Noah Coco '26
Staff Editor
The story of “crypto” is one of alternating exuberance and retrenchment over the past several years. Fortunes have been made and lost, frothy runs have concluded in spectacular crashes accompanied by prison sentences for once-prominent operators in the industry. Amidst all this market tumult, however, apologists have persisted and continue to publicly advocate for the potential benefits that cryptocurrencies can deliver to society. Professor Eric Alston is one of these apologists.
Professor Alston is a Scholar in Residence at the Finance Division of the University of Colorado Boulder Leeds School of Business. On Friday, February 9, accompanied by the Darden School of Business’s own Assistant Professor Dennie Kim, Professor Alston presented a discussion titled “Making Cents of Crypto.” Throughout the casual discussion between Professors Alston and Kim, both the potential virtues as well as the evident limitations on the widespread adoption of cryptocurrencies were on full display.
Professor Alston began by introducing cryptocurrencies as an alternative model to the traditional structure of financial systems characterized by trusted intermediaries with public institutional enforcement. The key to this traditional model, which is likely familiar to people within the United States, is public trust in the stability of both the underlying unit of account, i.e., the US Dollar, and of the institutions managing and enforcing this system. The phenomenon of cryptocurrencies as an alternative to this model is most salient in the context of countries where this traditional model tends to break down, whether through rampant inflation or through the forced appropriation of deposits by national governments (although these two mechanisms often work in tandem). Where are citizens of such countries to reliably deposit their earnings to remain out of reach by national governments? They can either hoard cash, or they can deposit their funds as cryptocurrencies on the public and transparent distributed ledgers provided by blockchains.[1]
As Professor Alston frames it, cryptocurrencies provide a different way to coordinate units of account on blockchains. Moreover, these network native units of account are reliably scarce (although this is not actually a universal feature of all cryptocurrencies). This means that they cannot be devalued through issuance of new units beyond a predetermined maximum supply, and they otherwise cannot be appropriated by governments because of the distributed nature of the blockchain ledgers. In theory, this would result in a stable and reliable unit of account that people can use to transact and, as Professor Alston noted, provide a mechanism for organizing the productive activities of society.
This, however, is the part of the crypto narrative where the limitations and challenges of the industry become most apparent. The first challenge, posed by a question from the audience, concerned the extreme price volatility of most cryptocurrencies. Even the casual observer would be familiar with the wild swings in the values of most popular cryptocurrencies. This speculation and general market exuberance is perhaps the reason that cryptocurrencies have come to occupy such a prominent space in public discourse to begin with. Professor Alston acknowledged this limitation as a consequence of the low barriers to entry and the potential for rapid gains in wealth in the cryptocurrency market. He postulated that of the over five thousand cryptocurrencies that currently exist, at least 90 percent of them need to fall away before volatility can begin to normalize. Furthermore, current issuers of cryptocurrencies are competing with each other over governance structures. With a crowded market of new entrants, Professor Alston contends, financiers have not yet efficiently channeled funding to the most competitive governance structures that will prove to be the most successful and attractive to consumers.
A second question challenged the premise that cryptocurrencies are reliably scarce, for reasons similar to those discussed above, in particular because of the very low costs to entry. How scarce are cryptocurrencies, really, if a new entrant can simply issue a new cryptocurrency? Professor Alston acknowledged this limitation as well, but he seemed content to respond that network effects will eventually consolidate users into a small number of cryptocurrencies that have a proven track record of stability. Much like the dot-com bubble, most unsuccessful or fraudulent cryptocurrencies will be weeded out during bear markets such that only the most resilient and stable remain.
A third challenge, tangential to this last point but not adequately addressed during the discussion, is that, thus far, many major cryptocurrency issuers or exchanges have also proven to be volatile and risky. The very institutions that administer this alternative financial system have proven to be either fraudulent[2] or prone to collapse through more traditional financial shocks.[3] Two problems emerge. The first is that the intermediaries that provide the services that allow the average person to engage with cryptocurrencies are often run by unsophisticated or even plainly fraudulent operators. This hinders trust in the institutions that issue and manage cryptocurrencies for consumers. The second is that many of these same intermediaries simply replicate the traditional model of financial services and are prone to the same risks that animate the traditional finance industry. On top of that, cryptocurrencies are even less regulated than traditional financial services (although this is starting to change) and pose a potentially greater risk of abuse from lack of oversight.
Although more implications of the deployment of cryptocurrencies were discussed, the three noted above seem to be the most consequential because they challenge the premises at the heart of what advocates propose is new and innovative about cryptocurrencies. It is likely too early to discount the entire industry, but it is clear that these fundamental limitations need to be worked out before cryptocurrencies can gain widespread adoption.
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cmz4bx@virginia.edu
[1] This is, of course, a very stylized simplification of the decision faced by people living in countries suffering financial instability. Prof. Alston acknowledged at least one alternative option to simply hoarding cash: investing in cinder blocks. This practice apparently proliferates in several countries because the value of cinder blocks tends to keep pace with inflation and serves as a better store of value than cash.
[2] Sam Bankman-Fried and FTX, for example.
[3] The market run on Terra Luna, for example, although perhaps this collapse was also simply the result of a fraudulent Ponzi scheme.