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Cryptocurrencies cannot deliver their claimed benefits, and instead pose grave risks that policymakers must curb
IN THE 14 YEARS since Bitcoin emerged, proponents have made promises that crypto will revolutionize money, or payments, or finance-or all of the above. These promises remain unfulfilled and look increasingly unfulfillable-yet many policymakers have accepted them at face value, supporting crypto experimentation as a necessary step toward some vague innovative future. If this experimentation were harmless, policymakers could let it be, but the ills of crypto are significant. Given these negative impacts, policymakers must train a more critical eye both on crypto assets themselves and on their underlying databases (known as blockchains) to determine whether crypto can ever deliver on its promises. If it cannot, or is even unlikely to, deliver, there must be strong regulation to rein in the negative consequences of crypto experimentation.
Among its negative impacts, the rise of crypto has spurred ransomware attacks and consumed excessive energy. Bitcoin's blockchain relies on a proof-ofwork validation mechanism that uses about as much energy as Belgium or the Philippines; the Ethereum blockchain keeps promising to shift from proof of work to the more energy-efficient proof of stake, but this never seems to happen.
A crypto-based financial system would perpetuate, and even magnify, many of the problems of traditional finance. For example, the amount of leverage in the financial system could be multiplied through a potentially unlimited supply of tokens and coins serving as collateral for loans; rigid self-executing smart contracts could deprive the system of the flexibility and discretion so necessary in unexpected and potentially dire situations. More generally, the crypto ecosystem is extremely complex, and that complexity is likely to be a destabilizing force (both because complexity makes it hard to assess risks even when there's plenty of data and because the more complex a system is, the more susceptible it is to "normal accidents," when a seemingly minor trigger cascades into significant problems). So any crypto-based financial system would likely be subject to regular destabilizing booms and busts.
Crypto's complexity arises from attempts at decentralization-by distributing power and governance in the system, there is theoretically no need for trusted intermediaries like financial institutions. That was the premise of the initial Bitcoin white paper, which offered...