Some people hear the word “blockchain” and think of Bitcoin, the wildly fluctuating digital currency that’s built on top of the blockchain digital ledger.
Michael Casey envisions a world of “DeFi” — decentralized finance — an ecosystem of financial applications built upon blockchain and cryptocurrency technologies. DeFi holds the potential to function as an alternative to centrally governed institutions like banks, reducing bureaucracy and providing financial services without geographical barriers.
In a session titled “Demystifying Decentralized Finance,” Casey, a former senior lecturer at MIT Sloan, talked about the upside of crypto hype, the specter of regulation, and the adoption of Bitcoin around the world.
Here are some observations from Casey, who also hosts the “Money Reimagined” podcast:
DeFi is better than “TradFi”
Asked what real world problems are solved by decentralized finance, Casey pointed to the myriad entanglements of traditional finance — the system of banks, exchanges and brokerages, and other financial intermediaries. In traditional finance, public governance, which entails laws and licensed financial institutions, acts as the trust source — and that’s a problem, Casey said.
“Trust in intermediaries imposes massive frictions in our system, hidden frictions that are just enormously costly,” Casey said. “And that leads to financial exclusion, it leads to breakdowns, it leads to security threats and all sorts of things.”
In decentralized finance, a public blockchain acts as the trust source, bypassing those functionaries.
“A lot of new ideas in DeFi are basically disintermediating credit, for example, or allowing for the transfer across borders of a stablecoin that can go from you to your cousin in Nigeria and disintermediate all of those functions in the middle,” Casey said.
“And not only does that save cost, it allows for the open application of new functionality” — leading to a wider lending, borrowing, and payments ecosystem, automated market-makers, self-executing collateral systems, stablecoins, and more, Casey said.
Crypto hype is not necessarily a bad thing
That’s a marketing problem for the cryptocurrency industry, Casey said.
“This community is obsessed with making money quickly, and I don't think it helps in terms of politics and the regulatory framework to have crypto bros touting their ‘Lambos.”
That said, he sees value in the noise and bluster.
“It's funny, I used to be very cynical about all of the speculation and hype. But I've come to appreciate that the mad energy that comes with the desire to get rich quick actually has ancillary benefits that feed the ecosystem of innovation."
And that's always been the case, he added. “That's what New York was built upon, that's what Amsterdam was built upon, it's what London was built upon. Basically we are building a kind of a new crypto civilization here.”
Regulation is welcome — up to a point
As the cryptocurrency industry in the U.S. grew exponentially in recent years, debate sharpened on how much and what kind of regulatory oversight was appropriate to protect investors while still leaving room for innovation — with at least some purists arguing that freedom from government oversight was a point of blockchain from the outset.
More specifically, industry watchers have kept close tabs on U.S. Securities and Exchange Commission Chair Gary Gensler, a former professor of the practice at MIT Sloan, who has said publicly that he favors more regulation.
Casey does as well.
“I’m not some sort of narco capitalist who thinks this whole thing is going to live perfectly in an entirely unregulated world," Casey said. "The thing is we need to figure out what that regulation should look like.”
Much of current financial regulation was designed to oversee intermediaries that have a fiduciary duty to investors, users, consumers, and so on, Casey said. But decentralized financial systems, in theory at least, create a framework where at least some of that regulation is redundant.
“So we end up layering in excessive regulation, and all it does is make it much harder to build innovative things, while at the same time essentially creating a protective compliance barrier around the incumbent banking system," Casey said.
Regulation needs to protect consumers but also allow for DeFi’s benefits — financial inclusion, a more open system, and creator innovation — to flourish, he said.
Energy consumption is a solvable challenge
Bitcoin and other cryptocurrencies have come under fire for the vast amounts of computing power during the mining process, in which transactions are validated and entered into the public ledger. The New York Times estimated that the process of creating Bitcoin to spend or trade consumes around 91 terawatt-hours of electricity annually, more than is used by Finland, a nation of about 5.5 million people.
Casey pushed back against the suggestion that energy consumption is a fundamental problem with cryptocurrencies.
“The more Bitcoin grows, the more consumption there will be. We need to advance civilization,” he said. “There's a whole host of reasons why you could argue that [Bitcoin] is a far more valuable system for value exchange than the U.S. financial system and the dollar-based international monetary system, and all the cost and all the energy that goes into that.”
Given that Bitcoin, and its energy consumption, isn’t going away, Casey advocated “thinking outside the box for system design.”
For example, Bitcoin mines could be set up next to solar or wind farms, with mining subsidizing the generation and development of that power, leading to a decentralized network of energy.
“It's really counterproductive when we get, ‘Oh, Bitcoin consumes too much,’ because we can turn it around, and turn Bitcoin into a driver of development,” Casey said.
China is a roadblock, but not a deal-breaker
Data from MIT Sloan shows China had by far the highest number of cryptocurrency miners of any country — until September, when Chinese regulators issued a blanket ban on all crypto transactions and mining.
The move could wind up benefitting the U.S., where most miners now reside. Beyond that, Casey said he is not concerned China will threaten Bitcoin’s dominance in the long run.
“This is a game of whack-a-mole; Bitcoin is popping up everywhere,” he said.
El Salvador in September became the first country in the world to officially adopt Bitcoin as its legal tender.
Beyond that, “You look at Argentina, you look at Mexico, you look at Nigeria, you look at parts of the Middle East and you see really interesting adoption patterns, not only of Bitcoin, but also of stablecoin payments and so forth,” Casey said.
In those places and elsewhere, cryptocurrencies are “solving real world problems for people who've been excluded from the financial system and pay heavy remittance systems, and don't trust their governments to manage their monetary systems,” Casey said.
“As big as China is, whatever happens there is still just a small piece of this global network that's really going everywhere right now,” he said.