The Earth Is Not Flat, and Cryptocurrency Is Not Evil

I was surprised by U.S. Secretary of the Treasury Janet Yellen's comments about cryptocurrency at a U.S. Senate Finance Committee hearing on January 19, 2021. She stated: "Cryptocurrencies are a particular concern. I think many are used — at least in a transaction sense — mainly for illicit financing. And I think we really need to examine ways in which we can curtail their use and make sure that money laundering doesn't occur through those channels."

Secretary Yellen's allegation about the primary use of cryptocurrency is not supported by recent data, and it was met with opposition from finance and cryptocurrency experts. Forbes recently characterized the cryptocurrency industry's response as a "collective eye roll" and quoted an industry expert who said that the Secretary's comments are "demonstrably false."

Yellen's stated intention to "curtail" the use of cryptocurrency reflects what I think is a short-sighted strategy by some federal fiscal policymakers. In this article, I will present a few salient points that I hope policy leaders will keep in mind as we embrace the now-inevitable disruptions (and benefits) from cryptocurrency and related technologies in the coming years.

1. Cryptocurrency Is Here to Stay

Cryptocurrency and the blockchain technologies behind it aren't going anywhere. In fact, they exist in response to market forces that demanded better ways to solve problems that have long plagued the information age: security, transparency, and prohibitively expensive information management costs, to name a few.

While millions of individual investors are buying cryptocurrency assets, recent large-scale investments in cryptocurrency by institutional investors, most prominently Tesla's $1.5 billion investment in bitcoin, point to a budding mainstream status for these assets. It's not just speculation anymore: Sophisticated organizations with avant-garde evaluation tools have embraced the value potential offered by crypto assets. Consider recent moves by Fidelity and other traditional Wall Street players to launch funds and indices that track cryptocurrency and related mining operations.

Does it seem plausible that all these regulated, and in some cases publicly traded organizations, would invest in an asset that was fundamentally tainted by illicit financing? Or is it more likely that investments in bitcoin and other cryptocurrencies are soaring because they are legal, legitimate, and represent an increasingly low-risk option that better aligns with their needs?

From a regulatory perspective, it seems to me that the U.S. Department of Treasury and related organizations have few realistic options. When this level of interest exists in an investment, it will be problematic (if not impossible) to "curtail" or otherwise hinder its use. And to what end?

The U.S. would be foolish to hinder the ability of its citizens to invest in the most important asset class to come around in a generation or more. It would also be a mistake to deprive U.S.-based crypto and blockchain development companies of the investment they need to compete in the global market.

The reality is that the proverbial crypto-genie is out of the bottle, and stifling American innovation, investment, and influence in what may be one of the most disruptive technologies of all time is not a good strategy.

2. Cryptocurrency Is No More Illicit Than the USD

If one wanted to single out a currency used for illicit transactions, look no further than the U.S. dollar (or any other hard fiat currency). Dollars are untraceable and un-auditable until they hit a bank account or are formally documented in some way, which doesn't typically happen when people have nefarious intentions. The Forbes article cited above chronicles the extent to which illegal activities carried out in fiat currency dwarfs those committed using crypto.

Blockchain-based cryptocurrency offers a level of transparency and auditability that is simply unmatched by any other financial instrument. While crypto will likely always be used for some criminal activities, the currency itself is just a medium of transfer and is no more inherently corrupt than any other.

Most importantly, blockchain technologies offer better traceability and controls for cracking down on known criminal accounts than those that are available for traditional paper currency.

3. Cryptocurrency and Blockchain Offer Tremendous Potential to the Federal Government

Cryptocurrency has the potential to help the U.S. federal government more effectively handle some of the tasks it has traditionally struggled to do well — especially cash and asset management.

In 2018, I wrote an op-ed for CNBC about how an agency within the Pentagon had lost track of $800 million, and how blockchain technologies could save federal agencies billions. I am more convinced about this than ever, due to blockchain's proven ability to passively manage enormous blocks of complex information.

At its core, blockchain is a tool for recording transactions such as contracts, orders, and payments, and storing that information securely on thousands of computers via a shared ledger or database. This ledger is recorded automatically and independent of human error, and it cannot be procedurally sidestepped. For any given transaction, there will be a ledger entry that documents all specified data parameters.

This ledger entry is virtually impossible to hack or manipulate because as each block locks, each entry is recorded on thousands of computers in real time. For any block that might be manipulated, there would be thousands more "copies" of the block that were in agreement, which would call attention to the hack.

I appreciate the information burden our federal agencies bear — perhaps more than most, given my background in providing IT solutions to public-sector agencies. As I pointed out in the CNBC article, the federal government has millions of civilian workers spread across more than 400 agencies, sub-agencies, and departments, and conducts business with thousands of commercial vendors. Any organization that large would naturally struggle to share information and process transactions across departments in a timely, accurate manner. It is truly a massive undertaking, and it is exactly the kind of problem blockchain technologies excel at solving.

Rather than demonizing these technologies, the federal government should be systematically embracing them at scale, following the example of more forward-leaning agencies such as CDC and DHS (as well as most other industrialized countries).

Embrace the Innovator's Dilemma

Fiscal policy leaders are now faced with the Innovator’s Dilemma, as described by Clayton Christensen, where the federal government must determine how to balance the needs of the present with those of the future. As long as inflation stays in check, centralized fiat currencies like the USD are meeting most people's needs today. However, all indications are that decentralized fintech options (such as bitcoin) are the future and will be major, mainstream options that challenge the primacy of fiat currency.

Secretary Yellen's comments indicate to me that some monetary policy leaders in the U.S. do not yet see the dilemma or its implications. They see how centralized banking and finance can still work today, but they don't yet acknowledge the extent to which cryptocurrency will disrupt the current model. I don't think that's a tenable position, and it's time for policymakers to accept that crypto will be a major store of value and a widely used tool for commerce going forward.

Rather than viewing the technology as a threat and villainizing it, policy leaders should look at the broader trend and open their eyes to the fact that bitcoin and crypto are now mainstream. It's time to get on board, engage proactively, and influence the technology in alignment with U.S. strategic interests — rather than relegating it to outlaw status until it causes further disruption in alignment with, perhaps, competing interests.

I'm a tech entrepreneur and venture capitalist, and I believe in the creative power and ingenuity of the private sector. Cryptocurrencies are the ultimate example of financial ingenuity, and we are all in for a wild ride as they continue to disrupt global finance in the coming years.

How do you think the federal government and central banks should approach cryptocurrency and blockchain technologies?

Feel free to join the conversation below.