The financial world is directly or indirectly linked to politics. Cryptocurrency, as a new technology, aim to disrupt the financial world. At least, it is presented like that in the media. However, the potential disruption of the financial world inevitably hits also politics, the sovereignty of states and banks.

Politicians are responsible for enacting laws that directly influence the economy. To name just a few things, they can regulate some market, decide about increasing or decreasing taxes, or can subsidy some business or even banks and companies. Economic decisions of politics have a direct effect on the life of people in every country. Politics often misuse the decision right for their personal profit. To prevent that there must be established some sort of common-sense financial controls that dictate how politicians can enact laws and set some borders for their economical decisions. Still, the relationship between politics and the financial world is too complex, and unclear to fully see or understand the full context. Let’s conclude that politicians need to have an influence on the economy since it is one of the most important parts of their job. We generally do not trust politicians much but so far we did not have some better alternative.

Cryptocurrency has grown and proven itself as a disruptive technology that is potentially resistant to sovereign laws and international financial regulations and can be considered as an alternative to the sovereign state’s concept of fiat money. If cryptocurrency adoption should rise to provide bigger personal freedom then it implies at least two things:

  • State sovereignty could be disrupted and crypto could expect hard strikes back if not used in a regulated way. There are basically three options for politicians and regulators. They could prohibit, regulate, or adopt cryptocurrency.
  • If we fully realize the potential of cryptocurrency and really want to disrupt the financial world together with state sovereignty then we need to have something that could replace politicians.

Prohibition, regulation, or adoption

When a given project is prohibited then it will not be allowed to use it and users might be persecuted. As a consequence, institutional investors will not be allowed to put money into the project so it would not be the ideal candidate for price speculation. Losing value could lead to an inability to use the project coins for something useful and for a PoW project it poses a security issue.

On the other hand, the team behind to project can implement any privacy feature without limitation. It is disputable how such a project could be adopted. Merchants and shops will not be able to legally accept payment via the coins of the project and they could also be persecuted if they violate the law. We could consider prohibited projects as a kind of protest coins for minorities (crypto-punkers). Potential mass adoption of prohibited projects would mean that some states and nations are no longer relevant since people would not use national fiat currency and start to create new economic communities. This scenario is not very probable for many reasons. For example, Monero, ZCash, and Dash are prohibited in some countries (Japan. South Korea, etc.).

When a state prohibits something people will be more interested in it.

The regulation goes hand in hand with adoption. A project that is compliant with regulations and laws can be considered as regulated. Thus, teams behind projects are limited in the implementation of some features and maybe they might be forced to introduce some unpopular functionalities. Let’s have a look at what Satoshi Nakamoto wrote in 2009:

“The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts.”

Satoshi created Bitcoin as a protest to governments and central banks that have significant control over the financial sector. He was fed up with the modern financial system and created an alternative to money controlled by a government or central bank. Bitcoin allows people to use the electronic version of cash. The original vision of Bitcoin and cryptocurrency was to be more than just an investment tool. He wanted Bitcoin to become a tool for daily life for people around the world helping them to avoid usage of fiat. The main purpose of decentralization is the mitigation of trust in controlled money, decrease the overall costs of the financial system, reduce the economic pressure, and transaction censorship.

Can a regulated project fulfill Satoshi’s Vision? Probably not, or not in all aspects. Regulation always means to enforce some control over the project. For example, if you have a look at some recommendations proposed by the Financial Action Task Force’s (FATF) you will see requirements related to KYC/AML. It should be possible to link every transaction with the identities of the sender and the recipient. As a result, full privacy without limitations will probably never be accepted by regulators.

However, blockchain technology is not about Satoshi’s vision. Satoshi wanted something that is not probably 100% achievable in the real world. To be honest, Bitcoin currently does not fulfill his vision. It is easy to track transactions between users and in many cases, it is possible to connect them with a real identity. Moreover, Bitcoin does not scale and Lightning Network is a rather centralized system that will always suffer from problems related to centralization.

We can benefit from using blockchain technology despite compliance with regulations. Regulations are about the discussion between teams, the crypto community, and regulators. We can either do a revolution and ignore all rules and laws, or we can communicate and hopefully create a better financial world. Both approaches are valid. There will be projects making revolution and project making evolution. Evolution is about improving the current financial system and giving people more freedom, alternatives, and power. To fix just part of the current financial system or offer regulated alternatives could be a significant improvement and an important step toward decentralization.

How we can benefit from blockchain

Properly implemented open and decentralized blockchain technology can mitigate the trust and reliance on governments and central banks. All we need is tolerance for open blockchains. Adoption will never cross a needed number of users if we take the revolution way. If we want to create some kind of decentralized value, decentralized money, and new social or economic structures, people must be sure that they can freely participate without fear of persecution.

It is hard to predict how states and nations embrace open public blockchain and how they utilize them. To be honest, it can never happen. We can expect a new form of digital money built upon private blockchains where states and banks stay in control of the total coin supply. It is not necessarily bad. Controlling supply is one of the tools for driving national economies. Public blockchains as an acceptable alternative is a win-win situation and it is good enough for the beginning.

Blockchain is about avoiding middlemen what can reduce the cost of services, increase trust, and make the service more secure and reliable. We can benefit from blockchain technology without replacing fiat currencies as the first step. We have to learn how to use blockchain technology and people must build trust in it. And it is not only about blockchain. There are smart contracts allowing the creation of decentralized self-executing digital contracts and there could be other technologies that will be used within “blockchain”.

If we want to replace something we need to have a viable alternative or some concept to do so. The blockchain transaction system itself is not able to replace banks. Let’s try to avoid middlemen as the first step and then, a bit later, we can think about replacing the current banking system.

Let’s have a look at how Charles Hoskinson answered when asked for the future of banks and central banks:

“They have to — instead of being middlemen of necessity, they have to become middlemen of value. There are all these entities in society that provide a service, and we don’t really like them, but they’re there and we need them to get something done. It’s like the eBays, the Airbnbs, the Ubers. They’re there. They provide a lot of utility. They bring two sides of a market together, a producer and a consumer. But then what happens is that they get a monopoly, and as a consequence of that, they start to de-platform people or screwing people on fees. They really sculpt a market in a way that really becomes unfair.

So, what our technology is doing is getting rid of these middlemen of necessity. It’s allowing the producer and the consumer now to find each other and interact with each other as if Uber existed or Airbnb existed, or the other middleman existed, but instead of having that middleman taking value away from them, we no longer need them.

The point is: consumer choice and the freedom of movement is increasing. Instead of being locked into a system and forced to live in that system and endure the consequences of that system — like if you’re in Venezuela — you now have a way of insulating yourself a bit or voting with your digital fee and moving into a different system. So, in the not too distant future — instead of just having one currency, and say, if I live in America, I’m dollars, if I live in Europe, I’m euros — you can now actually have portfolio-based wealth with some gold, some silver, some stocks, some different currencies, and you can spend any one of them at any point of sale.

So, when you go to Starbucks, you’ll be able to just tap your phone, you pay them in gold. They got paid in dollars. They have no idea that you’ve paid them in gold because that infrastructure is all there and nobody even knows that composition. You could be from Ukraine. You could be from South Korea. It doesn’t really matter. So, what does it mean? It means that the impact that central banks have upon your lifestyle and your quality of life diminishes, and if they’re going to be relevant, then they actually have to become middlemen of value. They add something to your life, they add something to the transaction, they add something to the economy. And if not, they become obsolete like the horse and buggy makers and the horsewhip makers and the others that got pushed out by the cars, and society moves on and changes.”

We cannot predict the future but if we are able to realize Charles’s vision we can find out that we no longer need traditional banks in a form we know them today. Decentralized finance can take over a significant part of the bank’s job. Banks can either adopt the technology and add some value, cooperate, or go away.