You can read the full report here (It’s 513 pages long).

To save your time and summarize, here are some key highlights and some of my thoughts into the report (highlights from the report are in the quotes section):

In addition to the decentralized custody and control of money, it has been argued that crypto assets may provide other benefits, such as improving payment systems, increasing financial inclusion, and creating mechanisms for the distribution of intellectual property and financial value that bypass intermediaries that extract value from both the provider and recipient. Looking under the hood at these arguments, however, shows a more complicated picture. So far, crypto assets have brought none of these benefits.

Banks such as the Canadian Imperial Bank of Commerce (CIBC), Australian & Israel Banks are using the Ripple Network for cross-border transactions, because they know they can perform transaction settlements in a matter of seconds with very low fees compared to current wire transfers that has comparatively higher fees & longer transaction times in days. It’s pretty weird that the report ignores the best of what cryptocurrencies offer.

Crypto assets to date do not appear to offer investments with any fundamental value, nor do they act as an effective alternative to fiat money, improve financial inclusion, or make payments more efficient.

While I may agree that point on memecoins, a lot of the cryptocurrencies out there do offer fundamental value as means of cross-border payments, medium of exchange, shopping for goods & services, staking to provide security against Distributed Denial-of-Service (DDoS) attacks, store of value and most importantly, providing wealth sovereignty & economic freedom from centralization risks. Stablecoins running on efficient blockchain networks are more effective alternatives to fiat money, while the permissionless nature of blockchains & cryptocurrencies have definitely improve the financial inclusion for the people who are not successful in registering for a bank account. These points are the complete opposite of what the statement above is mentioning.

“Stablecoin” is also an industry label for a form of crypto asset that is purportedly backed by a portfolio of underlying assets and claimed to have a stable exchange value with these assets.

According to Investopedia, Stablecoins are cryptocurrencies that are pegged, or tied, to that of another currency, commodity or financial instrument. It can either be backed by fiat money, overcollaterized by a collection of financial assets or algorithmically pegged. While we do have stablecoins such as DAI & DJED are backed by a portfolio of crypto assets & other stablecoins, it’s definitely not the main definition of what stablecoin is as what’s written in the statement above.

One reason many crypto assets are highly volatile is that many of them do not have a fundamental value. For example, stocks are claims on the future profits of firms and debt is a claim on interest and principal payments. Even commodities such as gold and silver have fundamental values, because they can be used in jewelry and for special manufacturing purposes

Conversely, unbacked crypto assets are traded without fundamental anchors, suggesting that their market prices only reflect speculative demand, or market sentiment, not claims on cash flow.

Crypto assets do have fundamental value in that they can:

• Act as a reward mechanism to secure the network from DDoS attacks.

• Act as a transaction fee for miners/validators to record your transaction.

• Provide delegation features to provide higher voting power for validators or stakepools to be chosen and validate the next block.

• Provide governance to which crypto assets can be used as deposit to make policy proposals & voting power to govern the direction of a protocol of a platform.

• Be a form of money that can be used as a medium of exchange to pay for goods & services in basically all sectors, such as retail, supply chain, IoT, software services and many more.

• Provide liquidity to decentralized exchanges to stabilize the price fluctuations of the crypto asset pairs.

• Act as state rent to compensate miners for providing storage space to persist data in a transaction (Nervos CKB is doing this).

• Act as form of security for a financial platform that enables profit sharing for holders to earn a share of the revenue generated by the platform, similar to stocks but more efficient with smart contracts capability.

• Become tokenized assets reflecting the value of stocks, financial indices & commodities with better traceability & proof-of-ownership features.

• Be staked to have a higher reputation score as oracle operators to provide accurate data feeds responsibly.

• Be represented as NFTs that unlocks even more use cases, such as music, art & scientific IP rights with better traceability & proof-of-ownership features.

With all these points being laid out, crypto assets are definitely very far from being just a speculative demand or market sentiment.

Cryptocurrencies can serve as a unit of account, given that the relative values of goods and services can be expressed in cryptocurrency (e.g., a single chicken in commerce is worth roughly 0.0001 bitcoin). However, individuals would likely need to first convert bitcoins or other cryptocurrencies to dollars to understand relative values as cryptocurrencies are not as effective as the U.S. dollar as a medium of exchange (discussed below). Thus, cryptocurrencies currently do not fully serve as units of account.

While it’s true that everyone values things relative to the US Dollar, in the future, if Bitcoin becomes the global reserve currency where everything is valued in ‘Satoshis’ instead, your perception of value will be totally different. When cryptocurrencies are better alternative forms of money than the USD, individuals do not even need to convert bitcoins or other cryptocurrencies to dollars to which the dollar devalues every day due to the infinite printing of dollars. Just imagine a world where every single item is valued in Satoshis.

The strength of the U.S. dollar is derived from several important factors, such as faith in government institutions and the legal system, but cryptocurrencies lack these factors.

Tell me, do you have faith in the current government institutions and the legal system?

Cryptocurrencies currently experience substantial amounts of volatility, and thus are not stable stores of value. For example, the value of a bitcoin (relative to the U.S. dollar) increased by over 1,000 percent from March 2019 to March 2021, and then decreased by over 70 percent from November 2021 to October 2022. This volatility means that anyone who is using bitcoins to store their savings is subject to high-volatility risk in their purchasing power.

I agree that the current crypto markets are pretty volatile against the US Dollar. Then again, cryptocurrency market is still not fully matured. Harvard Business Review has put this perspective right in that the focus on price volatility isn’t as strong an argument as critics might think. Due to the fact that crypto is still not widely adopted as a useful form of money and a medium of exchange yet, cryptos are mostly used to perform trades & arbitrages. Once cryptos are more matured, where countries & governments adopting them into their respective financial systems to perform trades with other countries, while also providing the citizens options to use different currencies for medium of exchange, we can see the prices will become more stable over time.

Sovereign money can easily satisfy money’s requirements. The main reason for this is that the value of sovereign money is backed by a trusted institution—the central bank.

With the central bank printing more money, especially during the recent events of bailing out banks since the 2008 financial crisis, causing non-stop inflation and devaluing the Dollar currency, are you sure you can called the central bank, a “trusted institution”?

One important feature of many cryptocurrencies is validating transactions through consensus mechanisms, which are a way to distribute profits from new issuance among participants such as cryptocurrency miners that verify the cryptocurrency transactions.

Another point not mentioned in this sentence is that the profits are obtained not just from new issuance of currency, but from transaction fees too. Blockchains such as Bitcoin, Ethereum & Cardano have “mempools” that stores unverified transactions for nodes to perform validation & include these transactions into the next block. When issuance of new currencies stopped, the network revenue generated will be from transaction fees alone.

A fundamental problem with stablecoins is one that has been known in the traditional banking sector for centuries: run risk. If stablecoin holders wish to redeem their stablecoins for $1 each, this will require the stablecoin issuer to liquidate some of its reserves. Depending on how liquid these reserves are, and the state of broader financial conditions, this liquidation may lead to disruptions in the markets for the reserve assets and reduce the market value of the issuer’s remaining reserves because the sales of the reserve assets put further downward pressure on the prices of remaining reserves. If reserves are falling in value at the same time holders are seeking redemptions, then the issuer may receive less than $1 for each $1 placed in stablecoins, thereby causing the stablecoin issuer to become insolvent.

Yes, reserves are the real problem for stablecoins, especially if the dollars backing the centralized stablecoins such as USDT & USDC do not back exactly 1:1 as intended. Tether also has its controversies of lack of transparency in their actual reserves being backed, the ‘affiliated entities’ that hold those reserves & more than 50% of the USDT are minted on the Tron blockchain, which also has their fair shares of controversies & subpoena from the SEC as mentioned in my previous Weekly Pizza Bits. On the other hand, USDC is only slightly better than USDT, but also have their fair share of risks especially after the collapse of Silicon Valley Bank & multiple other banks that caused a major depegging because SVB holds approx. 8% of the USDC reserves.

Overcollaterized stablecoins with more than a dollars worth of a mixture of crypto assets, stablecoins and other financial assets may be a safer risk option. DAI, FRAX, DJED & SigUSD are some of the examples of overcollaterized stablecoins as previously covered in my stablecoin journey. However, with the US government hunting down every type of stablecoin, holding stablecoins currently looks riskier than holding fundamentally sound crypto assets until the regulatory framework is clear.

Many participants in the crypto asset industry are not acting in compliance with existing laws and regulations, and some of the most common unlawful activities in the crypto asset industry are scams especially aimed at retail investors. One of the principal areas where there is mass noncompliance is disclosure surrounding crypto assets that are securities. This lack of disclosure prevents investors from recognizing that most crypto assets have no fundamental value.

It’s true that there are a lot of scams in the crypto world, and much easier to do so because it’s fairly simple to create a new wallet, send & receive cryptos everywhere and then connect to DApps. Even though there are also many blockchains & Web3 platforms that are offering real world utility, the marketing power from the number of super high APYs platforms, gambling platforms and other very risky platforms further outweighs them thus new or normal users have higher probability of getting crypto platforms that advertises high yields in their social feeds.

More scams will happen often especially in the digital age. Besides crypto, local banks are also regularly sending out emails to consumers about the dangers of phishing scams. It’s time for the crypto community to be more matured and work together to educate especially the newcomers on which platforms provide real-world utility & fundamental values, and which platforms are outright scams. Focus more on how the blockchain & cryptocurrencies technology will help out the average people, instead of telling people how blockchain & cryptocurrencies will make them loads of money.

Having a community with a more matured mindset will also be easier to tackle the crypto scams out there, as the people would be wiser to avoid using those scam platforms.

DLT (Distributed Ledger Technology) and blockchain technology are not necessarily suitable for all applications; some considerations have been proposed for successful blockchain technology applications. See box 8-4 for the proposed DLT use cases. However, at its core, DLT is simply a database, and many proposed DLT-based projects do not actually employ decentralization.

For context, the box 8-4 use cases they mentioned are:

• Walmart & supply chains.

• Helium & the decentralized internet.

• NFTs to store images.

• NFTs for virtual real estate (e.g. Decentraland)

If these are the only examples that the report can give to summarize the overall use cases for DLT & cryptocurrencies, the people who research in the blockchain space knew <1% of the real world use cases out there. In summary, some of the real-world use cases that are either in current development or already live in different blockchains, while also using DLT technology are:

• Artificial Intelligence (SingularityNet, Fetch.Ai, Humans.ai)

• Decentralized Oracle Data Feeds (Chainlink, Band Protocol, Charli3)

• Healthcare (Rejuve, Immunify.life, Medibloc, Acoer)

• Connectivity (WorldMobile, Helium)

• Music (Audius, ProjectNEWM, ANote, BitSong)

• Cloud Computing (Akash, Nunet)

• Automotive (QoWatt, Holoride)

• Supply chain (Vechain, Atala SCAN, Atma.io)

• Identity Solutions (BrightID, IAMX, Atala PRISM)

• Bookstore (Book.io)

• Gaming & Metaverse (Enjin, Sandbox, Illuvium, Cornucopias)

I think I can go on forever listing down many use cases that are using at least some form of blockchain technology integrated into their platforms. Therefore, it’s definitely not just a simple database, it’s a technology that enables a decentralization of all types of business sectors that enables everyone equal opportunity to access those services.

Though DeFi applications claim to help broaden access to credit by decreasing intermediation fees, they create serious risks to investors and cause at least two risks for the broader financial system: the use of significant leverage, and the performance of regulated functions without compliance with appropriate regulations. DeFi platforms acting as unregulated banks, broker-dealers, exchanges and other entities subject to regulation should be operating in compliance with existing regulations and rules.

Since DeFi is operated globally to everyone, I agree that a global standardization of DeFi regulation is needed providing that it doesn’t remove the underlying principles of giving people permissionless access to financial services. The one thing I’m afraid is if the wrong type of regulation would sets us back to the current days of traditional banking to which everyone needs to provide sensitive information before using a service. Let’s hope for now that it won’t go to that path.

The Federal Reserve has prioritized designing and developing a faster payment system. The Federal Reserve plans to launch this new system, which is called the FedNow Service, later in 2023. Through financial institutions participating in FedNow, businesses and individuals will be able to send and receive payments conveniently, and recipients will have nearly instant access to funds, giving them greater flexibility to manage their money and make time-sensitive payments.

I’m surprised that the US doesn’t have a money transfer system that is instantaneous. The fastest type of transfer they have is an ACH transfer (Automated Clearinghouse). In Malaysia, we have DuitNow, a money transfer system that is instantaneous and has been implemented in almost all of the popular local & foreign banks. Transactions are settled within seconds, no fees are charged up to RM5,000 transfer limit, and the system works by associating your bank account with a more commonly used identification, such as your ID & phone number, but with downsides of legitimate privacy concerns.

Summary

I think I have covered a lot of the key points from the report. Basically, the US government is not very optimistic about the future of blockchain & cryptocurrencies while maintaining their stance in supporting the US Dollar, FedNow & CBDCs. However, I think that it’s a pretty good read to understand the US gov’s perspective of the economy in general so I would still recommend to read it if you have the time and form your own opinions. Digital assets only cover a chapter of the report and there are still many more chapters that covers the year in review, global challenges, supply labor challenges and many more.

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