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Bad News for Autocrats

MIT Sloan Professor Simon Johnson, Faculty chair of the MIT Sloan Fellows MBA program

MIT Sloan Professor Simon Johnson, Faculty chair of the MIT Sloan Fellows MBA program, thinks researchers, technologists, academicians, and entrepreneurs are overlooking a crucial aspect of cryptocurrencies. Amidst thousands of ongoing discussions about the uses, abuses, and transformative effects of cryptocurrency technologies in commerce and finance, he notes that very few people are considering its likely effects on politics around the world—especially in societies under the control of autocratic regimes.

The topic is timely, Johnson believes, because authoritarianism is on the march worldwide. In an opinion piece for The Business Timeshe cites the most recent Economist democracy index, which indicates that half the countries around the globe were less democratic in 2017 than in 2016. More dire still is the assessment that only five percent of the world’s population lives in fully democratic states.

How cryptocurrencies can resuscitate democracies
One can easily imagine why an autocrat would not want people to have access to potentially untraceable, but secure, digital records. “For starters, with access to such records, a citizen could make payments or donations that bypass the banking system and its embedded surveillance,” writes Johnson. “Rules that restrict political organisation would become easier to defy.”

By way of example, Johnson describes a hypothetical system for collecting, storing, and sharing political grievances and protests that is structured like the user-controlled health-records platform MIT colleagues are developing. “There is potentially no limit to how ingenious people can become with regard to writing so-called smart contracts, which will trigger payments or other transactions (like sending protest messages) when particular events occur,” Johnson contends. “For activists around the world, the only constraint is their creativity.”

Revolutionary models for accessing capital
In a 2018 article for Consensus MagazineJohnson describes yet another paradigm-shifting aspect of cryptocurrencies in general and initial coin offerings (ICOs) in particular. A common feature among various ICOs is how potential investors are wooed by the promoters of these platforms. “While many will describe their tokens…as pre-sold, negotiable ‘products’ with a utility function that gives the holder access to the system’s services,” he writes, “so far the most disruptive aspect of this idea lies in how it changes the fundraising dynamic.”

According to Johnson, an ICO is fairly straightforward in that sense. The developer of a useful technology seeks to prefund it in a manner that shares the resulting value with early users and those willing to provide risk capital. Given that access to capital is a key constraint for such ventures in our economy, “ICOs offer a more direct route for both tapping and deploying funds, for matching founders with investors. That turns out to be quite revolutionary, although also controversial.”

Although many citizens around the world may feel discouraged by recent trends in politics and economics, Johnson believes the momentum may be changing thanks, in part, to the rise of cryptocurrencies. “I would not be surprised if the pendulum begins to shift back in favor of those who would prefer more open systems and a greater degree of productive political and economic competition.”

Simon Johnson’s latest book Jump-Starting America: How Breakthrough Science Can Revive Economic Growth and the American Dream, with coauthor and MIT Economics Professor Jonathan Gruber, examines the lessons of the post World-War II American success story and lays out a plan that will create the industries of the future—and the jobs that go with them.

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