s where their fiduciary obligation stops.
The reports are filed with an organization called FinCen (the Financial Crimes Enforcement Network), an arm of the Treasury Department. (The Department’s website now has a statement condemning the unauthorized disclosure of SARS as breaking the law.) The authorities, underfunded and under-teched, take a sort of whack-a-mole approach to what’s called AML, or Anti-Money-Laundering activity, reports The Guardian. JPMorganChase, Deutsche Bank, and Paul Manafort are just a few in the cast of characters called out in the FinCen Files report.
Cryptocurrencies are no strangers to money laundering scams (Mt. Gox was one of the early and most infamous.). In comparison to what happens in conventional finance, though, crypto’s money-laundering incidents pale, even though they grab headlines. Done right, digital currency and blockchains should make money laundering more difficult.
Making Friends in Traditional Circles
Traditional institutions are starting to get the green light to participate in crypto initiatives. (Defi, though, is still a bit of the Wild West, partly because the amounts involved remain low and regulators haven’t yet much paid attention.) The Office of the Comptroller of the Currency is now allowing major banks like JPMorganChase and Wells Fargo to act as crypto custodians and to back stablecoins.The UN and UNICEF are committing to using crypto in various ways on a global level. Norwegians may be unaware, but crypto is among assets held in their country’s national pension fund.
Other signposts are closer to home. I spoke with Caitlin Long, via email. She helped create the Wyoming Special Purpose Depository Institution to allow for digital assets, and was instrumental in developing new entities like Kraken and Avanti (both operating in Wyoming). Each of these offer digital products that will co-evolve with traditional banking. Long calls them “bridge” entities, meaning they exist on a continuum between mainstream and natively-digital companies. Kraken, which just launched, will offer consumers a cryptocurrency exchange. Avanti (which Long will oversee) will serve institutions and high-net-worth customers as a digital asset custodian, once it receives its charter. Other states, including California and Texas, are now looking at copying Wyoming’s SPDI charter, Long says.
Taking the World By DeFi
A pandemic, an increased wariness about big banks, crazy amounts of national debt, and shifting attitudes about digital payments are giving crypto its next shot of adrenaline. DeFi will not be the last crypto jargon we’ll see, as digital assets vie for their place in our portfolios. But the argument that money needs to become more digital is increasingly persuasive.