UCL Centre for Blockchain Research Associate: Crypto Miners ‘Need More Scrutiny’
Testifiers share dangers and benefits of crypto during meeting of US Senate Committee on Banking, Housing and Urban Affairs
Angela Walch, professor at St. Mary’s University School of Law and a research associate at UCL Centre for Blockchain Technologies, was among the experts who testified in front of US Senate Committee on Banking, Housing and Urban Affairs this week.
- Crypto could be even more dangerous than the current flawed financial system, Sen. Elizabeth Warren said at the Tuesday hearing
- Much like 10 years after creation of the internet, Coin Center director argues, crypto has not yet reached full potential
Several cryptocurrency and blockchain experts testified in front of elected officials of the US Senate Committee on Banking, Housing and Urban Affairs on Tuesday to lay out the benefits of crypto networks and parts of it that still need to be addressed.
During a meeting called “Cryptocurrencies: What are they good for?” senators heard from Angela Walch, professor at St. Mary’s University School of Law and a research associate at UCL Centre for Blockchain Technologies; Jerry Brito, executive director at non-profit Coin Center; and Marta Belcher, chair of Filecoin Foundation.
Keep reading for some of the session’s main takeaways:
The power of crypto miners, software developers can be dangerous
Walch argued that the positive terms associated with cryptocurrencies, such as “decentralized” and “disintermediated,” can be misleading.
“Crypto, understood through a realistic lens, is not a miracle get-out-of-the-financial-system-free card,” she explained. “It has the same problems. We need to examine the power concentrations within it and make thoughtful policy and risk decisions about how to address that power.”
Pockets of power within crypto include software developers, Walch said, as well as miners, who can exploit their power within proof-of-work systems by choosing the order in which transactions go onto the blockchain.
“[Miners] can delay people’s transactions, they can take money to do what are called things like sandwich attacks and front-running and back-running and all kinds of games,” she added. “They are intermediaries and multi-million-dollar, multi-billion-dollar financial systems. They need more scrutiny.”
Brito said that though miners are technically intermediaries who can affect the order that payments are confirmed on the blockchain, they cannot redirect, steal or initiate a user’s payments.
While the order that transactions appear on the public ledger don’t matter in a case of one person sending money to another person, he added, it can matter in decentralized exchange transactions on something like Ethereum. The same problem exists in traditional financial markets, which Brito noted is why high-speed traders build proprietary infrastructure to get their trades in as soon as possible.
“One advantage of decentralized finance is that the blockchain reveals these strategies publicly, rather than happening secretly thanks to murky internal policies at a large financial institution,” Brito said.
He noted that a solution could be to implement alternative market mechanisms that reduce the advantages of transaction ordering, adding that many economists favor using frequent batch auctions rather than continuous order books.
“If we were going to change from a continuous order book to frequent batch auctions at CME or the New York Stock Exchange, that would require one massive institutional change,” Brito explained. “With crypto, it’s trivially easy for anybody to build a competing exchange that users will go to…and we’re beginning to see this. Also, the developers of the Ethereum network itself don’t want to see this and they’re going to be addressing the problem as well.”
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Links between crypto and traditional finance are increasing
A report published by Intertrust Group found that 98% of hedge fund CFOs surveyed expect to invest in crypto in some capacity over the next five years. One in six hedge funds plan to invest more than 10% of their investment holdings in cryptocurrencies within that span.
As the crypto financial system grows, the more likely it is that risks associated with the space will bleed over into the traditional finance system, Walch said.
“Things that go wrong in the crypto system — a catastrophic software bug, any sort of failure there — can actually have an impact on every single holder of the cryptocurrency that is affected, holders of financial products that imbed that cryptocurrency, all of the investment funds that touch that cryptocurrency [and] all of the potential other cryptocurrencies within the crypto financial system because of the fear of contagion,” she explained.
Such could be said for any commodity, Brito argued, noting that a literal bug that wipes out orange crops could affect funds investing in orange juice.
“It’s certainly a possibility, but I wouldn’t say it’s something that should lead us to shy away from cryptocurrencies, just to make sure that we have guardrails in place for hedge funds and other investment vehicles,” he said.
Use cases of crypto have not yet reached full potential
Testifying with Walch and Brito was Belcher, who leads the Filecoin Foundation. Filecoin, which Belcher described as “the airbnb for file storage,” is a peer-to-peer network with built-in economic incentives to ensure files are stored reliably.
The ability to program money, which Filecoin uses, is the most important thing about cryptocurrency, Belcher argued. Such technology allows for someone to write a computer program that says for every second a song is played, a millionth of a cent can be automatically transferred to the songwriter, for example.
Since launching last October, nearly 3,000 Filecoin storage providers have contributed about 8 exabytes of storage capacity — enough to store all of mankind’s written works in all languages 10 times over, Belcher added.
Senator Steve Daines, a Republican from Montana, called Filecoin one of the many promising uses for cryptocurrencies.
“The last thing we should do is regulate innovators into oblivion,” he said during the meeting.
Brito compared the state of the crypto space now to the early days of the internet, during which he said many still did not see the extent of its potential.
“While we may not yet have the Wikipedia or Netflix of cryptocurrency, that does not mean that we never will,” Brito said. “And indeed, there are thousands of entrepreneurs around the world developing new applications of cryptocurrency networks, some of which I have no doubt will change the world even if I can’t now predict what they are.”
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Colonial Pipeline saga still a concern to some
Senator Jon Tester, a Democrat from Montana, mentioned the ransomware attack on Colonial Pipeline. When Belcher called ransomware a cybersecurity problem rather than a cryptocurrency issue, Tester interrupted her.
“If you’ve got a ransom that’s being required and is paid for in cryptocurrency…cryptocurrency can’t wash their hands and say well this isn’t really my problem, this is somebody else’s problem,” Tester said. “No, like it or not, it’s a problem and cryptocurrency is a part of that problem.”
Many crimes have been committed with cash, Belcher quipped back.
“I wouldn’t blame the technology, and I think it’s actually a terrible technology to commit crimes, because it creates a public record of each transaction,” she added. “And so law enforcement are able to analyze the public chain, and that’s why they were able to get back the Colonial Pipeline [ransom].”
Elected officials seem to be split on crypto
Democratic Massachusetts Senator Elizabeth Warren, who has long been publicly skeptical of cryptocurrency, echoed that sentiment during Tuesday’s hearing.
“Instead of leaving our financial system at the whims of giant banks, crypto puts the system at the whims of some shadowy, faceless group of supercoders and miners, which doesn’t sound better to me,” she said. “…In fact, crypto could be even more dangerous for consumers, more dangerous for the environment and more dangerous for the stability of our financial system.”
Committee Chairman Sherrod Brown, a Democratic senator from Ohio, said that while it’s understandable that many people do not trust the country’s largest banks, crypto technologies seem to mirror the Wall Street model rather than challenge them. He named potential solutions such as increasing the number of community banks and improving access to no-fee bank accounts.
“The best thing we can do to protect Americans’ money is to adopt smart regulations that protect consumers, that protect investors, that separate the innovators from the extortionists,” Brown said.
Senator Pat Toomey, a Republican from Pennsylvania, said during the session that elected officials shouldn’t lose sight of the many potential benefits that distributed ledger technology offers.
“We should also be mindful that private innovation has enabled most of these developments,” Toomey noted. “We should not suppress the concepts of individual entrepreneurship and empowerment that have made this innovation possible.”