It's Still Not About The Technology

I, like many others, signed the Letter in Support of Responsible Fintech Policy, saying:

We strongly disagree with the narrative—peddled by those with a financial stake in the crypto-asset industry—that these technologies represent a positive financial innovation and are in any way suited to solving the financial problems facing ordinary Americans.

In response, famed cryptographer Matthew Green, who I'm told HODLs ZCash and is involved in a blockchain startup, posted In defense of crypto(currency), basically arguing against regulating cryptocurrencies because, although their current state is rife with crime and is cooking the planet, better technology is possible.

Bruce Schneier responded with On the Dangers of Cryptocurrencies and the Uselessness of Blockchain. Below the fold, I argue that both of them have missed the most important point.

Schneier starts by summarizing Green's points:

1. Yes, current proof-of-work blockchains like bitcoin are terrible for the environment. But there are other modes like proof-of-stake that are not.
2. Yes, a blockchain is an immutable ledger making it impossible to undo specific transactions. But that doesn’t mean there can’t be some governance system on top of the blockchain that enables reversals.
3. Yes, bitcoin doesn’t scale and the fees are too high. But that’s nothing inherent in blockchain technology—that’s just a bunch of bad design choices bitcoin made.
4. Blockchain systems can have a little or a lot of privacy, depending on how they are designed and implemented.

Schneier doesn't really disagree with these points, although I definitely disaagree with point #3, but instead writes:

To me, the problem isn’t that blockchain systems can be made slightly less awful than they are today. The problem is that they don’t do anything their proponents claim they do. In some very important ways, they’re not secure. They doesn’t replace trust with code; in fact, in many ways they are far less trustworthy than non-blockchain systems. They’re not decentralized, and their inevitable centralization is harmful because it’s largely emergent and ill-defined. They still have trusted intermediaries, often with more power and less oversight than non-blockchain systems. They still require governance. They still require regulation. (These things are what I wrote about here.) The problem with blockchain is that it’s not an improvement to any system—and often makes things worse.

I agree with Schneier here, but I argue that here he falls into the trap Green lays by framing the problem as being about the quality of the technology. He gets closer to the real argument against Green when he writes:

blockchain does nothing to solve any existing problem with financial (or other) systems. Those problems are inherently economic and political, and have nothing to do with technology. And, more importantly, technology can’t solve economic and political problems. Which is good, because adding blockchain causes a whole slew of new problems and makes all of these systems much, much worse.

As I argued in Can We Mitigate Cryptocurrencies' Externalities? the real question that needs to be answered is "how to reduce the harms the technology is imposing on the world?"

It would not be a surprise if Green's startup could produce better technology than Bitcoin or Ethereum. Since their advent, many thousands of cryptocurrencies have launched. Many of them can credibly claim better technology than either Bitcoin or Ethereum. None of them have made a significant dent in Bitcoin's or Ethereum's market share. So why would Green think that the fix for the current problems is better technology? It is because he has a hammer and sees the problem as a nail.

Back in 2018, in the context of discussions of decentralizing the Web, I wrote It Isn't About The Technology, arguing that the problem wasn't developing better technology, which already existed, and it wasn't even inventing a viable business model, which didn't exist, but that even if you had those things, the problem was persuading people to switch.

Source

We have the same problem in cryptocurrencies. The reasons for cryptocurrencies to exist, and thus to cause all the harms, are the speculation and the scams. Speculators go where the other speculators are. Scammers go where their victims are. Launching yet another cryptocurrency with better underlying technology but no speculators and no victims would have no effect on the harms. Launching a better permissionless blockchain without a cryptocurrency won't work, as I pointed out in You Can't Have One Without The Other.

And in any case, the arena for the big-time speculators and scammers isn't the Bitcoin and Ethereum spot market, where the technology might be thought to matter, but in the roughly ten times bigger derivatives market, where it clearly doesn't. Nothing will dent the market share of Bitcoin and Ethereum unless it is rife with speculators and victims. Even if you could create yet another arena for speculation and scams it wouldn't be a solution to the problem we face.

Green's plea that regulation not suppress the potential for better technology to emerge is, based on the history of better technology emerging, futile. Even if the potential better technology emerges it would not solve the problems Green concedes, because It Isn't About The Technology.

Finally, I have to thank Schneier for this:

EDITED TO ADD: Nicholas Weaver is also adamant about this. David Rosenthal is good, too.