Dogecoin‘s creator, Jackson Palmer, has written an interesting paper on the institutionalization of cryptocurrencies in this week’s Diar report.
Palmer refers to what can be described as a “widespread excitement” about the prospect of large traditional financial institutions entering the crypto space, particularly referring to the Bakkt project, bitcoin ETFs and Fidelity.
According to Palmer, this excitement would be nothing more than a paradox because institutionalizing crypto is a contradiction in term. In fact, cryptocurrencies have peculiar characteristics that do not make them “perfect” for traditional investors: resistance to censorship, transactions without trust and a publicly verifiable history.
Resistance to censorship means that the user can interface with the currency without ever having to go through an intermediary. In fact, thanks to the decentralized Proof of Work consensus algorithm, for example, there is not a single entity that can censor transactions on the blockchain.
Returning to an intermediary (essentially a bank or other institution) would reintroduce intermediation which decentralization has expressly wanted to get rid of.
If, for example, the website of the intermediary were hacked or put offline, the user would lose their access to the decentralized network; such intermediaries can block or limit the access of users to their account, so much so as to be able to prevent transactions from being carried out.
In other words, the intermediary reintroduces censorship: anyone who relies on an intermediary loses the first advantage of cryptocurrencies.
The same applies to trust: the intermediary becomes the custodian of the funds, which must be trusted. In short, those who choose to rely on intermediaries also lose the second advantage of cryptocurrencies: trustless transactions.
Cases such as the now famous one of Mt. Gox show that this trust cannot always be considered well placed, so the problem can not simply be ignored.
Even with regard to verifiable history, the concept does not change: if transactions are not recorded publicly on blockchain, but on a register managed by an intermediary, you can not be sure of being able to access a verified and public history of all transactions: these become “off-chain” and are recorded on private databases.
Consequently, according to Palmer, as the involvement of the so-called institutional players in cryptocurrencies expands, it will become increasingly attractive for them to issue their own tokens that they can control centrally, rebuilding real monopolies.
The scenario he paints is one of a future in which Wall Street bankers will control currency services, and issue centrally managed currencies.
Stable coins like USDC have already begun to allow them to take this path.
However, to Palmer’s speech it should be added that such intermediaries will most likely remain optional and will not have the power to modify the basic protocol of cryptocurrencies such as bitcoin’s, which will continue to guarantee to those who want to use it in a disintermediate way the absence of need to rely on an intermediary.
This will be the benchmark with which all intermediaries will have to deal: if they are not able to offer a comparable service, in terms of security and reliability, they will be unlikely to survive. Therefore, as long as it is possible to use cryptocurrencies in a trustless manner, it is difficult for intermediaries to offer their customers unreliable and unsafe services.
