"Cryptocurrencies: Irrational Exuberance or Brave New World?" Milken Debate: Part Two

Vlad Costea

This is the second part of CryptoGlobe’s coverage on the Milken Institute Conference cryptocurrency debate. The debate was entitled "Cryptocurrencies: Irrational Exuberance or Brave New World?" and hosted 4 of the most prominent figures in the fields of cryptocurrencies and economics:

“Coiners”
  • Bill Harhydt (CEO and founder of Abra) 
  • Alex Mashinsky (CEO of Celsius Network)
“No-Coiners”
  • Brent McIntosh (General Counsel at the US Department of the Treasury)
  • Nouriel Roubini (Chairman of Roubini Macro Associates)

Q6: How much illicit activity is there in the crypto space and how good is the government at tracking the transparent blockchain?

Brent McIntosh: As crypto presents challenges and opportunities for tracking. The blockchain is perfectly traceable, but you often don't know who's at the end of the chain. It's a challenge to trace, but it's also a great opportunity for financial transparency. 

Nouriel Roubini: If companies are registered and have stocks and bonds, then ICOs are based on a whitepaper that is total vaporware. He then goes on to cite statistics according to which 80% of ICOs are scams, and 61% of them are already out of business. Also, he references a recent statement of the SEC chair who said that all the cryptocurrencies with the exception of Bitcoin are securities. ICOs break all regulations, are scams, and eventually the SEC and CFTC will have to crack them down.

Alex Mashinsky: (who had recently done an ICO for Celsius): Over 90% of the internet companies which were operating in 1995 have run out of business within 5 years. There are a lot of bad ideas in any innovation wave, and likewise, 90% of cryptocurrencies can become worthless because they're not competitive enough. The Celsius ICO raised $50 million and every operation has been performed legally, according to the lawyers involved.

The ICO speculators are just like tourists, they come and they leave. Not all those who invest do it just to make big returns, and he personally received phone calls from investors who believed in the project and wanted to contribute to it by virtue of goodwill. The point is that ICOs are a great way to raise money for ideas that will change the world, in ways that are lesser strict. 

Also, Mr. Mashinsky applauds the governments and its institutions (the SEC and the CFTC) for seeing the good side of the crypto industry and trying not to overregulate it before reaching its fullest potential.

Nouriel Roubini: While 95% of start-ups fail, there are still assets and patents involved (which can be later sold on the basis of registered ownership). There are security laws and rights which protect investors in start-ups, while ICOs are completely risky and offer no guarantees.

Q7 (to Mr. Bill Barhydt, Abra CEO): You deal with these coins which can fund ICOs, do you think about delisting some of them?

Bill Barhydt: The front-end application is very simple and everybody can use it, but the background is very complex. 25 cryptocurrencies are enabled for exchanging, buying and selling within the app, and all of them are tracked in the market-making system. The advantage is that the Abra stats show what's liquid, how many transactions per day are being made, what the spreads are, which local foreign exchanges are being used, and this is a good indicator to determine which cryptocurrencies should be included in the app. From a securities perspective, Abra undergoes a rigorous selection process which makes sure that even during times when the market is down, there is consistency in the services and the cryptocurrencies function like they're supposed to. 

Mr. Barhydt then proceeds to tell a story about a meeting he's had with the head of the Bank of Mexico and explains that a 2-hour whiteboard explaining session revealed that the official was not aware of the programmable money dimension of Bitcoin and had no idea it was just software. He also said that the Mexican bankers had a moment of clarity when they realized that they can integrate Bitcoin into their business in order to have low-cost retail payments, low-cost cross-border e-commerce, investment exposure into US stocks (which is impossible for the average investor). A lot of people have no idea that these implementations are possible because everyone's focused on the price.

Q8 (for the coiners): Do you fear that these unregulated ICOs which turn out to be scams end up ruining your businesses?

Bill Barhydt: Just because uninformed people invested in something they didn't understand doesn't mean that there is something wrong with the structure of doing an ICO. Also, ICOs can be made to function the same way as securities, with dividend payments, lock-ups, shareholder rights, and they're all programmed into smart contracts. This was not possible to do in the first iteration of the smart contracts because it was quick and easy. However, there is always room for improvement. 

Alex Mashinsky: TCP/IP and HTTP were not shut down because a bunch of companies went bankrupt in 1996, or because of the porn and gambling. The Celsius Network has KYC'd every investor from all over the world and unlike China, the USA is a much more progressive country which knows how to balance innovation with risk management. He also mentions that several countries around the world (such as Malta, Singapore, Gibraltar, and Estonia) that pass special laws to invite technology companies to operate on their soil, and the US citizens and regulators don't want all that capital to go offshore due to discouraging regulations.

Q9 (for the US Department of the Treasury General Counsel): Can the blockchain as a technological innovation be useful for the government in order to conduct its business? Also, can we see a crypto version of the US dollar?

Brent McIntosh: It's still unclear, but still very probable that the government will build blockchain applications. Registering property-owning and allowing citizens to vote are just two of these possible implementations. But in regards to a crypto dollar, we still find ourselves in a premature phase and we can't have that kind of discussion yet. 

Q10 (for Dr. Nouriel Roubini): Can you find any good uses for distributed ledgers and blockchains?

Nouriel Roubini: Even separated from its cryptocurrency application, blockchain is an overhyped technology because none of the ongoing revolutions in FinTech have anything to do with it. He then goes on to compare blockchains with Excel spreadsheets. Also wondering why would anyone want to have all the private transactions on a public ledger? 

Mr. Roubini goes on to say that blockchains can't scale to handle major transaction volumes, decentralization isn't sustainable due to the need to create scalability and believes that Bitcoin is the only implementation of the technology which somewhat works but can't compete with the FinTech innovations. 

Q1 from the audience: When will tokens become securities in order to bring more trust in the ICO market?

Brent McIntosh: Primarily, that's a question for the SEC. Chairman Clayton has stated that he sees all ICOs as a security. 

Bill Barhydt: He doesn't believe that the SEC will ever do the classification, though the default status is that of a security by consensus. 

Q2 from the audience: When will the SEC enforce these regulations so investors know how to pick security tokens?

Alex Mashinsky: The line between what is a security and what isn't has not been tested yet, and it's the Supreme Court which has to decide whether or not we live in a new world where some securities are not legally treated as securities. The SEC should follow the example of the CFTC and consider following the will of the citizens over imposing rules of the old order. 

Q3 from the audience: One of the meanings of "decentralized" refers to resistance to the government's actions. How is the government going to act if the technology really becomes autonomously decentralized?

Brent McIntosh: Nobody really knows where this technology is heading and the approaches will keep up with innovations. It's hard to tell where we will be in 10 or 20 years. 

Q4 from the audience: Should I accept cryptocurrencies as a means of payment at the school I've started?

Alex Mashinsky: If the capital is required in order to run the business, then it's too risky due to the market volatility. However, a small percentage of payments can be accepted in crypto as an investment, as there are high chances that the currency will appreciate. If the percentage is kept somewhere between 5 and 10, then it's reasonable. 

Q5 from the audience: The case of cryptocurrencies seems to be similar to the attempt of Alexander Hamilton to centralize over 800 US banks which used to issue their own currencies. How can the scalability issue of Bitcoin be addressed in order to create real value and sustain the increasing demand?

Bill Barhydt: There is no central governance in Bitcoin and this is a feature which enables immutability and security. No benevolent dictator can reverse or erase transactions by overtaking the network, but the downside is that changes happen very slowly. However, the market solves this problem through competition, as lots of cryptocurrencies emerge to address every small issue that exists in Bitcoin. The case of cryptos is the exact opposite of aggregating everything into a central bank.