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Episode Transcript

Christopher GIANCARLO: I do want to talk about one thing. There’s this concept of Web 3.0.

Chris Giancarlo, also known as CryptoDad, is a former chairman of the Commodity Futures Trading Commission, or C.F.T.C. We’ve been hearing from Giancarlo throughout this series on blockchain technology and cryptocurrencies. So what, exactly, is Web 3.0?

GIANCARLO: It’s a whole new architecture of things of value, of banking, finance, and money itself.

To appreciate this new architecture, we need to backtrack a few decades. Let’s start with Web 1.0.

GIANCARLO: Web 1.0 was a pretty static online experience.

Think about using A.O.L. dial-up service and Netscape Navigator to look at websites. Years later came companies like Facebook, building interactive platforms that encouraged a less-static online experience. This is sometimes called Web 2.0.

GIANCARLO: But people are concerned that Web 2.0 got hijacked by a number of big-tech companies that not only censor what you see, they actually condition how you react to what you see. And they’ve turned us, the surfers, into the product themselves. 

It took years for some of us to appreciate what Giancarlo is saying here. But now we know: if you are not paying for a product, the product is you. This brings us to Web 3.0.

GIANCARLO: The promise is we can take back control. We can actually control with great granularity who would have access to our information and what pieces of our information.

In the first two episodes of this series, we defined what blockchains are and what sort of spawn they’ve been generating: cryptocurrencies, N.F.T.s, and so-called smart contracts. But theoretically at least, blockchain technology can also become the foundation for web3. The idea is that a global chain of collaborative computers can help migrate digital information away from centralized platforms, which are controlled by big companies or institutions, and onto a decentralized internet that’s owned by no one. Again, that’s the theory. Here’s how you pitch web3 if you are Arianna Simpson, a partner at a big venture-capital firm that invests in this space.

Arianna SIMPSON: It’s really kind of empowering the users, which is a very significant shift from what we saw as the model in web2.

Should we be leery of promises as bright as this? Perhaps. The first blockchain, Bitcoin, was supposed to function as a digital currency — but you typically still can’t use Bitcoin to buy a burrito. N.F.T.s are supposed to help artists and other creatives distribute and profit from their work — but the market is so full of scams and gimmicks that it’s hard for legitimate creators to get a foothold. If you were a skeptic, you might see the whole space as something like this:

Vitalik BUTERIN: This anything-goes sewer where you just have all kinds of crazy green, bug-eyed monsters floating around. 

But that’s no skeptic. That is Vitalik Buterin, who is essentially the godfather of web3 technology. His creation, the Ethereum blockchain, has been called a “computer for the entire planet.” If things go according to plan, a distributed computing network could replace all sorts of traditional middlemen — like banks and payment processors, even the real-estate and retail industries. This utopia is sometimes called decentralized finance, or DeFi. Even Kristin Smith, a professional blockchain advocate, admits that the borders of this utopia are still hazy.

Kristin SMITH: DeFi is moving so quickly we’re not totally sure what that’s going to look like at the end of the day.

And so, in this third and final episode of our series, we ask: can the cryptoeconomy deliver on its promises?

Antoinette SCHOAR: Unfortunately the solution is not that easy.

Should we even want a decentralized world, built on the blockchain?

Christian CATALINI: I think that’s a good-sounding answer, but it’s the wrong answer.

And, if you’ve heard the first couple episodes in this series, you know we still need to launch our N.F.T. rocket. 

Tom SACHS: No. No. There’s too much wind. 

Today on Freakonomics Radio: is the future of crypto already over?

SACHS: I’m not running. I’m just leaving. 

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In 2019, one of the biggest tech firms in the world — the superstar of web2 — planted its very big foot right in the middle of web3 by announcing plans to create their own cryptocurrency.

GIANCARLO: What raised the roof when Facebook said they were going to launch a digital currency was, “Oh my God, who’s going to own all that data? Who’s going to have access?”

That, again, is former C.F.T.C. chairman Chris Giancarlo.

GIANCARLO: Because if you can have access to people’s financial transactions, you can know everything about them. 

Stephen DUBNER: Of course, they’re going to have access to user data, just as J.P. Morgan Chase does now, just as the Social Security Administration does now. All those institutions. Why is that not a feature that could be accepted?

GIANCARLO: The difference was it was Facebook. Within the two years of that announcement, there had been some very rocky testimony in front of Capitol Hill about how they use information, how they mine information. 

NEWS ANCHOR: Facebook C.E.O. Mark Zuckerberg will return to Capitol Hill.

Anna ESHOO: Are you willing to change your business model in the interest of protecting individual privacy?

Mark ZUCKERBERG: Congresswoman, we are — have made and are continuing to make changes to reduce the amount of —

ESHOO: No, are you willing to change your business model in the interest of protecting individual privacy?

ZUCKERBERG: Congresswoman, I’m not sure what that means.

GIANCARLO: I think politically they mishandled the rollout of that.

CATALINI: The bar from a regulatory perspective was extremely high, with regulators really thinking about, what does this look at scale?

That is Christian Catalini. He helped create Facebook’s digital-currency project. He’s also a professor at M.I.T. and founder of their Cryptoeconomics Lab. The Facebook currency was originally called Libra but then changed its name to Diem — and in early 2022, the project was shut down. But Catalini says it did have some lasting value.

CATALINI: In response to our first whitepaper, which was fairly naive and had a number of gaps, I think you’ve really seen a lot of effort towards building truly open, interoperable rails for payments and financial services. And I think that’s going to be a positive legacy of the project.

Catalini and his collaborators on Project Diem were developing what is called a stablecoin. Unlike Bitcoin, which is traded on open markets and whose value fluctuates wildly, a stablecoin is designed to maintain a consistent value relative to some real-world currency.

CATALINI: The vast majority of stablecoins are pegged to the dollar, or at least try to be somewhat close to the dollar.  

Although, as we learned in last week’s episode, even stablecoins can be incredibly unstable! A so-called algorithmic stablecoin called TerraUSD, collapsed entirely in May, and its founders are under investigation. The big crypto lending firm Celsius, meanwhile, appears to be in the middle of its own collapse. And there will be more. To be very short-handy about it: stability in the crypto space is more of a sales pitch than a fact. But you can see the appeal of some of these projects. The Facebook stablecoin, for instance, was designed to power a new universal payment system.

CATALINI: What’s interesting about stablecoins is that they’re potentially really useful for real-time, lower-cost, lower-friction payments. These networks are fairly open, especially relative to traditional payment systems, which tends to be gated. So you could use a cryptocurrency in a transaction without relying on an intermediary.

DUBNER: I know you are pitching that as a benefit, to get rid of the intermediary. On the other hand, if I’m the regulator, I’m thinking, “You want to make it easy for people to transact in a frictionless way without the intervention of the historical institutions.” I could imagine some real upsides to that. But I could also imagine just a sandbox for fraud, deceit, tax evasion, et cetera.

CATALINI: Look, there’s a lot that needs to happen for mainstream payment applications that do require anti-money-laundering controls and everything else to really scale up. What’s interesting is that as this space is maturing, a lot of the features that we’ve come to expect from the traditional financial system are re-emerging in crypto. So the version of crypto that’s completely unregulated and allows anyone to transact without any friction, maybe it was the view at the very beginning, but you’re already seeing today most people hold their crypto with a regulated entity, which is often a custodial entity, and so that’s not that different than a traditional financial intermediary. 

DUBNER: If that’s the case, though, doesn’t that defeat the purpose? In other words, if the point is, “Let’s eliminate the intermediary,” but then, yeah, we do need some compliance or regulation, doesn’t it just become, then, a different version of the financial system we have? 

CATALINI: Yes and no, right? What makes the technology interesting is that it has a shot at changing market structure and changing the balance of power between a consumer and an intermediary. We’ll still use intermediaries. But what the intermediaries add to the picture, how they add value, their market power or leverage will be different. Because when you’re operating on an open network you get interoperability from the start. If I’m a consumer on one digital wallet, I can transact with all the user base on a competing digital wallet. And that’s a very different dynamic than today. 

Let’s pause and unpack a bit of what Catalini is saying. An open network means that a financial institution, for instance, might no longer maintain its own proprietary ledger that requires a translator between institutions. This would create more interoperability — that’s geek-speak for “playing well with others.” Which means that a consumer with one digital wallet could transact easily with another consumer with a different digital wallet because all digital wallets would essentially speak the same language. Imagine moving from the Tower of Babel to a place where everyone’s money is speaking Esperanto. Right now, if you only use Venmo to move money around and your friend only uses Zelle, that’s a friction. A blockchain-enabled digital currency would theoretically remove that friction. It would also be easier to do things like move your money from one bank to another. Christian Catalini again:

CATALINI: If I have my assets with one entity, and suddenly they change their fees or they change their privacy settings, moving to a different one is much, much easier than in the traditional system. It’s a bit like in the early days of Mac versus P.C., when you were creating files on one system, and it wasn’t compatible with the other, people having to pick and choose who they want to be compatible with. In crypto, you’re typically compatible with everyone as a default. 

DUBNER: If we took a step back, what would you say is the biggest misperception about blockchain tech generally?

CATALINI: I would say there’s a lot of focus on the speculative and investment-asset angle and not enough on blockchain as a way to reshape markets and make them more efficient. One of the main challenges for this space is that it has always worked with the wrong metrics. And I think they’re actually quite detrimental because they don’t capture actual progress, right? You could have a network that has a very large market cap. Does that actually translate into meaningful interaction for, I don’t know, people trying to send a remittance abroad or people using it as an actual payment system? It doesn’t.

When Catalini says there’s too much focus on the “speculative and investment-asset angle,” he’s primarily talking about cryptocurrency trading — or what might be called crypto investing, or speculation, even pumping-and-dumping. As of this recording, the biggest cryptocurrency, Bitcoin, has lost roughly 70 percent of its value since last fall. That said, the global supply of Bitcoin is still worth more than $350 billion, up from zero dollars when the first Bitcoin traded, in 2009. And how did cryptocurrency become such a tradable asset, especially when you can barely use it to buy anything? Much of the credit — or blame, depending on your view — goes to this man.

Brian ARMSTRONG: Yeah, my name’s Brian Armstrong. I’m the co-founder and C.E.O. of Coinbase.  

And Coinbase is …?

ARMSTRONG: Coinbase is a cryptocurrency company. We help people buy and store and use cryptocurrency. 

In the first episode of this series, Armstrong told us that his crypto epiphany came from spending time in Argentina.

ARMSTRONG: I got to see a country that had gone through hyperinflation, and how the wealth of really the poorest people in society was eroded.

Which may be why Armstrong describes the mission of Coinbase like this:

ARMSTRONG: Our mission is to create more economic freedom in the world. 

So Armstrong saw crypto as not only a hedge against inflation but a hedge against centralized, institutional currency. Which meant, when he started a crypto exchange, he made sure it was decentralized, right? Actually, no.

ARMSTRONG: You’re correct that Coinbase really started off as a centralized exchange. And in some ways, that goes counter to the ethos of crypto. But the way we always thought about it was that we have all this money in the traditional financial world and we need to get some more of that money into the crypto world. So let’s go build a reliable bridge between the traditional financial world and this new crypto world. And that still is Coinbase’s primary revenue driver today. But I should say that I’m a big fan of the movement to decentralization. 

Coinbase is one of the biggest crypto companies in the world. Even though its share price has fallen about 85 percent since the peak — the crypto selloff has been bad for them, too — it still has a market capitalization of around $14 billion. Even though cryptocurrencies are intended to eliminate middlemen, Coinbase is something like the ultimate middleman. For a fee of 1 to 4 percent, you give Coinbase your dollars and they buy and store cryptocurrency for you. It might help here to think back to the California gold rush in the mid-19th century. Who got rich then? Most gold miners didn’t. But the firms that supplied equipment and food and clothing to the miners — Levi Strauss being the most famous example — they did very well. So is Coinbase the Levi Strauss of the crypto gold rush?

ARMSTRONG: It’s always been tricky for Coinbase to navigate this because, on the one hand, we want to enable the vision of a totally decentralized world. But we also need to connect into many of the banks of the world and work proactively with regulators. So I’ve often felt that we are playing an intermediary role — we’re bilingual, we know how to speak regulator and we also know how to speak diehard crypto fan. And sometimes it feels like both sides are a little frustrated with us because we operate somewhere in the middle. 

SCHOAR: I understand that there are lots of crypto enthusiasts who almost feel that the world will be an either-or. Crypto will take over everything and the traditional financial system will just wither. I don’t think that is how the future will play out.

That is Antoinette Schoar. She’s an economist who teaches finance and entrepreneurship at M.I.T.’s Sloan School of Management.

SCHOAR: At M.I.T. we have a mantra that technology by itself is an enabler, but the real success comes with finding the applications of technology that help society solve problems.

So what kind of problems does Schoar think blockchain tech will help solve?

SCHOAR: For me, right now, the jury is out because this is an early stage where people are exploring and finding new applications. It might actually lead to much more efficient payment systems, making payment systems themselves smarter.

Smarter how?

SCHOAR: Smarter in the sense that we could make them conditional. 

This goes back to the smart contracts we talked about in episode two. They’re programmed with conditional, “if/then” language.

SCHOAR: Imagine you send money to your grandmother somewhere abroad and you want to make sure that it’s truly only your grandmother who accesses the money. You could put restrictions so that you make sure that your second cousin who lives with your grandma does not actually take the money from your grandma.

So Schoar likes the idea of programmable money — but also the idea of stripping away some of the institutional friction in the financial sector. Again, this gets to the idea of DeFi, or decentralized finance.

SCHOAR: What happens is the smart contract that is underlying this DeFi app will match your coins with some other participants’ trading demand. And then you will directly interface with this other account. And so you never actually have to go through the centralized exchange. 

That’s what you might call a micro benefit of DeFi. What about the macro benefits?

Francis SUAREZ: There is going to be some massive disruptions based on this technology. I think there’s an infinite number of use cases. 

That is Francis Suarez, the mayor of Miami and a big crypto booster.

SUAREZ: I’ll use my country of origin, which is where my parents were born, in Cuba. So one is remittances. You have a situation where the Cuban government takes a percentage of remittances, and then it also converts the remainder from U.S. dollars to Cuban pesos, which are basically worthless. So you have essentially made the receiver dependent on the worthless central bank currency. And it’s a control mechanism, obviously, because everything is controlled by a central bank. And by the way, that’s a massive disruption to an authoritarian regime, not to be able to control its own currency, not to be able to control direct investment from external sources.  

This lack of control that Suarez is pointing out — we should assume that governments won’t just stand by and watch their central-banking authority get diluted. Case in point: China recently banned Bitcoin mining and all cryptocurrency transactions. Their official position is that crypto, quote, “doesn’t play a positive role in … technological progress” and that crypto mining “features high energy consumption and carbon emissions.”

SUAREZ: They say they care about the environment; they really don’t. Control is really the big issue. And the fact that Bitcoin is independent means it’s not controllable by the government. 

Does this mean China is sitting out the blockchain revolution? No. China, like many countries, is working on its own central-bank digital currency.

GIANCARLO: Over 80 percent of the world’s major economies are now exploring central bank digital currency.  

That, again, is former C.F.T.C. chair Chris Giancarlo:

GIANCARLO: And for China, it’s part of the Chinese Communist Party’s essential documents that the Communist Party is the leader in all things having to do with finance for the Chinese people. And the notion that their financial data could be held by Alipay or WeChat Pay, which are these payment systems that have grown up very rapidly in China, was anathema to China. 

China’s central-bank digital currency project is moving fast.

GIANCARLO: And there’s a real reason to be concerned. Because their digital currency is going to be a surveillance system. If you criticize the government, your digital wallet will be disabled to get a train out of your village. Or to get the apartment you want. It’ll be part of their social credit system. And even in Europe, looking at a digital euro, they’re going to show you commercial privacy, but not freedom from government surveillance. We can’t do that in the United States.

When Giancarlo says “we can’t do that in the United States” — he’s not just making a theoretical point; this is something he’s actively dealing with in his new position.

GIANCARLO: Two years ago, I launched what’s called the Digital Dollar Project

His goal is to lobby the U.S. government to explore the development of a digital currency that may be powered by blockchain technology. The first couple years of the project were spent laying groundwork.

GIANCARLO: Writing papers and doing conferences and thought leadership and all that. 

He’s made substantial progress.

GIANCARLO: The Fed is firmly now in the side of exploring this technology. And we’ve now shifted our focus to lay out what we think the core principles should be, if the U.S. develops a central bank digital currency. We’re not advocating the U.S. should, but what we’re saying is, if it does, certain what I would call civil liberties, like absolute privacy for lawful transactions and free enterprise, are things that must be in a central bank digital currency.

The Digital Dollar Project is looking at a number of pilot programs.

GIANCARLO: Working with some main-street payment providers, a number of N.G.O.s and charities. We want to test out a whole range of uses from retail uses to perhaps how would we have greater financial inclusion. But you also want to look at large wholesale payments across the globe. 

Now at this point you may be thinking: wait a minute, I thought the whole point of blockchain tech and cryptocurrency and decentralized finance was that the big institutions we have now — federal government and central banks, commercial banks and other financial institutions — that they wouldn’t be so involved. Here again is the M.I.T. economist Antoinette Schoar.

SCHOAR: One of the arguments you hear in the crypto community is that the benefit of especially DeFi applications is to get rid of financial intermediaries. And I think what they have in mind is to get rid of banks or centralized brokerage firms. The argument often is, “Look, it’s these banks that are making a lot of money, and if you could just get rid of them, rents would not accumulate.”

To an economist, “rents” are profits that go to someone who isn’t providing much value.

SCHOAR: Unfortunately the solutions to rent accumulation is not that easy. And the reason is that within financial markets, there are in-built economic forces that push the system towards more concentration. Financial markets benefit from economies of scale. Think about your credit card. Having a credit card becomes more and more useful the more other merchants and other people use the same credit card. If there were 700 different credit-card providers, and you had to each time figure out, “Does this merchant use credit card No. 1 or credit card No. 350,” it would not be so good for anyone.  

Which is why there are only four major credit-card networks in the U.S.: Visa, Master Card, American Express, and Discover. It’s why there are only a handful of big securities exchanges, like the New York Stock Exchange and NASDAQ.

SCHOAR: If there were 700 different exchanges, and I had to figure out every day, “Where are currently most of the traders and so where do I get the best price,” that would be much less efficient. Once you understand this central feature of financial markets, you also understand that even if you allow for free entry of new players, it will not bring down these in-built forces for monopolization. And this is one thing that in the crypto space, many people seem to not understand. They always insist on this mantra that just because blockchains allow for free entry, it will get rid of all the rents. But if you understand what we just discussed, then it’s clear that this is not true. 

And also, even in a cryptoeconomy, there are switching costs. Think about the time and effort it now takes to switch your phone carrier or healthcare provider; and think about the money you might save by switching if it weren’t such a hassle. Antoinette Schoar points out the same thing is happening with the crypto exchanges that got big early on — exchanges like Coinbase and Binance.

SCHOAR: People will not switch to a newcomer, even if this newcomer might provide better execution and much lower fees just because everybody else is still on Coinbase and Binance. 

Once you consider the leverage of the big crypto exchanges, and how the U.S. government is looking toward a digital currency, and how banks and other financial institutions are rushing to master crypto for their own, competitive sake — you start to wonder if the whole DeFi future will be heavy on the “fi” and light on the “de.” Power and leverage tend to concentrate, at least if the incentives are strong enough. And there’s another type of concentration to talk about here: wealth. Income inequality has become a feature of the modern economy. Miami Mayor Francis Suarez likes to say that the cryptoeconomy can democratize investing and wealth-building.

SUAREZ: So, right now, unless you’re a qualified investor, you’re only allowed to invest in public equities.

“Public equities” meaning stocks and bonds — but not the more sophisticated financial instruments that are available to high-income people, or so called “qualified investors.” Which is why, Suarez says, a lot of lower-income people have been buying cryptocurrencies.

SUAREZ: I mean, the numbers are staggering. And the reason why is because look, when you have your money in a bank account, you’re losing purchasing power. And so, it’s not surprising to me that people in minority communities throughout this country are searching for ways to combat a currency that’s losing value. 

But buying cryptocurrencies does not necessarily mean you make money. Anyone who bought crypto last fall, hoping to keep riding the wave — they’re now down 60 or 70 percent. In Bitcoin, the big winners have been the earliest investors. And who tends to invest early in new technologies and assets? That’s right: so-called “qualified” investors and other well-off or well-positioned people. Antoinette Schoar and her fellow economist Igor Makarov have run the numbers on Bitcoin ownership.

SCHOAR: We compare the concentration of Bitcoin ownership to the wealth inequality in the U.S. So in the U.S., about 0.1 percent of Americans control about 16 percent of all wealth. In comparison in Bitcoin, what we find is that 0.01 percent of Bitcoin owners control 26 percent of all the Bitcoins that are out there. The concentration is actually ten times even more concentrated than the wealth in the United States. 

Another research project, led by the data scientist Alyssa Blackburn, provides some background for this Bitcoin concentration. Blackburn shows that during the first two years of Bitcoin’s existence — 2009 to 2011 — the vast majority of Bitcoin was mined and collected by just 64 people. Most contemporary Bitcoin owners can be connected to those original 64 miners by a chain of just six transactions. So a relatively tiny group of people acquired and held onto Bitcoin during its meteoric rise. A recent report from the U.S. Federal Reserve reads: “Those who held cryptocurrency purely for investment purposes were disproportionately high-income, almost always had a traditional banking relationship, and typically had other retirement savings.”

SCHOAR: It does go against this narrative that Bitcoin and cryptocurrencies allow the not-big guys to participate equally in this ecosystem. 

Now, there’s an easy counterargument for a crypto booster to make: we’re still in the early days of this new technology; the benefits of crypto and DeFi need time to develop.

SCHOAR: We don’t want to be the person who in 1993 sits there and says, “Why do we need the internet?” Isn’t the mail service just doing a swell job? Right?

Coming up: Assuming blockchain tech can decentralize our financial system, what should we watch out for?

CATALINI: People lost their coins, lost their money. 

SCHOAR: You have to trust that this smart contract actually does what it says it will do.

SMITH: This is a question that needs further thought. 

And if you missed the earlier episodes in this series — episodes 508 and 509 — you can find them and all our episodes on any podcast app. You can also find other special series we’ve made — on the college market and the art market, on sports and creativity, on the secret life of a C.E.O. Our entire archive is also at, where you can find transcripts and show notes, and sign up for our newsletter.

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Until recently, the U.S. government had mostly stayed out of the cryptoeconomy. Chris Giancarlo was one of the people who encouraged that position. In 2015, he was on the Commodity Futures Trading Commission.

GIANCARLO: And I issued a public call for Congress to take a “do-no-harm” approach to blockchain technology. Let’s let it develop. Let’s monitor it. Let’s understand it. And let’s see where it goes.

DUBNER: Now “do no harm,” we think of from Hippocrates, right? “First, do no harm.” That’s the physician oath. But that phrase also has some resonance in D.C. in terms of regulating the internet, like 25 or 30 years before this time you’re talking about now, right? 

GIANCARLO: You’re absolutely right, Stephen. Great historic memory there. So it was back in the 1990s that the first wave of the internet came out of Silicon Valley and people started surfing the web. The interesting thing is Washington’s policy response was very enlightened. It was bipartisan. It was the Clinton White House, and it was the Newt Gingrich Congress. It was forward-leaning. It said, “You know what? We got to see where this goes before we come in with a heavy-handed regulatory approach. So our official response is going to be the Hippocratic Oath of “first, do no harm.” And it led to the United States really dominating that first wave of the internet in a way that’s led to all kinds of societal changes. The way we gather information, the way we social-network, the way we use local transportation, the way we consume entertainment. It’s really been a very dramatic step forward into the digital future. 

So yes, the U.S. got a head start into the digital future in part because of light-touch regulation — and light-touch taxation, by the way. But today a lot of people argue those early tech firms were given too much freedom — too much leeway to build platforms that have become too dominant. Google today has around 85 percent of online search for global desktop users — and, with that dominance, they also have a monster grip on the online advertising market. Facebook has nearly 3 billion global users, and around 74 percent of all social-media site visits in the U.S. Amazon has close to 60 percent of all e-commerce sales in the U.S. If Washington could go back in time 20 years, would their touch be a little heavier? Perhaps. But then again, the most powerful people in Washington don’t necessarily have a deep understanding of new technologies. Here is Senator Orrin Hatch questioning Facebook founder Mark Zuckerberg in 2018:

Orrin HATCH: So how do you sustain a business model in which users don’t pay for your service?

ZUCKERBERG: Senator, we run ads.

So given the median politician’s grasp of the economics of new technologies, it may not be a terrible thing for them to take a light tough with crypto — the “first, do-no-harm” approach that Chris Giancarlo advocated. But that position is changing, fast. S.E.C. chairman Gary Gensler has called the cryptoeconomy the “wild west” — and says he wants to rein it in. President Biden recently signed an executive order charging the entire federal government with “addressing the risks and harnessing the potential benefits of digital assets and their underlying technology.” How does the crypto industry see all this new regulatory attention?

SMITH: A lot of what we’ve seen to date has been very reactive. It’s usually somebody has a stupid idea, and we have to go try to kill that idea. 

That’s Kristin Smith. She runs the Blockchain Association, the main lobby for the industry.

SMITH: I worked on the Hill for 10 years, so I’ve been the recipient of lobbying and then I was a multi-client lobbyist for many years where I did the lobbying. And typically, you can have a 20-minute meeting with somebody and usually describe all the background they need to know to make a decision on an issue. Crypto is not that way. There are so many new concepts and there’s an entirely new language that describes it — you can’t do it in a single meeting.

Last summer, when Congress passed a big bipartisan infrastructure act, its sponsors wanted to raise money to offset new spending. One idea was to capture capital-gains taxes from the surging market in cryptocurrency trading.

SMITH: And at the very last minute, they tucked in a provision that redefined what a broker was for the purposes of tax reporting. 

The idea was that centralized exchanges like Coinbase would send out forms to let investors know how much tax they owed on their crypto gains. That’s what brokerages and banks do. Congress estimated this would raise $28 billion over a decade.

SMITH: The problem was the expansion of that broker definition beyond these centralized exchanges. The language was too broad. So all of these other participants in the ecosystem could arguably be on the hook for the same kind of reporting, even though they didn’t really have access to that customer information.  

Who are “these other participants in the ecosystem”? Think about DeFi apps, with anonymous, peer-to-peer asset swaps. There is literally no middleman to log and report the data.

SMITH: There’s a big question as to who should do reporting on that transaction. We’ve had wonderful conversations with the I.R.S. and Treasury, and they have a lot to learn about the world of DeFi, right? And DeFi is moving so quickly, we’re not totally sure what that’s going to look like at the end of the day.  

SCHOAR: We want to make sure that people who are interacting on DeFi apps are paying capital gains tax the way other investors are also paying taxes. 

That again is the M.I.T. economist Antoinette Schoar.

SCHOAR: We don’t want a situation where there’s a parallel financial infrastructure to our traditional system.  

Tax evasion isn’t her only concern about DeFi.

SCHOAR: When you have an ecosystem where everyone can anonymously access the financial market without know-your- customer regulation, without anti-money laundering protection, then it becomes really difficult to keep unwanted or even illegal actors out of our financial system.

CATALINI: So I think there’s a lot of enthusiasm about making the financial sector more competitive. But at the same time, there’s very reasonable concerns around, can you use the systems to facilitate money-laundering or sanctions evasion.

And that, again, is our other M.I.T. economist, Christian Catalini. He, remember, was part of Facebook’s failed digital-currency project. But even Catalini appreciates the S.E.C.’s “wild west” concern.

CATALINI: And so, that has also attracted, of course, all sort of market manipulation and bad actors that take advantage of retail investors looking for the next big thing. Something that the space will have to realize is that for it to become more integrated with the traditional financial system, it has to live by the same standards. When it comes to what is happening in the United States, my hope is that we find the right balance. A little bit like in the early days of the internet — what gave the U.S. such an unfair advantage was the somewhat light-touch regulation that allowed a lot of experimentation.  

DUBNER: You’ve mentioned things like market manipulation and bad actors and so on, but when you mention them, your tone of voice is not only nonjudgmental, but just kind of almost dismissive. “Like, yeah, that’s what happens.” But you don’t seem that concerned about those bad elements. Why is that?

CATALINI: So if you think about early exchanges and crypto custodians, there were players that were not regulated, not very reliable — people lost their coins, lost their money. Now, that was, of course, very expensive for the people involved. But these are early adopters, and I think they knew that they were getting in on something with potential massive upside, but also a lot of risk. Often something that you hear is like, “You’re trusting code or you’re trusting math.” And I think that’s a good-sounding answer, but it’s the wrong answer. It is true that many of these blockchains operate based on code and incentives. But behind them, there’s always human-created institutions. They just happen to be different types of institutions than a bank. They follow different rules. They have different social contracts around them. But when you really boil it down to the fundamentals, there’s people — that are making choices in how they operate. So often you’re trusting an open-source community and some core developers to make the right choices.

SCHOAR: You have to trust that this smart contract actually does what it says it will do.

Antoinette Schoar again.

SCHOAR: Many people say, “But, look, it’s a smart contract — it’s a code that is encoded on the blockchain. So as long as you can understand what this program actually does, it’s all extremely transparent.” And in theory, that is totally right, because everything is written down in computer code on the blockchain. But of course, sometimes these programs become so complicated that people don’t fully understand what the program actually does. We don’t all want to have to be finance professors to just even make a savings decision. Like, we don’t want to all be doctors to cure a cold. 

In other words: blockchain advocates like to say their tech will eliminate a lot of the complexity and opacity and path dependence in our financial system, the sludge that’s built up over years of business-as-usual and institutional bloat. Antoinette Schoar’s warning is that blockchain tech may be differently complex and opaque — more nimble, maybe, but also highly susceptible to fraud. And that anyone who says this isn’t the case, you should probably assume, is promoting their own position. One thing blockchain boosters don’t like to talk about is how an anonymous, decentralized, and permissionless financial system will address the victims of fraud.

SCHOAR: Normally if you get somehow defrauded, you always have an opportunity to seek remediation through the legal system. That whole process of remediation becomes impossible if it’s truly permissionless, anonymous, and decentralized — there’s no one I can sue afterwards to be made whole again. Because there is no address even to send my legal notice to. What that means from an economic perspective is that you have to be 100 percent sure upfront that you truly understand every wrinkle and every nuance of the interaction you are engaging to protect yourself.

Antoinette Schoar says you have to “truly understand every wrinkle and nuance of an interaction.” That requires a lot of effort, a lot of focus, a lot of savvy. And she’s talking about a single financial transaction! Where does that leave those of us who’d like to understand every wrinkle and nuance of the entire cryptoeconomy? It can hurt your brain to even consider that. There’s too much future still to be played out; the present is too opaque, too volatile. Consider the story of Ruja Ignatova, the founder of a cryptocurrency called OneCoin. Ignatova has a law degree from Oxford and a consulting background at McKinsey. Today, her whereabouts are unknown, and she’s on the F.B.I.’s list of Ten Most Wanted Fugitives. OneCoin, they say, was nothing but a Ponzi scheme, and she’s charged with defrauding investors of more than $4 billion. With crypto prices cratering lately, this is the kind of story we should expect to hear more. As Warren Buffett likes to say when there’s a stock-market meltdown: only when the tide goes out do you discover who’s been swimming naked. Our current moment is being called a crypto winter. But it’s not the first crypto winter, and likely not the last. For his part, Ethereum founder Vitalik Buterin thinks a crypto winter may be just what the cryptoeconomy needs right now.

BUTERIN: There is definitely this kind of creative, destructive aspect to crypto winters. Because crypto winters are the time when the projects run by people who only care about the short term and who only are fair-weather friends of the underlying principles and ideals of crypto kind of pack up and leave. And the people who are really dedicated in it for the long term, they always stay, right? And often the most useful and amazing things get built during crypto winters. Ethereum itself was built during 2014 to ’15. So Ethereum is a product of a crypto winter. And I do think we need breaks from the kind of irrational exuberance when prices start going up really rapidly. Reminders that, like, “Hey guys, you have to actually be financially sustainable, and you can’t just pretend to work, but only actually work when everything is going up by 30 percent every month.” So yeah, I think crypto winters have definitely their big cost, but they also have some pretty important blessings.

Costs and blessings — that’s a good measure to keep in mind generally when you’re looking at a big new technology. If you are still personally confused over whether the crypto revolution is mostly hype or a fundamental reordering of modern life, the good news is: you really don’t have to do anything about it. If you think cryptocurrency as an asset class is a total hustle, stay away from it. If you think money is fine the way it is — no one’s shutting down your bank account. Not yet, at least. And if they do, the new system will probably be so layered up with regulations that you’ll barely notice the difference. If you think N.F.T.s are a total joke — don’t engage with them. Or, only engage with the N.F.T.s being created by actual artists. Like our friend Tom Sachs.

SACHS: I’m a sculptor. I’m 55 years old.

His big project at the moment is called the Rocket Factory.

SACHS: We make N.F.T.s. We make physical rockets that represent the N.F.T.s. We shoot off the rockets. 

These are model rockets we’re talking about.

SACHS: And the N.F.T. and the video of the rocket going off altogether, these are not three separate things. This is one thing. 

You may remember, this blockchain series of ours began with Tom Sachs’s N.F.T. rocket project. You may also remember that he hand-paints the rocket parts with the logos of famous brands.

SACHS: Like Budweiser, Chanel, Trojan, Skippy, NASA, Hello Kitty.  

But as we discovered, the Tom Sachs Rocket Factory had somehow failed to make a Freakonomics Radio-branded rocket. Sachs tried to make up for this oversight by giving us a rocket that slams together three different brands on the three different parts of the rocket. First, the nose cone.

SACHS: It’s matte gray with a portrait of Brian Griffin, the dog on Family Guy.

Then there’s the rocket body.

SACHS: It’s McDonald’s red, and it’s hand-painted golden arches.  

And then there’s the base.

SACHS: Which is a deep, deep navy blue with a hand-painted United States Postal Service logo.

And now we went outside to launch it.

SACHS: Well, this is a beautiful day in New York City. We’re in midtown. We’ve got a fantastic audience of about 700 people watching. I think this is like a pretty primo spot, man.

This was in Bryant Park, in midtown Manhattan. To be honest, it wasn’t an ideal launch site.

SACHS: I’m nervous about where we’re launching it because of trees. Trees are the enemy. 

So he decides to launch the rocket over the beautiful big lawn at the center of the park.

SACHS: Wait a minute, no. There’s too much wind. 

DUBNER: Too much wind.

Maxwell TURNER: Too much wind. Okay, false alarm. 

Finally, the conditions were right.

DUBNER: Let’s do it.

SACHS: Shall we? Three, two, one, launch. Dud, we need another igniter.

I tried to not read too much into the fact that the first N.F.T. launch I’ve ever witnessed was literally a dud. Tom Sachs was not deterred.

SACHS: We’re going to do it. We’re going to do it anyway. 

He attached another igniter to our Brian Griffin-McDonald’s-U.S. Postal Service model rocket N.F.T.

SACHS: Three, two, one.

DUBNER: Wow. Beauty! 

It was a spectacular launch: nearly straight up into the spring-blue sky, hitting its apex, the parachute deploying and gently lowering the rocket to the pristine lawn. The crowd loved it. I loved it. There were some park personnel who didn’t love it.

SACHS: I’m sorry. We’re done — we’re leaving. Sorry. We’re leaving. I’m sorry. I’m going to leave. I’m not running. I’m just leaving. Sorry. It’s tangled. It’s tangled. No, I’m — I’m leaving. I’m leaving. I’m sorry. I apologize. 

Later that night, I found myself thinking about Tom Sachs and his rocket launch. It felt like the whole crypto story rolled up in one escapade. It happened in real life, with hundreds of witnesses in public, but it was performed primarily in service of a virtual product. The rocket was a physical, handmade thing but the real value lay in the digital component, the N.F.T. Faced with wind, trees, a dud igniter, and unappreciative park personnel, Sachs acted, in the moment, like a latter-day Odysseus or Jason. He transcended his meat suit and carried out his mission with a wave of courage and — if we’re being honest, unhinged moxie. There’s a lot to be admired there, and perhaps feared as well. Thanks to Tom Sachs for leading us through this blockchain adventure; thanks also to all the economists, regulators, crypto inventors and investors, and others who’ve walked us through this emerging landscape. And most of all, thanks to you, as always, for listening.

*      *      *

Freakonomics Radio is produced by Stitcher and Renbud Radio. This series was produced by Ryan Kelley. Our staff also includes Neal CarruthGabriel Roth, Greg Rippin, Zack LapinskiRebecca Lee DouglasJulie KanferMorgan Levey, Eleanor Osborne, Jasmin Klinger, Emma Tyrrell, Lyric Bowditch, Jacob Clemente, and Alina Kulman; we had help this week from Jeremy Johnston. Our theme song is “Mr. Fortune,” by the Hitchhikers; the rest of the music this week was composed by Luis Guerra. You can follow Freakonomics Radio on Apple PodcastsSpotifyStitcher, or wherever you get your podcasts.

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