In a recent appearance before Congress, Chairman of the Federal Reserve Jerome Powell had some harsh criticism for cryptocurrency. Many of his complaints were all too familiar to those in the blockchain space, rehashing such old favorites such as 'cryptocurrencies are great if you're trying to hide or launder money' or '(crypto assets) have no intrinsic value.'
Powell also spoke about severe risks posed to 'unsophisticated' investors, saying, "Relatively unsophisticated investors see the asset go up in price, and they think, 'this is great, I'll buy this.'
In fact, there's no promise of that." Powell's concerns do reflect real issues for investors looking to turn a profit in crypto. 2017 has seen a vast number of ICOs that were at best useless, and at worst fraudulent.
Whether or not you subscribe to the idea that the current requirements for being an accredited investors perpetuate America's 'rich get richer' problem, Powell's assessment largely stands up.
There was one particular part of Powell's speech though that deserves some thought though, one that highlights a common and often harmful misconception for those outside of blockchain.
The Common Misconception
In addition to Powell's list of criticisms above, he added the following statement:
"It's not really a currency. We're not looking at this as something that we should be doing ... Mainly I have concerns. If you think about what currencies do, they're supposed to be a means of payment and a store of value basically and cryptocurrencies are not used very much in payment ... and in terms of the store of value, if you look at the volatility it's just not there."
- Jerome Powell
The thing about Powell's allegation is... he's right. He may not be right for the reason he thinks he is, but he is correct that most 'cryptocurrencies' behave nothing like real currencies.
There are three functions something must have in order for it to be considered money, which are:
1. Medium of Exchange - This eliminates the inefficiencies in the barter system our ancestors relied upon
2. Unit of Account - This facilitates valuation and calculation of assets
3. Store of Value - This allows economic transactions to be conducted over long periods of time as well as geographic distances
To perform all these functions optimally, money should be available, affordable, durable, fungible, portable, reliable, and scarce. Raw materials like gold, silver and bronze have historically been used for currency because they fulfill many of these requirements.
Most cryptocurrencies, it turns out, fulfill none of these requirements. But that's because most blockchain protocols weren't designed to.
In Almost All Cases, 'Cryptocurrency' is a Misnomer
Most crypto assets were not designed to function as currencies. Take a look at a network like Augur, which is a decentralized prediction market that allows participants to bet on the outcome of certain events.
Was it ever Joey Krug's intention for you to be able to go into Dunkin Donuts and buy your morning coffee with an Augur token?
Absolutely not. Augur tokens are a native, necessary component of the incentive and security infrastructure that make up Augur's network. They were intended to allow participants to transact in secure, permissionless way on the Augur network alone.
Even bitcoin is only truly suited to be a unit of account and a store of value. The recent lightning network and other layer two upgrades have vastly improved transaction costs and throughput, but it's hard to look at bitcoin's PoW consensus mechanism and conclude that it was originally intended to support a global amount of transactions.
Why the Words Matter
It may seem 'nit-picky' or even obvious to participants in the blockchain ecosystem to point out distinctions like this, but Powell's speech proves that it's not.
Scalability, interoperability, and liquidity are often cited as the most significant barriers to mainstream adoption, but I would disagree.
Until there is at least a basic level of understanding, particularly from federal regulatory bodies, it's likely we won't see adoption meaningfully accelerate.
In the same speech to Congress, Powell indicated that the Fed isn't seeking to regulate the crypto market because "the cryptocurrency market isn't big enough to threaten financial security."
This is a very bad thing, because despite the persistent 'anti-regulatory' voice in crypto, the space needs regulation. A new financial system can't be built without it.
A good beginning would be to start using the proper verbiage to describe crypto assets. Here's a very basic taxonomy of crypto assets that exist today.
1. Cryptocurrencies - Blockchain protocols designed to facilitate P2P digital transactions. Some of the most popular currencies include Bitcoin, Zcash and Monero.
2. Platforms - General purpose blockchain-based 'operating systems' designed to facilitate the creation of dapps. Ethereum and EOS are two high profile examples.
3. Security Tokens - This is the broadest definition on this list, and will likely be broken down into many subcategories as developers build new protocols. However, a good definition for now is a digital, fungible financial instrument that holds some amount of value. Think about the definition of a security today - basically same thing, except this is digital instead of being a piece of paper.
4. Utility Tokens - Digitally native assets designed to support transactions within a designated blockchain network. Golem and Augur tokens are both good examples. (Note: A utility token can be considered a security if it's issued in a manner that fails the howey test.)
5. Collateralized Tokens - Tokens whose value is derived from a physical underlying asset such as gold or oil. CarbonX is an example.
6. Non-Fungible Tokens (NFTs) - Unique digital assets, also often known as 'Digital Collectibles.' Cryptokitties is perhaps the best known NFT.
7. Stablecoins - A price-stable cryptocurrency. You might notice that this is a similar definition plain old cryptocurrencies. It's very likely that in some years all cryptocurrencies will be some form of stablecoin. Basis and Tether are examples of stablecoin projects.
Bitcoin was the first blockchain project to reach a mainstream audience, which was actually was intended to be a cryptocurrency.
The huge amount of attention bitcoin garnered in the press is probably why all subsequent projects have been lumped into the same bucket.
The reality doesn't reflect this simplistic understanding, however. There are a number of distinct crypto assets, each of which were built for a different purpose and require a different regulatory body for supervision.
Perhaps if Jerome Powell had a more nuanced understanding of crypto assets, he wouldn't have made the speech that he did.