Over the spring and summer of 2022, we saw a number of other purportedly decentralized crypto players stumble and fail—and as they did so, it became abundantly clear that there were intermediaries calling the shots. A stablecoin is a type of crypto asset designed to maintain a stable value, and as the Terra stablecoin lost its peg to the dollar in May 2022, holders looked to founder Do Kwon’s Twitter feed for guidance. Before Terra failed, it received an attempted rescue package of crypto loans from a nonprofit established by Kwon. The loaned crypto was allegedly deployed to allow some of Terra’s largest holders—commonly referred to as “whales”—to redeem their Terra stablecoins at close to par value, while smaller investors lost nearly everything. In the crypto market turmoil that followed the failure of Terra, multiple episodes showed the power of founders and whales in platforms ostensibly administered by decentralized autonomous organizations. Many crypto proponents were quick to criticize the affected platforms, saying that they were never really decentralized in the first place and that only the “truly decentralized” deserved to survive. All of crypto, however, is centralized to varying degrees.
‘Decentralization illusion’
Voting rights in decentralized autonomous organizations and wealth tend toward concentration in crypto even more than in the traditional financial system. In addition, decentralized blockchain technology cannot handle large volumes of transactions very well and does not accommodate transaction reversal, so it seems inevitable that intermediaries will emerge to streamline unwieldy decentralized services for users (especially because there are profits to be made by doing so). Without mincing words, economists at the Bank for International Settlements concluded that there is a “decentralization illusion” that is “due to the inescapable need for centralized governance and the tendency of blockchain consensus mechanisms to concentrate power.” And of course, many of the crypto businesses that have emerged over the past decade make no pretense of decentralization: centralized exchanges, wallet providers, and stablecoin issuers, for example, are all critical players in the crypto ecosystem. Many of these intermediaries are simply new (and often unregulated) equivalents of what already exists in traditional finance.
And so crypto users will always have to trust in people. These people are no less greedy or biased than anyone else—but they are largely unregulated (sometimes even unidentified), and in the absence of consumer protection regulation, the crypto industry’s claims of furthering financial inclusion take on a more troubling cast. The crypto ecosystem is certainly rife with hacks and scams that prey on users, but at a more fundamental level, the value of crypto assets is driven entirely by demand because there is no productive capacity behind them, and so founders and early investors can profit only if they can find new investors to sell to. If they rely on traditionally underserved populations to make up that market, then the most vulnerable members of society—in both developed and developing economies—could be left holding the bag.
Even if the market for crypto assets were somehow sustainable, there are many reasons to doubt that crypto could democratize finance. For example, crypto lending platforms demand significant amounts of crypto collateral before they grant loans, so they won’t help those who lack financial assets to begin with. And although stablecoins are often touted as a better payment mechanism for underserved populations, the World Economic Forum concluded that “stablecoins as currently deployed would not provide compelling new benefits for financial inclusion beyond those offered by preexisting options.”
Fixing finance’s flaws
To be clear, financial inclusion is a real and pressing problem, and there are also many other problems with traditional finance that need to be solved. Part of the reason crypto firms, venture capitalists, and lobbyists have been so successful in selling crypto is their very lucid and compelling indictment of our current financial system. The largest banks did perform terribly in the lead-up to 2008 (and some still do); lots of people are underserved by the current financial system; in the United States, in particular, payment processing is too slow.
