Tip Sheets

Unsung crypto market risks to take center stage at hearing

Media Contact

Abby Butler

Six cryptocurrency CEOs will testify before the House Committee on Financial Services on Dec. 8, as lawmakers discuss the implications of rapidly expanding crypto markets and how to best regulate them.

Ari Juels

Joan and Sanford I. Weill Professor

Ari Juels, professor at the Jacobs Technion-Cornell Institute at Cornell Tech and an expert in financial cryptography, says that new financial products emerging in the blockchain ecosystem carry tremendous promise along with a myriad of risks.

Juels says:

“The new financial products emerging in the blockchain ecosystem carry tremendous promise along many dimensions. This promise is especially marked smart contracts, which enable the creation of financial instruments with unprecedented transparency, mechanization, and auditability. 

“At the same time, carefully considered regulation is a necessity, given the myriad risks engendered by blockchain-based financial technologies. Apart from the risk of financial instability, the risks of exploitative arbitrage, pyramid schemes and environmental damage are often underappreciated. 

“Arbitrage opportunities in the blockchain ecosystem already exceed $1 billion per year – and are probably far greater. Some of these arbitrage opportunities may be benign, but some common forms of front-running (and related activities) essentially amount to picking users’ pockets. Technical quirks in blockchain systems help make front-running possible and the blockchain community has created systemic support for the practice. 

“There is a fine line between crypto schemes that involve real innovations and create incentives by rewarding early participation and those that deliver little or nothing of technical value but enrich their founders and speculators.

“Because of its use of Proof-of-Work (PoW) mining, the Bitcoin network uses as much electricity today as a mid-sized country. While proponents of Bitcoin argue that it is transitioning to green energy, they do not acknowledge the opportunity costs of doing so. Bitcoin does not equal blockchain, however. There are other cryptocurrencies with more functionality than Bitcoin that use an alternative method of block generation, called Proof of Stake, that consumes far less energy.” 

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