Why crypto will live on

February 04, 2022 10:01
Photo: Reuters

Unless you've been hiding under a rock, you've probably heard of crypto. If you aren't dabbling in it and don't believe in it, you probably know someone who believes otherwise.

But what is it really? Without taking too much of a technical deep dive, think of it as your transactions recorded in many separate global independently maintained ledgers or accounting books. Say you pay a merchant $10, that transaction gets recorded in these different books. So you ask, what's so great about that? Lower transaction fees for one. Plus since these synchronized records are being kept by independent parties, a hacker would need to alter at least 51% of the validating record books in order to alter it (also called a "51% attack"). So it's much harder for a hacker to do that to many distributed servers versus hacking just one centralized traditional bank server.

But even if things worked as they should, let's take one application that is ripe for moving into crypto. Remittance. The World Bank said that over $589bn was remitted globally in 2021, and on average sending $200 was charged around 6.4% [see https://www.worldbank.org/en/news/press-release/2021/11/17/remittance-flows-register-robust-7-3-percent-growth-in-2021]. Many underdeveloped countries have workforces who send money back home to their families, such as workers who send money from HK back to the Philippines.

Unless these foreign banks have local branches, typically these bank wires take a few days, and charges sometimes reach ten percent of the amount remitted. Why is that? For starters, a bank in one country can't always directly send money to another bank in another country. The current infrastructure for bank wires is the decades old antiquated SWIFT system. In SWIFT, banks first send the money to one or two intermediary banks, who have the relationship with the receiving bank. Each of these banks has their own ledger and their own transaction fees. Plus some of them even take around three days to process the transaction, partly so they can also give the recipient the currency conversion that is favorable to them.

So what's the big deal about eliminating trusted third parties and just trying to do deals and transactions with software coded contracts instead of trusted third parties like banks, lawyers, and the like? Betrayal of trust that's why. Over the past few years, we have seen a lot of headlines about priests, banks, lawyers, insurance companies, trading firms, who have done things that are not in the best interests of the people they are supposed to serve. The concept of "trusted human third party" has taken a beating.

One important event was the subprime mortgage crash of 2008. Regular folks on Main Street had no idea that their retirement pensions, insurance plans, home mortgages, and savings were being threatened by exotic derivative instruments that were developed by Wall Street. Because of greed, worthless mortgages taken out by jobless people who had no business buying a house were being bundled together and securitized and stamped "AAA" grade by the rating agencies, and eventually threatened the downfall of the banking and financial system. Unfortunately, since they were deemed by the US Government as being "too big to fail," the major banks got their massive bailouts through the Troubled Asset Relief Program (TARP).

What angered millions of people around the world was that the senior Wall Street executives who were at the helm and thus responsible for the debacle were still getting their fat bonuses, while regular employees were being thrown out of work. You would think that having to accept government cash injections into these banks would have tempered the greed of some of those responsible. But no, nothing would stand in the way of their bonuses, regardless of how much they had contributed to the crisis. As a result, Occupy Wall Street became a popular movement because of that anti establishment anger.

No wonder people now distrust the traditional elite power structures these days and prefer software code that treats everyone equally, no matter who they are, with no special favors. The events of January 6, 2021 in the US Congress pretty much attests to this mistrust in central authority. Add to that the massive overprinting of fiat currency that has led to inflation not just in the US, but in other parts of the world as well.

It was also in that same year 2008 that Satoshi Nakamoto (whoever he is) chose that seminal point in history to launch Bitcoin [see https://bitcoin.org/bitcoin.pdf], the first of the cryptocurrencies. In fact, the kids of the people who lost their jobs during the mortgage crisis are now the ones at the helm of some of the other cryptocurrencies. It was not incidental that Nakamoto tried to eliminate the "trusted human element part" of the equation. So when famous economists and monetary leaders like Paul Krugman and Christine Lagarde argue against crypto, they conveniently forget what drives it along in the first place. Nakamoto wrote in the introduction to the Bitcoin paper that, "What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party." No one trusts anyone anymore.

The rest of society should wake up. Crypto is here to stay. It is not perfect yet, and it continues to evolve and improve, but eventually it will be the traditional way we all do banking and finance.

-- Contact us at [email protected]

The writer is a Filipino crypto and blockchain advocate.