In June of this year, the El Salvador Congress voted in favor of President Nayib Bukele’s proposal to make Bitcoin legal tender in the country. It became the first and still the only country to officially adopt the cryptocurrency as legal tender alongside the U.S. dollar.
Cryptocurrency use is growing in retail stores, from Starbucks and AMC movie theaters to Overstock and Home Depot. For parishioners who might carry less cash, a growing number of churches accept Bitcoin in their offering plates.
In addition, Venmo, PayPal, and Cash App have added cryptocurrency purchasing to their payment services, expanding the reach of Bitcoin. The convenience of buying cryptocurrency on payment apps, however, comes with trade-offs. Venmo, PayPal, and Cash App lock users into a transaction fee that might make it more expensive than if people were able to comparison shop for more than one exchange. Some of the apps are limited to buying and selling and don’t let users move cryptocurrency to a wallet. But they may entice beginners to use cryptocurrency for the first time.
There are thousands of different cryptocurrencies, from Bitcoin to Dogecoin, but no consensus on the precise number. The range is between 5,000 and 12,000, valued at about $2 trillion globally.
These digital money, high-tech alternatives to regular paper money represent a versatile and fast way to purchase or sell something. But how might cryptocurrencies continue to expand? And what is the current state of crypto regulations?
Penn Today asked experts across the University to share their thoughts on what the future cryptocurrency landscape looks like, from business and banking, laws and regulation, to environmental impact.
Cryptocurrency will have an integral role not only in banking, but across the board in financial services. Cryptocurrency has already begun to infiltrate asset management as a potential investment or for lending purposes. It is also a facilitator of financial infrastructure for payments, clearing and settlement. The ability to tokenize a transaction allows financial institutions to finalize payments or trades much more quickly than the current one or two-day payments system—perhaps even same-day or instantly. This will reduce or eliminate the kind of intra-day credit exposure that gives rise to challenges for individuals and poses significant risks to our financial system. At the same time, these new uses for cryptocurrency necessitate evaluation of the existing policy framework, including consumer protection, capital markets, prudential and systemic risk regulation.
More broadly, cryptocurrency will have a role in businesses across different industries. Smart contracts may be used to complete financial transactions. Blockchain, the technology that powers cryptocurrency, may disrupt other traditional industries like real estate, health care, and entertainment. Already we are seeing this disruption vis-à-vis non-fungible tokens (NFTs), which are beginning to power the art world, sporting events, and music. We at Wharton look forward to being at the forefront of this transformation.
Does cryptocurrency need laws and regulation? I think the answer is yes. Despite the fact that the cryptocurrency community has recently celebrated the 13th anniversary of the release of the bitcoin white paper, cryptocurrencies are still pretty much a “wild west.” Regulators, companies, and investors have had a hard time in defining a cryptocurrency as a commodity, a security, or something else, as well as determining which body should oversee and regulate them. This uncertainty is leading the cryptocurrency ecosystem to grow mostly on its own. New cryptocurrencies are created on an almost daily basis with creative names such as Dogecoin and Shiba Inu, without the need to be registered or meet specific legal requirements. Are bitcoins and these new creative forms of money inevitably changing the overall monetary and financial systems or not? Does the freedom to create a new form of payment entirely governed by a computer protocol mean economic freedom?
The truth is that although the still unknown creator of Bitcoin claimed to have introduced a peer-to-peer money system that does not rely on trust and third parties such as banks, we still need to trust Bitcoin and the other cryptocurrencies. We need to trust the protocol which a software programmer has written, instead of a legislator voted (at least in democratic regimes) by the majority of its citizens. Money based on cryptographic protocols certainly represents progress in technology that would enable us to perform transactions in a likely safer and faster way, as credit cards did decades ago. However, much liberty and freedom that cryptographers might see in bitcoin and these new cryptographic forms of money, I still see a role for the letter of the law. As the French philosopher Montesquieu said, “liberty is a right of doing whatever the laws permit.”
We are living at the dawn of a transformation of our financial system. The combination of the internet, advanced cryptography, and fast computers have allowed the private sector to introduce digital currencies, from Bitcoin to Facebook’s diem.
Central banks, in response to this private sector pressure, are considering the issuance of central bank digital currencies (CBDCs). In my research, I have argued that we should be cautious about CBDCs. More concretely, I have highlighted how central banks that issue a CBDC are subject to spending runs. If the agents in the economy believe that the price level will increase soon (regardless of whether this belief is based on solid facts), they will run to get rid of their CBDCs. Since the total amount of goods existing in the economy is essentially fixed in the short run, the spending run will lead either to an immediate increase in prices, thus self-fulling the concerns about inflation that triggered the run, or shortages by the stocking out of goods. Furthermore, the speed of electronic transactions makes it possible to have a spending run nearly instantaneously.
Notice that a central bank cannot fix a spending run by issuing more CBDCs. The origin of the run is the belief among the agents that prices will go up. Issuing more CBDCs will only make agents even more worried about inflation.
Central banks will face, in a world with CBDCs, a whole new set of challenges. We want to be sure of what we do before we open the door of CBDCs.
Blockchain protocols, and the tradable assets native to these networks, are revolutionary accounting tools. Properly implemented, they can be used to assign ownership to individuals, companies, and governments without the need for a verified mediator. Nothing demonstrates their potential better than the market needs of the energy transition.
As our electricity grid modernizes and grows to accommodate distributed renewable generation and new end uses, it will become more challenging to balance and manage markets. The grid is transforming from a unidirectional highway between provider and customer to a multidirectional network of “prosumers.” Distributed, digital ledgers can help support this changing market by creating unique, quantifiable, traceable digital assets that mirror the electricity sales between generator and consumer. This protocol could, by design, allow transmission and distribution organizations to reliably and transparently collect a share of sales for infrastructure maintenance.
Another challenge of the energy transition is ensuring that generators and fuel suppliers are adequately penalized for their carbon emissions. A cap-and-trade carbon market creates a fixed number of carbon credits available to major industrial emitters, but implementation is limited by the burden of traditional accounting.
Using blockchain or another peer-to-peer verification method, carbon credits could be distributed, traded, and predictably phased out without the need for a centralized governing body. Instead, all available regulatory capacity could be directed to ensuring that companies report accurate emissions, that the cap-and-trade program includes as many industries as possible, and that all carbon offsets are verified.
The energy transition requires seismic changes in the way that we produce, consume, buy, and sell energy. Blockchain protocols using a “carbon coin” or “watt-hour token,” as described above, could act as legitimate and useful regulatory tools for fair and reliable energy accounting.
We created BlockPenn, an infrastructure for connecting IoT [Internet of things] sensors to a distributed ledger for long-term monitoring of energy and environmental performance in spaces across the Penn campus. As part of the study, we propose methods to evaluate the environmental footprints of building users based on live data from sensors placed across offices, laboratories, and dormitory rooms. We created an algorithm for normalizing and benchmarking energy usage and carbon footprint, considering a variety of related environmental factors, which can be executed as a smart contract (an application that runs on the blockchain and assigns tokens to end users based on a predefined set of conditions) on the blockchain network.
In this use-case, the smart contract is employed to reward users with points based on their environmental performance over time. This is meant to create an incentive for improvement as well as awareness and visibility to the building users’ energy impact. A dashboard visualizes both the sensor data and the smart contract transactions.
Beyond this specific study, BlockPenn is designed to be scalable and expandable, so that individuals can connect their own sensors and write smart contracts, allowing users to participate in the experiment or create their own experiments using distributed sensor data.
We direct this research in collaboration with blockchain expert Lior Glass. A cross-disciplinary team of Penn students and researchers is working on the BlockPenn project, which is funded by the Ripple UBRI initiative and the Stevens Center for Innovation in Finance.
Dorit Aviv is an assistant professor of architecture at the Stuart Weitzman School of Design at the University of Pennsylvania. She is the director of the Thermal Architecture Lab, a cross-disciplinary laboratory at the intersection of thermodynamics, architectural design and material science.
William W. Braham is a professor of architecture at Penn’s Stuart Weitzman School of Design. He is currently director of the Master of Environmental Building Design and of the Center for Environmental Building + Design.
Jesús Fernández-Villaverde is a professor in the Department of Economics in the School of Arts & Sciences and director of the Penn Initiative for the Study of the Markets. His research includes topics such as monetary economics, economic history, and political economy.
Sarah Hammer is the managing director of the Stevens Center for Innovation in Finance and senior director of the Harris Alternative Investments Program at the Wharton School. In these roles, she focuses her efforts on private capital investments and financial technology. Hammer is also adjunct professor of law at The University of Pennsylvania Law School, teaching an upper-level juris doctor course on financial regulation.
Giovanna Massarotto is an academic fellow at the Center for Technology, Innovation and Competition at The University of Pennsylvania Carey Law School. Her scholarship focuses on how technology affects society and the intersection between law, economics, and computer science. She is an active scholar and author of “Antitrust Settlements: How a Simple Agreement Can Drive the Economy.”