The history of crypto is littered with failures of centralized institutions, not core decentralized crypto mechanisms. Mount Gox is a Japan-based Bitcoin exchange that went under in 2014. The failure of FTX, which was once valued at $32 billion, is now part of history.
Despite these and other disruptions, blockchains continue to function smoothly. Blockchains, which complete and record transactions, have not been successfully gamed or hacked, although many billions of dollars will be available to those who figure out how to do it.
The failed institutions are those that often resemble pre-crypto financial intermediaries such as banks and exchanges. And the reasons they go under are classic rather than high-tech. In the case of FTX, for example, there are allegations that depositor funds were used for other purposes and were not kept in reserve, a very old story in finance.
Crypto banks and exchanges have another point of weakness: namely, that they can be regulated. The entire structure of US financial regulation is geared towards intermediaries, which can be monitored, required to report information and hold fixed amounts of capital. In the case of depository institutions, FDIC insurance may be applied, with corresponding risk controls. In the case of clearinghouses, the Federal Reserve and the Treasury would likely serve as lenders of last resort, should such assistance be needed.
My point is not that these rules are perfect (they are not). It is that, day by day, middlemen cannot escape from their legal obligations.
To the extent that crypto clearinghouses and exchanges have a future, they too will be regulated, and this is even more certain after the FTX fiasco. So the question becomes: How many (alleged) efficiencies of crypto will remain under such a regulated regime? After all, the original point of crypto was to reduce the transaction costs associated with traditional financial institutions. Intermediary costs, reserve requirements and legal compliance costs can offset those benefits.
Middlemen nevertheless proliferate in crypto, for some obvious reasons. Quite simply, most people don’t want to go through the trouble of running their own crypto wallet, securing their passwords and figuring out how the system works. It’s scary, even for people who are sophisticated about finance or technology.
Now enter AI. New AI systems are getting better at recognizing voice, executing commands, understanding text and even writing their own computer programs. Is it such a stretch to imagine AI making an easy to use crypto wallet?
You will still keep your crypto in your wallet, and will not need to trust any intermediary, except for AI of course. At will, you will give your AI desired commands. Open the purse for me. Send 0.1 Bitcoin to my brother. Convert all my accounts to cash. And so on.
In essence, AI facilitates your interaction with the system, but without creating a separate corporate entity between you and your funds. If the AI company goes bankrupt, your funds will still be in your wallet. Perhaps an AI program will manage your personal finances more broadly, not just your crypto wallet.
You may wonder if you can trust a company that supplies AI. But that question is answered relatively easily with another: Do you trust your smartphone or computer to do online banking? For the vast majority of people, the answer is yes. But if those companies build software programs to block or redirect consumer fund flows for their own purposes, those efforts won’t last a day and the companies will quickly be out of business and out of court.
Crypto skeptics like to point out that crypto has been around for 13 years but still doesn’t have clearly defined legal use cases. This is a valid concern. At the same time, many technological developments do not blossom until additional pieces of infrastructure are in place. It had electricity for decades before it changed factory floors. The Internet originated in the 1960s, but it took decades to revolutionize commerce and communication.
AI and crypto each command a lot of attention on its own. The next step – and the best way to ensure there isn’t another FTX debacle – might be to get them to work together.
More from Bloomberg Opinion:
• Crypto wants a central bank: Matt Levine
• FTX’s collapse is part of a pandemic hangover: Robert Burgess
• Unraveling FTX allows DeFi to grow: Andy Mukherjee
This column does not necessarily reflect the views of the editorial board or Bloomberg LP and its owners.
Tyler Cowen is a Bloomberg opinion columnist. He is a professor of economics at George Mason University and writes for the Marginal Revolution blog. He is the author of “Talent: How to Identify Energizers, Creatives, and Winners Around the World.”
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