Recap of the US Senate Hearing “Exploring the Cryptocurrency and Blockchain Ecosystem”

Recap of the US Senate Hearing “Exploring the Cryptocurrency and Blockchain Ecosystem”

Francisco Memoria

The US Senate has recently listened to 'Dr. Doom' Nouriel Roubini, who’s a well-known cryptocurrency skeptic, and to Peter Van Valkenburgh, director of research at CoinCenter and well-known cryptocurrency proponent.

Dr. Doom Nouriel Roubini kicked off the hearing. He has called the cryptocurrency space the “mother of all scams,” in his prepared testimony for the Senate. In it, he claims cryptocurrencies aren’t scalable, are full of scams, and aren’t being used by anyone but criminals.

“Overhyped Technology”

In his 37-page document Roubini, colloquially known as Dr. Doom for his seemingly constant bearish approaches, claimed blockchain technology is no more than “overhyped technology” and a “glorified spreadsheet or database.” He also addressed the crypto market’s slump, and 'shitcoins'.

In his initial presentation during the Senate hearing, Roubini claimed there’s “no blockchain technology” in fintech, as while there is a revolution going on, it isn’t related to cryptocurrencies or their underlying technology.

He went on to summarize his prepared testimony, and in it mentioned most tokens issued by initial coin offerings (ICOs) would be considered securities. He pointed out even the Securities and Exchange Commission (SEC) launched a website with a fake ICO to warn investors.

In his presentation, Peter Van Valkenburgh started by looking into what bitcoin is and why it currently “works.” It’s revolutionary, he said, because it functions without the need of middlemen. Before it existed, he noted, transacting remotely required banks’ authorizations and potentially multiple ledger entries.

Is Bitcoin Perfect?

Continuing, Valkenburgh noted that bitcoin isn’t perfect, but neither was email in 1972 when it was first introduced to the world, implying bitcoin is still in its early days and still has a lot of room to grow, provided it’s given the chance.  

The director of research at CoinCenter said that it’s not yet widely accepted, it isn’t yet a stable store of value, and isn’t yet used often to quote prices. He added:

The mere fact that it works without trusted intermediaries is amazing. It’s a computer science breakthrough, and it will be as significant for freedom, prosperity, and human flourishing, as the birth of the internet.

Why should BTC be embraced? Because privately owned infrastructure has been becoming increasingly more powerful, and its failures increasingly grave, Valkenburgh said. Blockchain isn’t yet ready to answer all of the questions raised against it yet, but “it is our best hope,” he added.

As such, Valkenburgh argued the fintech sector needs light, pro-innovation regulations to let “these innovations flourish in America, for the benefit and security of all Americans.”

Electronic Cash, Identity, and the Internet of Things

Chairman Mike Crapo then asked the two witnesses about the three areas where decentralized computing is believed to be most helpful, which are “electronic cash, identity and the internet of things.” His questions included where they see the market go in the next year, and in under what conditions the cryptocurrency market may stabilize.

Per Valkenburgh, the crypto ecosystem’s volatility stems from the “struggle to find a level for something brand new.” Now that institutional investors are entering the market and products are being made for them, people will be able to short the market and “rationalize” it.

Commenting on the same issue, Roubini fired that cryptocurrencies “are not scalable, are centralized, and are not secure.” Pointing to miner concentration in countries like China, he argued cryptocurrencies don’t rely on centralized institutions, but on “an oligopoly of individuals that are shady, in countries you have no control.”

Achieving blockchain scalability, he added, will lead to “even more cartelization of mining.” Once this occurs, security is gone. While there are fees associated, losing a credit card doesn’t mean people lose money, Roubini said. Losing a private key, on the other hand, does.

The Fintech Revolution

While replying to a question by Senator Sherrod Brown regarding innovation, Roubini noted that there is indeed innovation in the fintech sector, which can revolutionize various financial systems we currently have. This innovation, however, isn’t connected to blockchain tech or cryptocurrencies, he argued.

Pointing to rising fees in most cryptocurrencies when their networks get clogged, Roubini added these are the “opposite of any successful technology in the financial sector or the internet.”

Replying to Senator John Kennedy – who asked whether or not the witnesses believe there are uses for blockchain technology - Roubini claimed bitcoin isn’t currently decentralized as most of its hashpower currently comes from China, and that private entities will likely use private databases to stop their records from being public.

The fintech innovation, to Roubini, is based on applications like Alipay, Venmo, Square, and M-Pesa. These, Valkenburgh replied, are huge databases that include every financial record of “every citizen in every country,” which makes them a single point of failure – these databases can be hacked, represent surveillance, and could be used as a “tool for totalitarians.”

Law Enforcement and Cryptocurrencies

Senator Doug Jones then asked the witnesses about the dangers of cryptocurrencies as they pertain to money laundering, sex trafficking, and other illicit activities. Replying, Valkenburgh noted that while bitcoin and other cryptocurrencies have been used by criminals, this could be a good sign as “if criminals aren’t using your technology, your technology is not worth anything.”

As to what could be done, buying cryptocurrencies on regulated exchanges means users go through KYC and AML checks. For cryptocurrencies circulating outside of exchanges, the director of research added the US has “phenomenal law enforcement” which has become “extremely adept at finding and de-anonymizing” BTC addresses.

Roubini, on the other hand, noted in principle law enforcement can go after illicit activities related to cryptocurrencies, although a system that’s pseudonymous implies risks for authorities, as it could allow anybody “not to declare their income, not to declare their wealth, not to declare their capital gains.”

Preserving Value

Senator Pat Toomey then addressed the witnesses, noting the cryptocurrency ecosystem’s slump this year has been noticeable and that the “volatility of bitcoin has been breathtaking,” after mentioning scams related to ICOs.

On the other hand, he added:

Central banks over time haven’t had the greatest record of preserving the value of the medium of exchange that they’re responsible for. We’ve discussed the friction in the payments systems that we have now, and I think fintech is offering fabulous new ways to minimize that friction.

Referring to Roubini’s point of view that cryptocurrencies aren’t currencies, Senator Toomey noted “anything can be a currency if it’s accepted by enough people.” When asked about the potential scalability, Roubini argued BTC’s proof-of-work consensus algorithm isn’t scalable.

Valkenburgh, on the other hand, pointed out bitcoin can go beyond its current 5 transaction per second limit with some of the technology that’s being developed, including batch settlements, the lightning network (LN), and more.

As for mining oligopolies, he noted that organization who manage to leverage immense amounts of resources to control a large part of the bitcoin network can harm it, for the most part, using denial of service attacks – which most internet-based systems are vulnerable to.

51% Attacks, ICOs, Identifying Crimes

Speaking to Senator Elizabeth Warren, Roubini responded to the miner oligopoly issue by claiming they could potentially leverage a 51% attack against the flagship cryptocurrency – something that, per his words, has been occurring everyday against small coins.

Miners having an oligopoly, he said, sees them raise transaction costs and control the bitcoin economy in their favor. Both witnesses then agreed last year’s bull run was a speculative bubble, caused by people looking to buy so they could sell at higher prices later on.

Addressing ICOs, Senator Warren noted that reports have shown these projects have raised billions of dollars, and that last year 80% of them were scams, according to a study. While Valkenburgh replied that securities laws have worked well in the last few decades, and may continue to work well after ICOs are regulated.

Senator Cortez Masto then asked whether or not there’s a protocol for identifying crimes like sex or drug trafficking on the flagship cryptocurrency’s network. Valkenburgh replied that Bitcoin is a protocol, so businesses can build on top of it to implement such procedures.

He added that bitcoin isn’t completely anonymous while replying to Nouriel, which means law enforcement officials can conduct investigations using bitcoin’s blockchain. The director of research noted he agrees a unified regulatory approach across the globe would be positive.

The Senate hearing was then adjourned. Senators will be submitting questions to the witnesses, who were asked to reply as quickly as they can.