Autor Cointelegraph By Andrew Singer

How stable are stablecoins in the FTX crypto market contagion?

If early November’s FTX collapse was crypto’s “Lehman moment” — as more than a few pundits have suggested — will the FTX contagion now spread to stablecoins? After all, Tether (USDT), the market leader, briefly lost its United States dollar peg on Nov. 10. In normal times, this might have raised alarm bells.But, these aren’t normal times.In fact, in the days following FTX’s Nov. 11 bankruptcy filing, stablecoin “dominance,” i.e., the sector’s share of overall cryptocurrency market capitalization, increased to 18%, an all-time high. Bitcoin (BTC), Ether (ETH), and most altcoins appeared to be feeling the pain from crypto-exchange FTX’s implosion, but not stablecoins.But, what awaits stablecoins in the longer term? Will they really emerge from the FTX fiasco unscathed, or is the sector due for a shake-out? Are stablecoins (still) too opaque, undercollateralized and unregulated for investors and regulators, as many insist? The collapse of the Bahamas-based crypto-exchange FTX hit the crypto world like a tropical storm, and so it bears asking once again: How stable are stablecoins? Is the contagion spreading?“The cracks in the crypto eco-system are increasing, and it would not be surprising to see a significant de-pegging event” in the future, Arvin Abraham, a United Kingdom-based partner at law firm McDermott Will and Emery, told Cointelegraph. Particularly at risk are those stablecoins that use other cryptocurrencies for their asset reserves, rather than fiat currencies like the euro or U.S. dollar, he said.“There is some evidence that FTX contagion did spread to stablecoins,” Ryan Clements, assistant professor at the University of Calgary Faculty of Law, told Cointelegraph, citing the brief USDT de-pegging event. “This shows how interconnected the crypto market is to it.” On Nov. 10, Tether fell to $0.97 on Bitstamp and several other exchanges and to $0.93 for a few moments on Kraken. Tron’s USDD stablecoin also wobbled. Stablecoins are never supposed to fall below $1.00. For its part, Tether blamed the depegging on crypto-exchange illiquidity. Relatively few crypto trading platforms are well capitalized, and sometimes “there is more demand for liquidity than exists on that exchange’s order books and has nothing to do with Tether’s ability to hold its peg nor the value or makeup of its reserves,” said the company.“Tether is completely unexposed to Alameda Research or FTX,” the firm added in its Nov. 9 blog post, further noting that its tokens are “100% backed by our reserves, and the assets that are backing the reserves exceed the liabilities.” Recent: Tokenized government bonds free up liquidity in traditional financial systems“The one thing that has saved Tether so far is that people have generally sold their Tether to others and most users have not actually cashed out,” said Buvaneshwaran Venugopal, assistant professor in the department of finance at the University of Central Florida. “Tether had to pay about $700 million recently and was able to do so.” That said, “the general lack of enthusiasm for crypto and the shrinking options for stablecoins may change this situation,” Venugopal told Cointelegraph. Tether has about $65 billion in circulation, according to CoinGecko, and U.S. Treasury bills make up over 58% of its reserves. “This is a large holding which would be affected if Tether has to sell under a crunch, especially in an increasing interest rate environment.” A darkening outlook for algos?What about algorithmic stablecoins, sometimes called algos? When TerraUSD Classic (USTC), an algorithmic stablecoin, collapsed in May, some forecasted that algos as a sub-class were doomed. Does the FTX failure dampen algos’ prospects?“They aren’t dead, and there are still some prominent ones, including the DAI token which is essential for the functioning of MakerDAO,” said Abraham. But, doubts remain, as algorithmic stablecoins are not easily understood and worries persist that “reserves can be adjusted on a dynamic basis potentially leading to manipulation and facilitating fraud,” said Abraham. Uncollateralized, or substantially under-collateralized, stablecoins are inherently fragile, adds Clements. Terra’s unsuccessful attempt in May to partially collateralize USTC with BTC in defense of its peg is another example of the fragility of an uncollateralized or under-collateralized stablecoin model, he told Cointelegraph, adding:“The industry seems to be accepting this fact and moving away from uncollateralized algorithmic stablecoin models.”“I think algorithmic stablecoins are going to be the sacrificial lamb within the stablecoin regulatory space,” Rohan Grey, assistant professor at Willamette University College of Law, told Cointelegraph. “They’re the ones whose heads will be on the chopping block” in the U.S. to appease regulators and other nay-sayers. Algos might still survive on the global stage, though, he suggested.Looking aheadIt could become very difficult for crypto-backed (i.e., non-fiat) stablecoins to defend their pegs in the event of another major cryptocurrency drawdown, however. In Abraham’s view, it would possibly lead “to an implosion similar to what we saw with the collapse of the Terra stablecoin in the early days of this crypto winter,” he said. What about a collapse of the Tether and/or Circle, the industry’s leaders whose coins are mostly backed by U.S. dollars or related instruments like treasuries? Such an event would be “a catastrophic event for the crypto industry,” said Abraham, because “so much of the industry hinges on using one or the other of these tokens as an intermediate means of exchange.” Many crypto transactions begin with a transfer of dollars into USDT or Circle’s USD Coin (USDC) as a way to avoid “the exchange rate volatility of Bitcoin and other cryptocurrencies.”“Tether is the really big one to watch right now because Tether is intrinsically connected to Binance,” said Grey, who noted that Binance is now playing the role of industry savior, a part played until recently by Sam Bankman-Fried and FTX. Tether’s and Binance’s fortunes are tied together, some believe. Still, one has to be careful when making comparisons between the FTX collapse and the 2008 Lehman Brothers bankruptcy, which foreshadowed the Great Recession of 2008–2009. “There are obvious differences,” said Grey, “one being that at this point, the crypto ecosystem is still relatively segregated from the rest of finance.” Any damage should be relatively contained in the overall scheme of things, i.e., “average people” won’t be hurt as happened in the U.S. financial crisis of 2007–2008. More transparencyIt seems as a given that more transparency, particularly with regard to reserves, will be required for stablecoin issuers post-FTX. “The value proposition of a stablecoin is ‘stability,’” said Venugopal. “Therefore, anything that a company uses to bring about stability must be well-understood by the users.”Absent legislation, stablecoin issuers may need to take it upon themselves to disclose more about their reserves. Grey, for instance, applauded the step that Paxos took in July when it announced that it would provide monthly reserve statements that included CUSIP numbers — Wall Street’s “bar code” for identifying securities — for all instruments backing its Paxos Dollar (USDP) and BinanceUSD (BUSD) stablecoins. Those coins are now backed exclusively by “cash, overnight loans secured only by U.S. Treasuries, and U.S. Treasuries with a less than 90-day maturity,” said Paxos.Stablecoins have long been criticized for being under-collateralized, and this issue arose again with the Terra debacle in May. Has the stablecoin sector made any progress in this area over the past half year in this regard?“Yes, uncollateralized and under-collateralized algorithmic stablecoins are far less popular post-Terra, and there is broader acceptance of the fragility of these stablecoin forms,” Clements told Cointelegraph. “You can see evidence of this in the soon to be launched Cardano DJED project, which will use an over-collateralized reserve model, and the abandonment of the undercollateralized NEAR algorithmic stablecoin project last month.” Collateral, of course, remains a challenge for the traditional finance sector, too, even for commercial banks. It basically means the company, in this case, the stablecoin issuer, “has to forgo lucrative opportunities elsewhere and keep the collateral for a rainy day,” noted Venugopal. “Even the highly regulated banks hate capital adequacy and other liquidity requirements imposed on them and find ways to minimize the amount of money left idle or return less income.” A sector shake-out?Many predict a consolidation in the crypto sector generally post-FTX as weaker coins are winnowed out, much as happened in 2018 as the initial coin offering mania waned. Might something similar happen in the stablecoin world? In September, even before FTX’s fall, an academic paper from researchers at the University of Chicago and Stockholm Schol of Economics noted that partially collateralized stablecoin platforms are always vulnerable to large demand shocks, suggesting some winnowing out might be expected. This seems a reasonable outcome, suggested Abraham, especially since the European Union’s Markets in Cryptoassets Regulation (MiCA) and other legislation will impose high compliance costs on stablecoin issuers. Requirements like auditable reserves “will make it much harder to issue stablecoins and should significantly limit the potential for collapse.”“When disclosure becomes mandatory, we are going to see fewer stablecoins,” Venugopal told Cointelegraph. “In general, I don’t think the world needs thousands of cryptocurrencies/tokens out there acting like securities or assets, especially when they are just speculative. We may need utility tokens but not security tokens.”Boosting investor confidenceGiven the risks, are there steps that coin issuers and/or regulators can take to avoid another industry calamity? “Stablecoins will definitely need to be more transparent with their reserves,” according to Abraham. This is already being prescribed in new legislation. He added:“Both the EU’s new MiCA and the draft Responsible Finance and Innovation Act in the U.S. impose reserve requirements on stablecoin issuers.”In the case of MiCA, an audit of stablecoin reserves will be required every six months.Recent: The metaverse is a new frontier for earning passive incomeVenugopal also agreed that if stablecoins want to become a viable medium of exchange and store of value for the decentralized finance world, they need to be more transparent and make their assets auditable, adding:“Tether has been long accused of lying about its cash reserves which are crucial to its U.S. dollar peg. The fact that Tether has been delaying its audit does not help.”Market perception of reserve instability, or insufficiency, can catalyze investor selloffs which impact a stablecoin’s peg, added Clements. “As a result, more transparency is needed in this area to increase investor confidence and stability, and to this end regulation could help the stablecoin market by requiring proof of reserves, audits, custodial controls on collateral, and other safeguards to ensure collateral transparency and sufficiency.”

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Election tally: Does blockchain beat the ballot box?

In October, Greenland was reported to be exploring the feasibility of an online voting platform for its national elections. Among the options being considered is a blockchain-based system. That isn’t entirely surprising. Electronic voting, or e-voting, has long been viewed as a promising use case for blockchain technology. “It’s time for online voting,” wrote Alex Tapscott in a New York Times opinion piece in 2018. “Using blockchain technology, online voting could boost voter participation and help restore the public’s trust in the electoral process and democracy.”It seems especially timely now as large swaths of the world’s population are raising questions about election integrity — most notably in the United States, but in other countries as well, such as Brazil. Tim Goggin, CEO at Horizon State, for one, believes that blockchain-enabled elections represent a “significant improvement” over the way most elections are operated today. Voting machines break down, software fails and election irregularities often create uncertainty and doubt among the voting public. With a public blockchain, by comparison, “it is much easier for voters to trace their vote,” Goggin told Cointelegraph, “and audit an election themselves.” Moreover, if something untoward does occur in the voting process, it is easier to identify it on a decentralized ledger with thousands of nodes than on current tabulation systems “where counting is done behind closed doors,” says Goggin, whose company set up a public election for South Australia in 2019, the first time blockchain technology was used in the voting process for that Australian state.Still, blockchain technology’s potential vis-a-vis public elections has been highlighted off and on for some time now. No country has yet to use blockchain technology in a national election. Marta Piekarska, senior DAO strategist at ConsenSys, recalls working at Hyperledger in 2016, where blockchain voting was discussed as a promising use case. “Six years later, and we are still talking about this,” she told Cointelegraph. “We are still quite far from a situation where any kind of distributed ledger would be considered” — at least in a national election. A few countries, notably Estonia, have been experimenting with systems that allow people to vote online, she further explained. On the other hand, “Netherlands abandoned the idea of doing electronic voting due to some of the concerns around security and authenticity of the votes.” Then, there’s sparsely populated Greenland, where the vast distances make it difficult for people to vote in person. A group of researchers from Concordium Blockchain, Aarhus University, the Alexandra Institute and the IT University will soon be investigating “whether a blockchain-based system will be a more trustworthy e-election on the world’s largest island,” according to the Concordium press release.Ensuring trust is criticalAny voting system requires trust, and trust requires a number of properties — any one of which can be a challenge depending on the circumstances, Kåre Kjelstrøm, chief technology officer at Concordium, told Cointelegraph. For in-person voting, these include: whitelisting: ensuring only eligible voters take part; identification: voters need to prove their identity when casting a vote; anonymity: votes are cast in private and can’t be traced back to the voter; security: locations are secured by the government; and immutability: cast votes can’t be altered.“Any digital system that replaces a manual voting system needs to address at least those same issues to ensure trust and this has proven to be rather tricky to pull off,” Kjelstrøm explained. “But blockchain may prove to be part of a solution.”A public decentralized blockchain ensures immutability by default, after all, “in that any transaction written can never be deleted.” The system is secured by cryptography and “transactions are anonymous, but are open for inspection by anyone in the world,” said Kjelstrøm, adding: “The trick is to maintain privacy and anonymity while ensuring any eligible voter can only cast their vote once. […] This is a current research topic at top institutions.”Permissioned or public chains?“The main problems I see for public elections as opposed to say corporate governance is that there cannot be a permissionless [blockchain] system because voter information is private and we cannot trust all third parties,” Amrita Dhillon, professor of economics in the department of political economy at King’s College London, told Cointelegraph.“The second problem is that of inputting the vote at a location of the voters choice: We cannot prevent anyone coercing voters at the point at which they submit the e-vote,” she added. Recent: Is DOGE really worth the hype even after Musk’s Twitter buyout?Others say permissioned chains aren’t the answer because they are run by a single entity or a group of entities that exert complete control of the system. “Worst case this means that a private blockchain can be tampered with by those self-same guardians and elections rigged,” said Kjelstrøm. This isn’t much of a problem in Western countries, “but in large parts of the world this is not true.” On the other hand, if one can “weave self-sovereign identity (SSI) into the core protocol,” as Concordium, a layer-1 public blockchain, aspires to do, that “may be just the right technology to power public elections,” said Kjelstrøm.That said, Goggin noted that many governments will probably opt to use private blockchains in line with their own privacy/data laws, and there are many ways to set up permissioned blockchains. But, if they don’t at least offer the public an auditable trace of voting records, then they aren’t likely to boost the public’s belief in election integrity. He calls himself “a big fan” of public and distributed blockchains. The privacy question is especially knotty when it comes to public elections. “You should not be able to tell which candidate some individual voted for, or even if they voted at all,” wrote Vitalik Buterin in a blog titled “Blockchain voting is overrated among uninformed people but underrated among informed people.” On the other hand, you want to ensure — and if necessary prove — that only eligible voters have voted, so some information like addresses and citizen status may need to be collected. Buterin viewed encryption as a way to get around the privacy conundrum. Goggin suggests something similar. Horizon State might ask a client to “hash,” i.e., encrypt or scramble, eligible voter identities “before we are provided them, and we then hash those identities again.” This means that neither the client nor Horizon State can readily determine who voted or how they voted. He added: “Voters will be able to see their vote on the chain, but there is no way for voters to prove that it is their vote, given they can see other votes on the blockchain also.”Dhillon, for her part, proposes a compromise where “some parts of the process are centralized,” i.e., voters come to a booth where their identity is checked and they submit their vote, “but subsequent parts of the chain can be decentralized to make them more secure and tamper proof.”Technical limitations?In 2014, the city of Moscow’s Active Citizen e-voting platform was created to let Muscovites have a say in non-political municipal decisions, and in 2017 it used the Ethereum blockchain for a series of polls. The largest of these tapped 220,000 citizens and the voting results were publicly auditable. It revealed some scaling limitations.“The platform based on proof-of-work reached a peak of approximately 1,000 transactions per minute [16.7 transactions per second]. This meant that it would not be easy for the platform to handle the volume if a higher proportion of Moscow’s 12 million citizens participated in the voting,” according to Nir Kshetri, a professor at the Bryan School of Business and Economics at the University of North Carolina at Greensboro. From this, Kshetri and others concluded that this PoW version of the Ethereum blockchain “was not sufficient to handle national elections.” Things might be different in 2023, however, when Ethereum 2.0 implements sharding. This could boost the chain’s speed to as high as 100,000 TPS, which in turn “increases Ethereum blockchain’s attractiveness for voting,” he told Cointelegraph. But blockchains probably still need to be more secure before they are ready for public elections, though this is manageable in Kshetri’s view. “Blockchains are likely to become more secure with increasing maturity.” Buterin, too, said in 2021 that security was still an issue vis-a-vis elections. For that reason, “in the short term, any form of blockchain voting should certainly remain confined to small experiments. […] Security is at present definitely not good enough to rely on computers for everything.”Online transactions, unlike manual systems, “can occur in the blink of an eye,” added Kjelstrøm, and software-driven attacks on an e-voting system can “potentially foil or damage the system or the vote.” Therefore, “any new system would have to be introduced slowly to ensure the voting system remains intact and fully functional.” Governments might begin at a small scale and conduct proof-of-concepts for select non-critical elections first, he said. Usability is critical Technology isn’t the only obstacle that needs to be solved before blockchain voting attains wide adoption. There are political and social challenges, too.“The technology is there,” said Piekarska. “We can do it right now. I mean, decentralized autonomous organizations are governed through online voting now, and they are managing trillions of dollars.” But national elections are a different beast, she suggested, because:“On the government level, your problem is: how do you create a system that is usable by citizens?” One’s constituency is not tech-savvy members of a DAO, “but people like my mom, who is still struggling with online banking,” Piekarska added.How long will it be, then, before the first national election with blockchain voting? “Hopefully not decades, but surely we’re not there yet,” said Kjelstrøm.“It could be tomorrow or it could be in 50 or 60 years,” opined Piekarska, “because there are so many things that need to align.” In Europe, most people trust their governments and the quality of voting is not really an issue, so the push for encrypted auditable ledgers may not be so urgent. In nations with weaker governance where elections are often manipulated, conversely, why would the powers-that-be ever consent to tamper-free blockchain voting? Greenland, which struggles with participation in its general elections primarily because of the great distances that its citizens must travel to vote, might prove an exception.“Yes, some solid governments want to do the right thing but they struggle with the accessibility of in-person voting,” Piekarska acknowledged. “That’s probably where we might see the first movers because there is a very high incentive for them to do it. But these are unique situations.”Recent: Proof-of-reserves: Can reserve audits avoid another FTX-like moment?All in all, it’s critical that people have trust in their voting system, whether manual, electronic or blockchain-based, and building trust can take time. But, as more people become used to accessing public services online, electronic voting should take greater hold in different parts of the world, and once that happens, blockchain voting could catch on, given its well-documented advantages, allowing individuals to audit their own votes. Large-scale blockchain-enabled national elections are probably some years away still. Even so, Goggin has been engaging in discussions recently “about providing elections at that scale,” adding:“While it isn’t the norm yet, governments are beginning to consider the value that online blockchain voting systems can offer in efficiency, accessibility, speed, security and transparency.” 

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Could Bitcoin have launched in the 1990s — Or was it waiting for Satoshi?

This year, Oct. 31 marked the 14th anniversary of the issuance of one of this century’s most consequential white papers — Satoshi Nakamoto’s “Bitcoin: A Peer-to-Peer Electronic Cash System.” Its 2008 publication set off a “revolution in finance” and “heralded a new era for money, one that did not derive its value from governmental edict but rather from technological proficiency and ingenuity,” as NYDIG celebrated in its Nov. 4 newsletter.Many aren’t aware, though, that Satoshi’s nine-page white paper was met with some skepticism initially, even among the cypherpunk community where it first surfaced. This reluctance may be understandable since earlier attempts to create a cryptocurrency failed — David Chaum’s Digicash effort in the 1990s, for example — nor at first glance did it appear that Satoshi was bringing anything new to the table in terms of technology. “It was technically possible to develop Bitcoin in 1994,” Jan Lansky, head of the department of computer science and mathematics at the Czech Republic’s University of Finance and Administration, told Cointelegraph, explaining that Bitcoin is based on three technical improvements that were available at that time: Merkle trees (1979), blockchain data structure (Haber and Stornetta, 1991) and proof of work (1993).Peter Vessenes, co-founder and chief cryptographer at Lamina1 — a layer-1 blockchain — basically agreed: “We definitely could have been mining Bitcoin” in the early 1990s, at least from a technical perspective, he told Cointelegraph. The necessary cryptography was in hand:“Bitcoin’s elliptic curve technology is mid-1980s technology. Bitcoin doesn’t need any in-band encryption like SSL; the data is unencrypted and easy to transfer.” Satoshi sometimes gets credit for establishing the proof-of-work (PoW) protocol used by Bitcoin and other blockchain networks (though no longer Ethereum ) to secure digital ledgers, but here too, he had antecedents. “Cynthia Dwork and Moni Naor suggested the idea of proof of work to combat spam in 1992,” added Vessenes.PoW, which is also effective in thwarting Sybil attacks, establishes a high economic price for making any changes to the digital ledger. As explained in a 2017 paper on Bitcoin’s origins by Arvind Narayanan and Jeremy Clark, “In Dwork and Naor’s design, email recipients would process only those emails that were accompanied by proof that the sender had performed a moderate amount of computational work — hence, ‘proof of work.’” As the researchers further noted:Recent: Tokenization at the crossroads of the trucking industry to ensure efficient payments“Computing the proof would take perhaps a few seconds on a regular computer. Thus, it would pose no difficulty for regular users, but a spammer wishing to send a million emails would require several weeks, using equivalent hardware.”Elsewhere, “Ralph Merkle invented Merkle trees in the late 1980s — so we had hashing functions that were secure for the times,” Vessenes added. So, why then did Satoshi succeed while others foundered? Was the world simply not ready for a decentralized digital currency earlier? Were there still technical limitations, like accessible computer power? Or maybe Bitcoin’s true constituency hadn’t yet come of age — a new generation distrustful of centralized authority, especially in light of the Great Recession of 2008?Establishing ‘trustless’ systemsDavid Chaum has been called “perhaps the most influential person in the cryptocurrency space.” His 1982 doctoral dissertation, Computer Systems Established, Maintained, and Trusted by Mutually Suspicious Groups, anticipated many of the elements that were to eventually find their way into the Bitcoin network. It also presented the key challenge to be solved, that is:“The problem of establishing and maintaining computer systems that can be trusted by those who don’t necessarily trust one another.”Indeed, an academic exploration of blockchain technologies’s origins by four University of Maryland researchers lauded “the 1979 work of David Chaum, whose vault system embodies many of the elements of blockchains.”In an interview with Cointelegraph last week, Chaum was asked if Bitcoin really could have been launched 15 years earlier, as some contend. He agreed with the U. of Maryland researchers that all the key blockchain elements were already present in his 1982 dissertation — with one key exception: Satoshi’s consensus mechanism: “The specifics of the [i.e., Satoshi’s] consensus algorithm is unlike, as far as I know, those in the literature on consensus algorithms.”When pressed for specifics, Chaum was reluctant to say much more other than that the 2008 white paper described a “somewhat ad hoc… crude mechanism” that actually “could be made to work — more or less.”In a recently published book, University of Oxford social scientist Vili Lehdonvirta also focuses on the uniqueness of that consensus mechanism. Satoshi rotated the cryptocurrency’s record-keepers/validators — better known today as “miners” — roughly every 10 minutes. Then “the next randomly appointed administrator would take over, double check the previous block of records, and append their own block to it, forming a chain of blocks,” Lehdonvirta writes in Cloud Empires. The reason for rotating miners, in Lehdonvirta’s telling, was to prevent the system’s administrators from becoming too entrenched and, thus, to avoid the corruption that inevitably comes with a concentration of power. Even though PoW protocols were well known at this point, the specifics of Satoshi’s algorithm “really came out of nowhere… it wasn’t anticipated,” Chaum told Cointelegraph. ‘Three fundamental breakthroughs’Vinay Gupta, founder and CEO of startup Mattereum, who also helped to launch Ethereum in 2015 as its release coordinator, agreed that most of Bitcoin’s key components were available for the taking when Satoshi came along, though he differs on some of the chronology. “The parts themselves were simply not ready until at least 2001,” he told Cointelegraph.“Bitcoin is a combination of three fundamental breakthroughs on top of public key cryptography — Merkle trees, proof-of-work and distributed hash tables,” all developed before Satoshi, said Gupta. There were no problems with network hardware and computer power in the 1990s either. “It’s the core algorithms that were the slow part […]. We just didn’t have all the core building blocks for Bitcoin until 2001. The cryptography was first, and the extremely clever networking layer was last.” Garrick Hileman, a visiting fellow at the London School of Economics, also cited a later date for Bitcoin’s technical feasibility:“I’m not sure the early 1990s is a strong claim as some of the prior work referenced in Satoshi’s white paper — e.g. Adam Back’s hashcash/proof of work algorithm — were developed and/or published in the late 1990s or thereafter.” Awaiting a favorable social climateWhat about non-technical factors? Maybe Bitcoin was waiting for a demographic cohort that had grown up with computers/cell phones and distrusted banks and centralized finance generally? Did BTC require a new social-economic consciousness to flourish?Alex Tapscott, a member of the Millennial generation, writes in his book Financial Services Revolution:“For many of my generation, 2008 began a lost decade of structural unemployment, sluggish growth, political instability and a corrosion of trust and confidence in many of our institutions. The financial crisis exposed the avarice, malfeasance and plain incompetence that had driven the economy to the brink of collapse and had some asking, ‘How deep did the rot go?’”In a 2020 interview with Cointelegraph, Tapscott was asked if Bitcoin could have happened without the financial upheaval of 2008. Given the “historically high unemployment rates in countries like Spain, Greece and Italy, there’s not much question that the ensuing lack of trust in institutions led many to view decentralized systems like blockchain more favorably,” he answered.Lansky seemed to agree. There was no social need or demand for a decentralized payments solution in the 1990s “because we did not have enough experience with the fact that centralized solutions do not work,” he told Cointelegraph. “Bitcoin was undeniably a cultural product of its times,” added Vessenes. “We wouldn’t have a decentralized push without this DNA of mistrust of central government technology controls.”Pulling it all togetherOverall, one can go back and forth arguing about who contributed what and when. Most agree, though, that most of the pieces were in place by 2008, and Satoshi’s real gift may have been how he was able to pull it all together — in just nine pages. “No single part of Bitcoin’s fundamental mechanics is new,” Gupta reiterated. “The genius is in the combination of these existing three components — Merkle trees, hash cash and distributed hash tables for the networking into a fundamentally new whole.”But sometimes, the historical environment has to be propitious too. Chaum’s project failed “because there was not enough interest in this service” at the time, among other reasons, according to Lansky. Satoshi Nakamoto, by comparison, had perfect timing. “He came up with Bitcoin in 2008, when the classical financial system was failing,” and the founder’s vanishing from the scene in 2010 “only strengthened Bitcoin, because the development was taken over by its community.” Recent: What Musk’s Twitter acquisition could mean for social media crypto adoptionIt should be remembered, too, that technological progress is almost always a collaborative effort. While Satoshi’s system seems “radically different from most other payment systems today,” Narayanan and Clark wrote, “these ideas are quite old, dating back to David Chaum, the father of digital cash.” Satoshi clearly had forerunners — Chaum, Merkle, Dwork, Naor, Haber, Stornetta and Back, among others. Said Gupta: “Credit where credit is due: Satoshi stood on the shoulders of giants.”

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Does the IMF have a vendetta against cryptocurrencies?

Is the International Monetary Fund (IMF) really hostile to crypto? Many in the cryptocurrency/blockchain space think so. In January, the fund asked El Salvador to drop Bitcoin (BTC) as legal tender. In May, it reportedly pressured Argentina to curtail crypto trading as the price for an IMF loan extension, and it also recently warned the Republic of the Marshall Islands (RMI) that raising a digital currency to the status of legal tender could “raise risks to macroeconomic and financial stability as well as financial integrity.”“I do believe that the IMF is an implacable foe of crypto,” David Tawil, president and co-founder at ProChain Capital, told Cointelegraph. Given that Bitcoin and other cryptocurrencies are ‘“issued” by non-state entities and are borderless, “crypto has the potential to be ubiquitous, which can significantly curtail the need for the IMF,” a financial agency of the United Nations.“Bitcoin stands against everything the IMF stands for,” Alex Gladstein, chief strategy officer of the Human Rights Foundation, told Politico in June. “It’s an outside money that’s beyond the control of these alphabet soup organizations,” while Kraken’s Dan Held simply tweeted, “The IMF is evil,” in response to the fund’s reported actions in Argentina.Still, others believe that this multilateral lending institution that serves some 190 countries — and has long been a lightning rod for criticism in the developing world — may have a more nuanced view of cryptocurrencies. A broad-minded view of crypto-assets?In a September report, “Regulating Crypto,” the IMF seemed to have no problem with the existence or even proliferation of non-governmental digital currencies. Indeed, it called for a “global regulatory framework” for cryptocurrencies in order to bring order to the markets “and provide a safe space for useful innovation to continue.” “The IMF has taken a very broad-minded view of crypto-assets,” John Kiff, managing director of the CBDC Think Tank and, until 2021, a senior financial sector expert at the IMF, told Cointelegraph, especially if one looks beyond some of the recent cases cited above. He added:“The Marshall Islands and El Salvador opinions pertained to country governments adopting crypto as legal tender when their unit of account currencies were already well established. And, those adverse opinions were mostly focused on the macroeconomic impact of hitching their fiscal wagons to cryptocurrencies.” Institutionally speaking, “it’s true that the IMF is skeptical of crypto, and it came down hard on El Salvador, Josh Lipsky, senior director of the Atlantic Council’s GeoEconomics Center, told Cointelegraph. But, that’s because the fund was worried about the financial vulnerability of that nation’s economy. The IMF “will have to bail them out” if and when El Salvador reneges on its international debt payments.Recent: Bitcoin miners rethink business strategies to survive long-termMeanwhile, “Argentina has done something like 20-plus lending programs over the years, so it can’t really go back to the IMF and renegotiate [its loans] while it is also conducting crypto experiments,” added Lipsky, who previously served as an adviser to the IMF and speechwriter to Christine Lagarde. The mayor of Buenos Aires, a cryptocurrency proponent, was reported to be developing plans that would allow the city’s residents to pay their municipal taxes in cryptocurrencies. “That raised some eyebrows” at the fund, commented Lipsky. Even Tawil agreed that the IMF was justified in forcing “certain policy choices, like austerity or taxation or removal of government subsidies that cannot be supported economically” under certain circumstances. If a country “has awful policies” that will make it persistently dependent on the fund’s support, then “the IMF will use its lending ability to influence policy choices.”Money laundering risks In connection with the Marshall Islands’ bid to implement a sovereign digital currency, or SOV, as a second legal tender, the IMF’s Yong Sarah Zhou cited not only financial stability perils but also “anti-money laundering and combatting the financing of terrorism (AML/CFT) risks.” Simon Lelieveldt, a Netherlands-based regulatory consultant for payments and blockchain, wasn’t really sure this was the fund’s main objection, however. Yes, crypto can be “used as an investment asset and also a tool for money laundering — as can cash in the bank,” but it is more likely crypto’s “ungoverned nature” that alarms the IMF and other intergovernmental organizations, including the Financial Action Task Force.Governments in the developing world sometimes feel “oppressed by IMF rulings and neoliberal dogmas” and are tempted to “escape the harness of the IMF” through the use of alternate legal tenders, actions that inevitably “lead to reactions from institutions that are afraid of losing their power,” he told Cointelegraph. A misbegotten case?El Salvador was the world’s first country to adopt Bitcoin, or any cryptocurrency, as legal tender in September 2021. “El Salvador was a really bad use case,” Lipsky told Cointelegraph. “What Terra Luna did for crypto in the United States, El Salvador did for crypto globally.” What went wrong? “There were so many failures, but if I were to pick one, it would be how rushed it felt.” There was a “paper-thin, two-page explanation how it [Bitcoin] would work,” and that was it. Rather than take an experimental approach, beginning with small pilots and independent risk assessments, the Bitcoin Law was hurried through El Salvador’s legislature and immediately imposed — “reckless and rushed,” according to one critic.The IMF’s wariness of crypto as legal tender only deepened in the wake of the El Salvador inept BTC launch, in Lipsky’s view.Still, institutions like the IMF and the World Bank arguably have an “outsized influence” on small countries looking to take more control over their currencies, and they “can apply pressure, from making aid conditional to simply blocking aid, unless countries comply with their requirements,” Henri Arslanian wrote in his recently published book, The Book of Crypto. Recent: What does the global energy crisis mean for crypto markets?When El Salvador recognized Bitcoin as legal tender, for instance, the World Bank, another lending institution in the United Nations system, not only criticized the move but “also refused to provide technical assistance, citing environmental and transparency concerns,” wrote Arslanian.Natural enemies?Given the mandate of nongovernment organizations like IMF and the World Bank — which is, broadly speaking, to support global financial stability and spur economic growth in the developing world — there could simply be a natural tension vis-a-vis decentralized currencies — which are often volatile and hard-to-control financial instruments with no return address or even identifiable individuals in charge. As Tawil noted, the IMF is often called upon to deal with economies “plagued by corrupt and inept leadership and illusory currencies” and, therefore, it really has “no incentive to add another ‘issuer-less’ currency.” Nevertheless, he added:“The IMF cannot ignore reality, which is that our future will be filled with cryptocurrencies.”

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Tech’s good intentions and why Satoshi’s new ‘social order’ foundered

All revolutions have their dogmas, and the cryptocurrency/blockchain insurgency is no different. It’s an article of faith among crypto adherents that decentralization will solve many of society’s ills, including the problem of governance. Vili Lehdonvirta — an Oxford University social scientist, book author, and former software developer — disagrees.“The underlying technology will change and it’s already changing,” he told Cointelegraph last week. “It’s becoming less blockchain-like, less like the original idea of a trustless system,” especially after the Ethereum Merge, where corporate-like ‘staking’ entities will be needed to “uphold the integrity of the chain,” in his view. Indeed, crypto networks generally could be moving in the direction of centralized digital platforms, “maintained by a bunch of people whom you have to trust, but hopefully you can also hold to account if they turn out to be untrustworthy.”Lehdonvirta’s new book, Cloud Empires, published by MIT Press, is in part a meditation on the perishability of ideology and/or good intentions. Its subjects are the 21st century’s massive digital platforms like Amazon, Uber and eBay, among others. Many follow a similar life cycle: Charismatic founders who set out to change the world, guide their enterprises on a dazzling growth path but then crash against a hard wall of reality. They survive this collision, but not always for the better. Subtitled “How digital platforms are overtaking the State and how we can regain control,” the book has an illuminating chapter on Satoshi Nakamoto and the blockchain technology he created: Its origins, adoption, metamorphosis and ultimate realization that cryptographically secured digital networks couldn’t entirely replace “untrustworthy” human authorities on matters of governance. There’s Amazon founder Jeff Bezos, “once hailed as a hero who created an ideal business environment for countless independent merchants,” but who eventually transforms into a digital monopolist, turning on merchants, indeed, “extracting extortionate fees and outright stealing lucrative business lines from them.”Appearing, too, is Uber co-founder Travis Kalanick, initially as a “fierce advocate of free-market solutions,” but he’s later seen fixing fares and regulating the number of cars on the streets. There’s Pierre Omidyar, creator of “the world’s first online reputation system,” who realizes in time that a “bad rep” alone won’t deter malefactors. His enterprise, eBay, evolves “into a central authority that formally regulates its marketplace.” A social order without institutionsAs for Satoshi, blockchain’s elusive pseudonymous founder known to the world principally through a nine-page white paper, “Bitcoin: A Peer-to-Peer Electronic Cash System,” published in 2008. “Nakamoto was bothered by how people still had to rely on powerful and opaque financial institutions to manage their finances,” writes Lehdonvirta, a professor of economic sociology and digital social research at the Oxford Internet Institute at the University of Oxford. He positions Nakamoto in a line of Digital Age libertarians, beginning with John Barlow, the cyberlibertarian “who dreamed of a virtual society in which order emerged independently of the authority of territorial states.” Nakamoto here is viewed through a political scientist’s lens. Lehdonvirta writes:“Nakamoto was not interested in making the institutions more democratic. Instead, he wanted to resuscitate the Barlowian dream of a digital social order that wouldn’t need such institutions in the first place — no bureaucrats, no politicians who inevitably betrayed their electorates’ trust, no elections rigged by corporations, no corporate overlords. Nakamoto still thought that such a social order could be created with technology — and in particular, with cryptographic technology.”Satoshi wasn’t the first to seek “political liberation” through cryptography. A subculture of “cypherpunks” and “crypto-anarchists” had been propounding that creed for decades, “But after years of work, they still had not succeeded in building viable payment platforms.”Recent: How decentralized exchanges have evolved and why it’s good for usersYet, Satoshi appears to succeed where others failed — at first, anyway. What did he do differently? The short answer: He rotated record-keepers.This revelation may seem underwhelming, especially as crypto miners have been vilified in recent years as would-be monopolists and eco-sinners. But, in Lehdonvirta’s telling, Bitcoin’s miners are really just network administrators, i.e., “record-keepers.” Their job, as originally conceived, was: “To go through recently issued payment instructions, check that they were valid, and collate them into a record known as a block — an official record of transactions that could be used to determine who owned what in the system. Of course, the administrator would not have to check transactions by hand: all the work would be done automatically by the peer-to-peer ‘banking software’ running on their computer.”After about 10 minutes, “the next randomly appointed administrator would take over, double check the previous block of records, and append their own block to it, forming a chain of blocks.”Rotating judges each dayWhat makes this Bitcoin genesis story different — a sort of tour de force, arguably — is the author’s ability to put Satoshi in historical context. Nakamoto was wrestling with a classic governance quandary — “who is guarding the guardians” — one that goes back to the ancient Greeks. The city-state of Athens grappled with this problem 2,600 years ago at the time of Solon the Lawgiver. Lehdonvirta writes, “Instead of trying to make government administrators more trustworthy, he [Solon] took a different approach: he wanted to make trustworthiness matter less.” Solon even had a machine to do this — a piece of ancient Greek technology called a “kleroterion,” or “allotment machine,” was a huge slab of stone with carved slots or matrices that was filled with bronze plates inscribed with the names of Athenian citizens. These were randomly selected each day by bouncing white and black balls:“Using the kleroterion, random people were selected to serve as government administrators in ancient Athens. Magistrates were appointed in this fashion annually. Judges were re-selected every morning.”Cloud Empires compares Nakamoto’s ledger validators with the kleroterion:“The responsibility for checking balances could circulate randomly between users, a little like how administrator posts circulated randomly between citizens in ancient Athens. Where Athenians used the kleroterion to rotate administrators every twenty-four hours, Nakamoto’s scheme used an algorithm to rotate the administrator approximately every ten minutes…”The justification in both instances was to avoid the corruption that inevitably comes with the concentration of power:“Just like in ancient Athens, this constant circulation of responsibility meant that the administration would be extremely difficult to corrupt. […] As long as a majority of the peers remained honest, the platform could maintain orderly records without any single trusted authority. Belief in good intentions was replaced with technological certainty. The problem of trust appeared to be solved.”People remain in charge — still Alas, if only it were so simple. As often happens in Cloud Empires, innovation, good intentions, and high-mindedness travel only so far before they run up against human nature. Here the defining event was The DAO Hack of 2016, “a catastrophe for The DAO and its investors but also for the entire Ethereum platform,” where an unknown attacker drained 3.6 million Ether (ETH) from The DAO project, the world’s first decentralized autonomous organization. The hack was reversed by a hard fork of the Ethereum network. The network basically hit the reset button, excising the ledger’s most recent transactions and resuming where things stood immediately before the attack. Ethereum co-founder Vitalik Buterin and the network’s core developers held a referendum before this radical step was taken that supported their recommendations, but opponents still maintained that this amounted to changing the rules retroactively.“The crisis revealed how a peer-to-peer blockchain system in the end was never really ‘trustless,’” concludes Lehdonvirta. “The network may have enforced its rules with robotic impartiality, but people were still in charge of making and amending the rules. In this instance, people decided to amend the rules to confiscate a person’s holdings and return them to their previous owners. […] Funds placed in the system were still ultimately entrusted to the care of people, not cryptography. The problem of trust remained unsolved.”According to Lehdonvirta, The DAO hack raised again the “age-old problem of political science that troubled ancient Athenians, too: The authorities protect us, but who will protect us from the authorities? How can we hold power to account?”Resisting autocracyIn an interview with Cointelegraph last week, Lehdonvirta was asked: Given the myriad disappointments chronicled in Cloud Empires, do you see reasons to be hopeful about digital platforms? Is there anything that makes you optimistic?“People are realizing: ‘I’m not living in the libertarian utopia that Barlow and other visionaries in Silicon Valley promised me. I’m actually living in an autocracy,’” Lehdonvirta answered. “People are realizing this and they’ve started to push back.”He provides examples in his book. Andrew Gazdecki, an entrepreneur, bands together with other businesses when trillion-dollar company Apple threatens to close down his enterprise. “And they actually win for themselves the right to continue doing business. And that’s not the only example. We had Etsy sellers in April this year — 30,000 Etsy sellers went on strike” when that marketplace raised transaction fees for its independent sellers by 30%. “People are not taking it,” Lehdonvirta told Cointelegraph.As for the crypto space specifically, “what’s really interesting” is that there are now a “lot of people imagining different ways of organizing society, different ways of organizing the economy,” he said. “Maybe the underlying technology blockchain turns out to be not as useful and not as revolutionary as was originally thought, but they’re still trying to come up with new ways of organizing society,” as through decentralized autonomous organizations (DAOs), for example. “I mean, does it make that any less valuable? I think people can in some way go even further if they don’t constrain themselves by this sort of a blockchain dogma.”He was asked about the kleroterion and ancient Greece — where did all that come from? As a “fellow” of Oxford University’s Jesus College, Lehdonvirta dines regularly with fellows from many disciplines, including historians and classicists, he explained. One lunch partner was an expert on ancient Greece who also happened to be “super curious about Bitcoin.” “I don’t remember exactly how the kleroterion came up. I found it in my readings somewhere. But basically the connection between Bitcoin and ancient Greece came about because I dine in a college together with experts of ancient Greece.”Recent: What new EU sanctions mean for crypto exchanges and their Russian clientsAs the crypto space evolves, he sees other hybrid types participating, including social scientists like himself. “I think what’s really interesting is that a lot of crypto people are becoming more and more interested in social and political science.” They’re realizing that many systems and projects are failing not because anything is wrong with the technology as such but because the governance has failed. He told Cointelegraph:“Humanity has been developing governance systems for thousands of years. We’ve figured out some things that work and some things that don’t work. So why don’t we build on that in the same way as when we do software development.” Programmers don’t build everything from scratch, from primitives, after all. They use well-known libraries and components to build software. “Why not the same with governance?”All in all, the Finnish-born social scientist seems to think that the intellectual ferment unleashed by Satoshi Nakamoto, 13 years might still evolve into something novel and useful in the organizational and governance sense, even if the technology itself never quite lives up to its high expectations.

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