September 23, 2024 | Read Online

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"The highest form which civilization can reach is a seamless web of deserved trust."

— Charlie Munger

The upside of regulated crypto: Trustless cooperation

Vice President Harris broke her long and conspicuous silence on crypto this weekend — happily, it sounded constructive: "We will encourage innovative technologies like AI and digital assets," she reportedly told an audience of Wall Street donors.

OK, fine. She didn't actually say "crypto" — just "digital assets," which is not really the same thing.

That was a deliberate choice of words, of course, and crypto people have taken notice: Her institutional phrasing will not win any cypherpunks to her cause.

She may not win over many moderate crypto types, either, given the large caveat that followed: "...while protecting consumers and investors."

To many crypto enthusiasts, that sounds disingenuous — like lending someone a car without giving them the keys to start it.

It's not that anyone thinks consumers and investors don't deserve to be protected, it's just unclear how to do that in crypto without compromising its core beliefs.

Is crypto still crypto if it's regulated?

Is it still permissionless if it needs to ask regulators for permission?

These questions have always seemed binary to me: If centralized authorities have a say in a protocol, can it still be considered decentralized?

And if crypto institutes all the same protections that consumers and investors have in TradFi, are we just recreating TradFi on blockchain rails?

If so, that doesn't seem very revolutionary, as the crypto financial system aspires to be.

And regulators aren't likely to accept a financial system with only some of those protections — so what would be the point of regulated crypto?

Many in the industry think the same way, which is why Harris's tepid endorsement of "digital assets" won't win her many votes.

For them, accommodation is tantamount to surrender, even if that means consumers are occasionally abused and investors are occasionally defrauded.

It doesn't have to be.

Be it "digital assets" or true crypto, "the goal should be to incentivize innovation that provides long-term, positive impact for society while minimizing fraud and manipulation," according to a mission-statement white paper recently published by the Princeton DeCenter.

It's hard to argue with that sentiment, other than to say (as I occasionally have), that it's just not possible to do both — surely you can't have the benefits of decentralization and the protections of centralization?

The DeCenter has me thinking you can.

Not just 1s and 0s

It often feels like people making the progressive case for crypto don't really mean it — it's easy to think they're just whitewashing the libertarian dream of a no-rules casino.

(I say that as an enjoyer of no-rules casinos.)

The DeCenter, by contrast, clearly means it: Their white paper is the most persuasive non-libertarian case for crypto that I've come across.

You might want to read it for a big-picture reminder of why we're here: "Decentralized technologies seek to transform trust, with the hope that this can empower people, advance autonomy and reduce the power and control that have accrued to centralized entities."

Or for a much-needed reminder of why crypto is so interesting: "We believe some of the most important challenges require interdisciplinary collaboration across computer science, engineering, economics, political science, ethics and the humanities."

(Note: That is my favorite thing about crypto.)

But if you're a true believer who doesn't need reassurance on either of those fronts, you might also read it to lower your stress levels about the upcoming election — because the DeCenter makes a convincing case that crypto's fate is not binary.

In fact, after reading their paper, I now think regulated crypto can still be cypherpunk.

That's largely because the DeCenter has a different take on "trust" than I'm used to seeing.

Crypto is generally described as "trustless" but the DeCenter authors say instead that it enables "trustful cooperation."

This is a careful distinction and here's how I understand it: Rather than embracing a code-is-law ethos with unmitigable consequences, we could instead aim for an era of "trustful cooperation" where code (via cryptocurrency) incentivizes the achievement of mutually agreed goals.

Importantly, those goals can still be cypherpunk: "Permissionless participation, censorship resistance, transparency, immutability [and] self-custody" could all be incentivized by the "trustful cooperation" enabled by "decentralized trust," according to the paper's authors.

"Privacy," for example, "is not all-or-nothing," they write. "It is possible to keep some information about transactions private, some public, and some available only to regulators or law enforcement."

That may not be good enough for the libertarian wing of crypto, but it could help bridge the gap not only between regulators and crypto enthusiasts, but also crypto enthusiasts and crypto skeptics like Charlie Munger and Yuval Noah Harari.

I've picked those two particular skeptics because, in both cases, their arguments against crypto boil down to a belief that the world needs more trust, not less.

The DeCenter paper demonstrates that a degree of trust is, in fact, inherent to crypto — and argues persuasively that many of crypto's core goals can be achieved even if perfect trustlessness is not.

"Centralized entities are not always eliminated when power is decentralized," they write, but, "their role is, at least, reduced to places where they provide important benefits that cannot easily be obtained otherwise."

That may not be the total victory that the small band of true cypherpunks are hoping for, but it sounds like an outcome that a much larger band of people would be happy with.

When you get to a fork in the road, take it

I suspect crypto will go in both directions.

First, a maximally trustless and permissionless form of crypto will be built and used by a small and dedicated band of principled cypherpunks.

This is already happening: decentralized TOR (anyone.io), decentralized encrypted messaging (session) and decentralized VPNs (various) are now all available and, I imagine, will come to be about as widely used as Tor browsers and BitTorrent (ie, not very).

At the same time, a more moderate form of crypto will be built and used by a larger band of (also principled) establishment types.

How that develops will depend in part on regulators and I don't know what crypto regulation would look like in a Harris administration (with yesterday's comment, she's now dedicated exactly one-half of one sentence to the subject).

But I'm now less concerned with it — after reading the DeCenter's white paper, I no longer think that accommodation is tantamount to surrender.

Also, I'm more optimistic that the establishment branch of crypto will ultimately be successful, even by crypto standards — regulated crypto will still be crypto.

And part of being permissionless is that some people will choose to be permissioned.

Irrespective of how many do, crypto will retain the potential to accomplish many of its core cypherpunk goals — no matter who wins the election.

(Or what they choose to call it.)

— Byron Gilliam

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