The vertiginous fall of Sam Bankman-Fried, the founder of the cryptocurrency exchange FTX who was recently convicted of fraud and money laundering, has raised questions about the trustworthiness of the largely unregulated crypto market. Can blockchain-based tools be used to help create transparency and build trust?
Ari Juels and Eswar Prasad argue that, while grifters and unscrupulous companies have exploited customers and investors, the industry is starting to use technology to shift the balance back towards innovation. One example is the development of proof of reserves, which enables institutions to verify their crypto assets and could prevent similar debacles in the future.
The irony is that most crypto holders today store their assets in exchanges that require high levels of trust and carry many of the risks of traditional financial institutions. However, JPMorgan Chase (JPM) has plans to move trillions of dollars of value onto the blockchain and monetary authorities are exploring central bank digital currencies.
In spite of the various challenges posed by the crypto industry, such as its environmental footprint, its use for illicit transactions, and privacy shortcomings, the community is innovating powerful new ways to harness the inherent transparency and trustworthiness of blockchain technology to create a more secure and flexible financial ecosystem. Governments must take a balanced approach that enables this remarkable technology to thrive.
Ari Juels is a professor at Cornell Tech, co-director of the Initiative for CryptoCurrencies and Contracts (IC3), and chief scientist at Chainlink Labs. Eswar Prasad is a professor of economics at Cornell University and a senior fellow at the Brookings Institution. This commentary was published with the permission of Project Syndicate.