The history of cryptography is full of failures of centralized institutions, not of the main decentralized cryptographic mechanisms. Mt. Gox was a Japan-based Bitcoin exchange that went bankrupt in 2014. The failure of FTX, which at one point had a valuation of $32 billion, is now part of that story.
Throughout these and other messes, blockchains continued to run smoothly. Blockchains, which consume and record transactions, have not been successfully manipulated or hacked, although many billions of dollars would be available to anyone who figured out how to do it.
The failing institutions are those that most closely resemble pre-crypto financial intermediaries such as banks and stock exchanges. And the reasons they fell were conventional rather than high-tech. In the case of FTX, for example, there are allegations that depositors’ funds were used for other purposes and not held in reserve, a very old story in finance.
Crypto-banks and exchanges have another point of vulnerability: namely, they can be regulated. The whole structure of US financial regulation is geared towards intermediaries, which can be controlled, required to report information and set up to a certain amount of capital. In the case of depository institutions, FDIC insurance may be required, along with corresponding risk controls. In the case of clearinghouses, the Federal Reserve and Treasury would likely serve as lenders of last resort, should such assistance be required.
What I mean is not that these regulations are perfect (they are not). This is because, on a day-to-day basis, intermediaries cannot avoid their legal obligations.
To the extent that clearinghouses and crypto exchanges have a future, they too will be regulated, and that is all the more certain after the FTX fiasco. The question then becomes: how many (supposed) crypto efficiencies would remain under such a regulated regime? After all, the original purpose of crypto was to reduce the transaction costs associated with traditional financial institutions. Intermediate costs, reserve requirements and legal compliance costs could more than reverse these benefits.
Intermediaries have nonetheless proliferated in crypto, for obvious reasons. Quite simply, most people don’t want to have to manage their own crypto wallet, protect their password, and figure out how the system works. It’s daunting, even for the financially or tech savvy.
Now enter the AI. New AI systems are getting very good at speech recognition, executing commands, understanding text, and even writing their own computer programs. Is it such a stretch to imagine an AI that makes a crypto wallet easy to use?
You would still keep your crypto in your own wallet and wouldn’t need to trust any middlemen, except of course the AI itself. At will, you would give your AI the commands you want. Open a wallet for me. Send 0.1 Bitcoin to my brother. Convert all my accounts to cash. Etc.
Essentially, the AI would facilitate your interactions with the system, but without creating a separate entity between you and your funds. If the AI company went bankrupt, your funds would still be in your wallet. The AI program would likely manage your personal finances more broadly, not just your crypto wallet.
You might be wondering if you can trust the company providing the AI. But that question is answered relatively easily by another: do you trust your smartphone or computer to do online banking? For the vast majority of people, the answer is yes. But if these companies built software to intercept or redirect the flow of consumer funds for their own purposes, these attempts would not last a day and the companies would quickly go bankrupt and be taken to court.
Crypto skeptics like to point out that crypto has been around for 13 years but still has no clearly defined legal use cases. It is a legitimate concern. At the same time, many technological advances don’t flourish until additional pieces of infrastructure are in place. Electricity existed for decades before transforming factory floors. The Internet was born in the 1960s, but it took decades to revolutionize commerce and communication.
AI and crypto are each getting a lot of attention. The next step – and the best way to ensure there isn’t another FTX debacle – may be to get them working together.
More from Bloomberg Opinion:
• Crypto wants a central bank: Matt Levine
• FTX Collapse Part of Pandemic Hangover: Robert Burgess
• Untangling FTX can allow DeFi to grow: Andy Mukherjee
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Tyler Cowen is a Bloomberg Opinion columnist. He is a professor of economics at George Mason University and writes for the Marginal Revolution blog. He is co-author of “Talent: How to Identify the Energizers, Creatives and Winners in the World”.
More stories like this are available at bloomberg.com/opinion