The history of crypto is replete with failures of the centralized institutions, not the core decentralized crypto mechanisms. Mt. Gox was a Bitcoin exchange based in Japan that went under in 2014. The failure of FTX, which had at one point a valuation of $32 billion, is now part of this history.
Throughout these and other messes, blockchains have continued to operate smoothly. Blockchains, which consummate and record transactions, have not been successfully gamed or hacked, even though many billions of dollars would be available to anyone who figured out how to do so.
The failed institutions have been the ones that most resemble pre-crypto financial intermediaries such as banks and exchanges. And the reasons they went under have been classic rather than high tech. In the case of FTX, for instance, there are allegations that depositor funds were used for other purposes and not kept in reserve, a very old story in finance.
Crypto banks and exchanges have another point of vulnerability: Namely, they can be regulated. The entire structure of US financial regulation is pointed toward intermediaries, which can be monitored, required to report information and made to a certain amount of capital. In the case of depository institutions, FDIC insurance can be imposed, along with corresponding risk controls. In the case of clearinghouses, the Federal Reserve and the Treasury likely would serve as lenders of last resort, if such assistance were required.
My point is not that these regulations are perfect (they aren’t). It’s that, day to day, the intermediaries cannot run away from their legal obligations.
To the extent crypto clearinghouses and exchanges have a future, they too will be regulated, and this is all the more certain after the FTX fiasco. Then the question becomes: How many of the (supposed) efficiencies of crypto would remain under such a regulated regime? After all, the original point of crypto was to lower the transaction costs associated with traditional financial institutions. Intermediary costs, reserve requirements and legal compliance costs could more than reverse those advantages.
Intermediaries nonetheless have proliferated in crypto, for some obvious reasons. Quite simply, most people do not want to have to deal with the trouble of running their own crypto wallet, safeguarding their password and figuring out how the system works. It is daunting, even for people sophisticated about finance or technology.
Now enter AI. New AI systems are getting very good at voice recognition, at executing commands, at understanding text, and even at writing their own computer programs. Is it such a stretch to imagine an AI that makes a crypto wallet easy to use?
You would still hold your crypto in your own wallet, and would not need to trust any intermediary, except of course for the AI itself. At will, you would give your AI desired commands. Open a wallet for me. Send 0.1 Bitcoin to my brother. Convert all my accounts into cash. And so on.
In essence, the AI would ease your interactions with the system, but without creating a separate corporate entity between you and your funds. If the AI company went bankrupt, your funds would still be in your wallet. Probably the AI program would manage your personal finances more broadly, not just your crypto wallet.
You might wonder whether you could trust the company supplying the AI. But that question is answered relatively easily with another: Do you trust your smartphone or computer to do online banking? For the vast majority of people, the answer is yes. But if those companies built software programs to intercept or redirect consumer funds flows for their own purposes, those attempts would not last a day and the companies would rapidly be out of business and in court.
Crypto skeptics like to point out that crypto has been around for 13 years yet still does not have clearly defined legal use cases. That is a legitimate concern. At the same time, many technological advances do not blossom until additional pieces of infrastructure are in place. Electricity was around for decades before it transformed factory floors. The internet originated in the 1960s, but it took decades for it to revolutionize commerce and communication.
AI and crypto each command plenty of attention on their own. The next step — and the best way to ensure there isn’t another FTX debacle — may be to get them to work together.
More From Bloomberg Opinion:
• Crypto Wants a Central Bank: Matt Levine
• FTX’s Collapse Is Part of the Pandemic Hangover: Robert Burgess
• FTX’s Unraveling May Allow DeFi to Grow: Andy Mukherjee
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Tyler Cowen is a Bloomberg Opinion columnist. He is a professor of economics at George Mason University and writes for the blog Marginal Revolution. He is coauthor of “Talent: How to Identify Energizers, Creatives, and Winners Around the World.”
More stories like this are available on bloomberg.com/opinion