US lawmaker‘s remarks highlight the need for greater web3 education
Rep. Sherman’s remarks underscore the larger — and more serious problem — of a pervasive misunderstanding of web3. Rep. Sherman’s remarks underscore the larger — and more serious problem — of a pervasive misunderstanding of web3.
Despite the alarming revelations of the old-fashioned embezzlement of customer funds under SBF’s leadership, another, more nuanced issue transpired on live television. John J. Ray III, the new CEO of FTX, testified to Congress on Tuesday, December 13th, regarding his findings associated with the awful series of unfortunate events that led to Sam Bankman-Fried’s crypto empire collapse. Brad Sherman, a US Congressman from California’s 30th district, demonstrated his anti-crypto outlook and simultaneous misunderstanding of web3 — in just 5 minutes.
There is no doubt that the events at FTX added to a long list of disasters for web3 in 2022 (think Do Kwon, 3AC). It is for this reason that many web3 enthusiasts are demanding regulatory clarity. Nonetheless, web3 deserves to be regulated by lawmakers that take time to understand the promise of the next evolution of the internet and establish guardrails that are congruent with its pace of innovation rather than imposing draconian rules that are disconnected from reality. During the hearing, Rep. Sherman espoused several concerning remarks that led me to believe he was either uneducated or suffering from a bad case confirmation bias.
In this article, I outline the remarks I found concerning and provide my opinion on why they are misrepresentations and how we as a community should educate and empower those around us on the promises (and pitfalls) of crypto and web3. All opinions are my own.
1) Crypto is an electronic pet rock
“…from the outside, crypto just looks like a non-fungible token, an electronic pet rock for the 21st century…something that might be good to invest in even though it has no apparent value…” — Rep. Brad Sherman, Dec 13, 2022
The notion of assigning value to seemingly value-less objects is a challenge societies have endured for centuries. It begs the question, what is value, who assigns it, and what does that mean for me? In some parts of the world, intrinsic value is assigned to livestock which is then used to barter for goods and services. Gold, with its allure and limited practical utility, is widely recognized as a store of value primarily driven by its scarcity rather than utility in jewelry or computer chips.
Rep. Sherman generalizes crypto as a non-fungible token in a manner that demeans years of hard work by talented individuals. There is a multitude of types of token standards, which Chainlink describes as “a set of agreed-upon rules that guide the design, development, behavior, and operation of cryptocurrency tokens on a given blockchain protocol.” Rep. Sherman is undermining an entire wave of innovation geared toward tokenizing objects. According to GitHub, Ethereum currently supports 24 different token standards, with ERC-20 being the most popular as it represents fungible tokens (e.g., ETH, LINK). Claiming crypto is a pet rock — or useless — disregards some amazing innovations in the open source world around creating use case-driven token standards and utility NFTs.
NFTs have gained a bad rep this year as prices have dwindled and the apparent gold rush is over. However, utility NFTs are just starting: earlier this year, the first NFT-linked house sold in the US for 210 ETH. Emerging startups like Hang.xyz are using NFTs to create novel loyalty programs with customers. And lastly, NFT social clubs are emerging as popular venues for the crypto community.
2) “Hidden Currency”
“[crypto] puts that advantage right in its name: crypto, hidden currency.”
— Rep. Brad Sherman, Dec 13, 2022
To address the hidden element of Rep. Sherman’s comments, I’d like to call your attention to the term public blockchain. In its truest form, the idea of a public blockchain is to allow network participants to view and access all transactions transparently. Ethereum’s block explorer Etherescan.io is a prime example of such an open ledger. In addition, given the open architecture of these networks, third parties have built dashboards to analyze the inflationary and deflationary effects influencing tokens (e.g., Ultrasound.Money for ETH). If anything, public blockchains are too transparent sometimes, which is why regulated financial institutions have been so cautious with their public blockchain strategies.
There are instances where the pseudonymous nature of public blockchains has led to serious challenges. For example, the Tornado Cash OFAC list sanction indicates that regulators are getting smart on mitigating the hidden nature of crypto by banning a protocol that essentially “mixes” tokens to make it hard to trace their provenance. In addition, despite the Binance hack that occurred late last year, investigators are nearing the identification of the hackers despite it occurring on a public network.
3) Crypto is trying to displace fiat
“In reality the hope of crypto is to be a currency — to compete with the US dollar and to announce its advantage over the US dollar. The other announced purpose of crypto is to compete with the US dollar as a world reserve currency.”
— Rep. Brad Sherman, Dec 13, 2022
Crypto displacing fiat currencies is, to me, an old wive’s tale — a myth, a scare tactic, and nonsensical word vomit. Except for Bitcoin maxis which are inherently anarchical, I would venture to say that the vast majority of people in the crypto space seek to have crypto co-exist with traditional money systems. A total rip-and-replace of today’s financial markets is near impossible and incongruent with the key goal of crypto — democratizing access to financial services.
Legitimate stablecoin issuers, like Circle, are bringing much-needed clarity into how privately-issued payment stablecoins (e.g., USDC, EUROC) can contribute to optimizing today’s major financial processes. For example, the recent joint paper with Circle & Uniswap illustrates the benefits of a DLT-based FX trading and cross-border payment system. In addition, central bank digital currencies (CBDCs) are gaining momentum amongst central banks. CBDCs, in their truest form, are digital representations of fiat currencies based on distributed ledger technology, which underpins cryptocurrencies. If anything, the industry acknowledges fiat currencies’ importance as they are being integrated into emerging projects, like stablecoins and CBDCs.
Conclusion
Rep. Sherman shares what is, unfortunately, a common view on crypto: it’s a useless tool that offers criminals a way to hide their financial activity and replace the US dollar. While this seems like an easy out at first glance, numerous innovations have taken place in the past few years that warrant a re-examination of the virtues of crypto and web3. Compliant DeFi, as I like to call it, is emerging, and we, as the web3 builders, must ensure we build a safe ecosystem that treasures customer protection. If that means appeasing and educating critics like Rep. Sherman, then so be it!
