Why the West should embrace Cryptocurrency and the Blockchain

You may have heard of cryptocurrency before, even if only in headlines. You may have heard rumors that it’ll replace gold or read headlines about illicit and illegal activity involving bitcoin. Perhaps you’ve even heard it compared to Ponzi schemes. According to some estimates, 96% of Americans don’t understand cryptocurrency at a basic level. With so many competing characterizations and not enough knowledge, how can we truly understand bitcoin, cryptocurrency at large, and it’s place in politics? And how can we expect our aging leaders to legislate it without first understanding it?

Around 11 countries currently ban cryptocurrency, including China, Egypt, and Russia. This begs the question: why? Although it may not be a simple answer, we do understand a portion of why: authorization regimes exert massive control on it’s people and control of the monetary system plays a large part in that control. Cryptocurrency provides a freedom of movement of money and these regimes actively work to keep money (and people) within their control. Those governments who reject cryptocurrency do so to protect their own financial and social interests. Now that we understand the reason these regimes want to ban it, we must ask the next question: if it’s bad for authoritarian governments, is it good for democracies?

Often when discussing changes in a capitalist system, it’s a discussion around financial power. Existing dynasties of power span decades and continue to hold vast wealth and influence. At the center of this system that controls our money is simultaneously our only access to it: banks. Because of money’s position in society, we collectively have decided some rules are necessary. Banking is a regulated industry, with many guidelines, rules, protections, and loads of paperwork. This central position enables them to charge fees that earn them billions. Cryptocurrency seems to avoid most of these regulations — since it’s not a bank. By design, it does not charge massive fees when transferring from fiat currencies (i.e. converting Bitcoin to USD). Their status in regards to tax implications isn’t fully defined or developed but there are some current guidelines in place. If someone buys cryptocurrency, they must keep a ledger of how much was bought, the purchase price, and the sale price when sold. This selling portion is the critical component: once you “sell” your cryptocurrency back to USD, you pay tax on those earnings; in other words, if someone purchases 1 Bitcoin for $10.00 in 2000 and sells it for $10,000 in 2018, they would add $9,990 (sell price of $10,000 — purchase of $10) to your earnings you’d report to the IRS, and potentially pay a tax on a portion of that income. Ultimately, these rules do keep shifting, so my advice is to consult a tax advisor for your personal cryptocurrency investments.

Now that we know what the basic tax rules are: now what? What is cryptocurrency and the blockchain? If you already know, you can skip this paragraph. Other articles may be better at explaining in full detail, but here is a simplified version: Cryptocurrency (such as Bitcoin) is a mathematically provable history of transactions with a set number of “tokens”. By both having a limited supply and a mathematically validated transactional recordkeeping, a monetary value can be assigned to a “token”. In some ways you can imagine it as a stock. Remember supply and demand? The same forces apply here. When demand increases, the value of the “token” increases; falling demand will cause the value to decrease. Instead of going through a bank’s processing system, any transactions are handled through a distributed network of computers to validate the transaction; this is called mining and anyone can do it. These computers that “mine” are actually confirming the transactions and play a critical role in supporting the system. In the way that these computers process the transactions, it is not much different than banks. However, the big difference is speed, efficiency and transparency: cryptocurrency transactions can occur relatively quickly, particularly when compared to banks. Since it also provides a historical transactional record, all transactions are visible to the public; that is, if you want to explore the data on a blockchain, it is free to access and analyze. By comparison, banks have no such transparency and operate at a snail’s pace when working with money. Ultimately, banks and wealthy dynasties exist at the center of money’s operation, and some of them see a risk to their power in cryptocurrency.

Others have taken a different approach: Visa is seeing crypto’s growth as inevitable and is eyeing crypto services as demand has increased. Some banks are looking to do the same but this doesn’t stop there as there are a host of other financial and data tools being generated by Blockchain technology: NTFs, smart contracts, crypto loans, cryptocurrency returns that operate like an interest bearing savings account, and so much more. The way cryptocurrency operates by using blockchain technology is also being used to store non-financial blockchain data. This is how an NFT operates; you’re purchasing the data portion of something that can be mathematically validated. Since its existence can be mathematically verified, there is value to that permanence of an NFT. Wrapping one’s head around NFTs is difficult but it doesn’t stop there. The ideas and products that are generated on an almost daily basis are astounding. This is generating wealth for many, as they operate a whole new world of ideas. Ideas mean businesses, which means money.

Although it is easy to point to the successes of cryptocurrency and blockchain technologies, rivals point out some negatives: (1) it is not regulated directly as a currency, so any gains or losses are not secured as would be in a normal bank; (2) there have been instances of theft through hacking or scams, although crypto has been recovered before; (3) there is an ongoing debate around the environmental impact of crypto technologies with some estimates showing the impact of crypto mining rivals that of entire countries’ emissions; and (4) lastly there is some discussion that cryptocurrency is primarily used for illegal activities, although that is mostly debunked.

Since cryptocurrency is not regulated as a bank, there is often an inherent risk with it’s value. For non-stablecoin cryptocurrencies, if you suffer a drastic loss in value, then that is a loss you have to absorb; this currently functions much the same way as a stock. Since this is a new technology that is completely digital, scams and hacking will continue; however, we have no shortage of scams today even without crypto. Indeed, the adoption of new technologies often brings an opportunity with it for those who look to take advantage of others, such as the infamous Nigerian Prince Email scam; this is an education problem that can be overcome. The environmental impact sounds problematic but even this may be short-lived, as there are promising improvements and as we work towards a carbon neutral future by investing in green energy. Lastly, the idea that cryptocurrency should be banned based on its use in a small percentage (criminal activity represented 0.34% of cryptocurrency transactions in 2020) of illegal activities ignores the fact that the vast majority of transactions are legal; digital currencies do not by themselves enable illegal activities and in fact serve as a ledger to enable better enforcement against financial crimes. In these ways, it is clear that the negatives of cryptocurrency are frequently overstated and unsubstantiated.

The stated negatives of cryptocurrency alone do not consider the equivalent problems within the current banking system. The environmental impact of existing banking infrastructure is not zero. There are a host of things to consider when calculating the banking industry’s environmental impact (one such analysis here) and comparing it to cryptocurrency: employees commute to work; banks have a number of branches and their energy use is not zero. As of 2012, banks used an estimated 195 billion kWh in energy use from their buildings; when converting to carbon emissions, that ends up being more than 90 million metric tons of CO2 per year for just bank’s buildings. Furthermore, more than 1.8 million bank employees also commute and with an average one-way commute time of 27.6 minutes nationally which adds 8 million metric tons of CO2 per year (an average of 4.6 metric tons per vehicle per year x 1.8 million employees) in carbon emissions. All totaled, banks contribute more than 98 million metric tons of carbon dioxide to the atmosphere a year. By comparison, Bitcoin mining deposits 34 megatons (34 million tons) of CO2 into the atmosphere per year, although 39% of mining is utilizing renewable energy. This is by no means a comprehensive analysis of energy use since Bitcoin is only one type of cryptocurrency; additionally, other coins may utilize less energy (energy use is based on the implementation of each particular cryptocurrency and there are many sustainable alternatives). When considering all of these factors, it is difficult to assume that cryptocurrency is less environmentally friendly than existing banks. Regardless, when considering any legislation to regulate crypto and blockchain technologies, these negatives must be considered.

Another often overlooked aspect of banks is their disproportionate costs for poor people. First, overdraft fees are not only high, they seem punitive; banks earned billions during the pandemic from overdraft fees that the poor are most susceptible to. Although some banks are changing overdraft rules and legislation to regulate this is on the horizon, cryptocurrency does not generally suffer from this onerous fee structure. Each cryptocurrency can charge different transaction fees, and can range from free to a small percentage of the transaction; some cryptocurrencies process your transaction more quickly by paying a larger transaction fee. Additionally, transaction fees may fluctuate day to day. Although many transactions process within seconds to within an hour, cryptocurrency transfers can sometimes take longer. By comparison, banking systems lag behind in their processing due to ancient systems that have not been upgraded and often process overnight. If someone living paycheck to paycheck makes a miscalculation, the bank can charge fee after fee causing them to fall even further behind. As many as 63% of us are living paycheck to paycheck so banking fees can cause severe financial distress. There is no “overdraft” with cryptocurrency; you can only send what you have and since money transfer is much faster (cryptocurrency transactions take anywhere from 2 seconds to 60 minutes on average) than banks (most banks reconcile transactions within a few days, although there are some banking products that offer quicker transfer, usually for an additional fee), reconciliation happens quickly. Cryptocurrency enables more freedom of movement of your money. If someone wants to send money overseas, they often face relatively large fees to do that with the median cost of a wire transfer being $49 USD; cryptocurrency charges a fraction of that cost. Banking has its own problems and cryptocurrency avoids many of them. It gives people back some freedom with their money without falling victim to massive bank fees. This is not to say that banking is bad and cryptocurrency is good; banking is a necessity for many services. However, to automatically dismiss cryptocurrency as an alternative is ignoring the future that’s coming.

Since we’ve explored what it is and examined some of the negatives, the next question is inevitable: how should the US government treat things? Should we leave things as-is and continue to treat it as a quasi-security? Should it become managed as a bank, or a subtype? These are not simple questions to answer yet there are already committees discussing these types of changes and even some states are starting to be more open to cryptocurrency. Ultimately, it’s up to voters to decide who they want to elect to regulate these issues of the future. Without direct government oversight, there is no financial guarantee if loss occurs. Many would point out that it’s doing well without the government stepping in. However, regulations are coming; it’s just a matter of how we move forward.

What if the US Government opened its doors to cryptocurrency by backing a stablecoin such as USD Coin (or utilized CBDC)? It could easily operate as a virtual bank to offer basic services — perhaps even through USPS. In fact, cryptocurrency solves some major problems: the storage of transactions is mathematically validated and is fully transparent. What if you opened the crypto world to legislative and governmental application? Not only are you able to permanently store things like representatives’ votes on bills on the blockchain, you can even store the content of the bill itself. News outlets or anyone could analyze the data since it would be accessible by anyone. We could additionally track campaign finance transactions through blockchain. By storing this data, we can create a way to have digital access to our legislative process, track the way money flows through politics and sustain a historical fact-provable record of events. It could be fully expanded to become a modern digital Library of Congress, able to store massive amounts of data. When designing the implementation, we can utilize green energy to run these systems. This isn’t cryptocurrency; it’s crypto governance. Using this technology, one can imagine a future with open access to government data and more efficient services. Access to blockchain technology enables this and many other solutions. This is just a sample of the creative ways we can think about this technology and its application in governance; the sky’s the limit as we think about future design and applications.

Ideas like this are exactly what we need to be thinking of. The technological implications are well beyond cryptocurrency; we can work to modernize government through the storage and availability of information on the blockchain. No one of us has the right solution to these problems. We often complain about an inefficient government but have failed to find solutions that can make a real impact. Using newer technologies, working with data, and by collaborating, we can find the right solution to move us forward.

I’m Daniel Ferrara and although the districts are not yet finalized, I am running for the California Assembly with the Forward Party Movement. I enjoy writing and thinking about solutions to modern problems that work for all of us. Our two party system has become too extreme as it strains to represent massive groups that are very different even inside them. In order to solve problems, we must work together to come up with solutions by being open to constructive disagreement. We can use blockchain and crypto technology to enable a more open and efficient government. By listening to each other and working together, we’ll find the best solutions.

Our current leaders are either being lobbied by massive crypto exchanges or don’t understand cryptocurrency. How can we expect them to understand how to write laws that don’t simply benefit the current powerhouses? Unfortunately, we likely can’t, as lobbyists often consult heavily on the actual language that ends up in laws. We must work to change this outdated system to protect itself from itself. As this party system grows in the billions, we must beware of money’s corrupting influence. We must fight back by enabling more competition. Ranked choice voting and open primaries is where it all begins. Only then can we enable more out-of-the-box thinking to solve problems in new novel ways.

In California, we could consider adopting a stablecoin (one whose value is static against a fiat currency) and finance low interest loans for new businesses. We could enable taxpayers to pay taxes using a stablecoin. We can invest in green crypto by investing in green energy. Cryptocurrency regulation is inevitable. We can embrace it as a way to move towards modernization of governance. It’s up to us how it happens. We have the opportunity to look forward in California. It’s time to look forward in cryptocurrency and the Blockchain. Are you ready to move forward?