Feb 25, 2022

A More Efficient Financial System: UT Professor Explains Potential of Cryptocurrency and the Blockchain

Reporting Texas


Image courtesy cryptowallet.com

If you were one of the 100 million Super Bowl LVI viewers, you probably noticed commercials for cryptocurrency. Or perhaps you’ve seen the billboards promoting crypto across Austin. 

The ads underscore a theme those in the crypto community already understand and are trying to convince the rest of us: Crypto needs you to believe in it.

“It’s a multifaceted invention that I think can change the world,” said Bobby Benavides, 46, a stay-at-home dad from San Antonio who invests in cryptocurrency. “The problem is it’s really hard to wrap your head around,” Benavides added. 

The information gap is pronounced, with 69% of Americans agreeing with the statement, “I don’t really understand cryptocurrency,” according to a 2021 YouGov poll. 

Far fewer people have experience with cryptocurrency. Less than 10% of Texans own Bitcoin. They are mostly men ages 25-34. 

And crypto has an image problem. In February, the U.S. Justice Department arrested a New York couple for conspiring to launder $3.6 billion in stolen cryptocurrency — the largest financial seizure in history, reported the Associated Press. 

The technology “started out with great intentions but is now dominated by venture capital firms looking for another way to make money,” said Owen Robertson, 20, a student of management information systems at the University of Texas at Austin. 

“This is one of those things with the potential for wealth transfer that’s been about who’s early, who are typically the wealthy,” Robertson said. 

Bitcoin, the most well-known cryptocurrency, was created out of distrust in banks and the financial system following the 2008 recession by an individual or group of people under the name Satoshi Nakamoto. There are over 10,000 cryptocurrencies, often called “coins” or “tokens.” 

Anyone with a phone can access exchanges such as Robinhood or Coinbase to buy and sell cryptocurrencies. In 2020, one-third of small-medium businesses in the U.S. accepted Bitcoin as digital payment. Experts expect the number to grow. 

Cryptocurrency uses blockchain technology to operate as a peer-to-peer — meaning no banks are involved — electronic exchange. Blockchain is a decentralized ledger, essentially an open database, that relies on a proof-of-work method — think contracts — for tracking and verifying transactions. 

Some praise cryptocurrency’s transparency and accessibility as solutions to wealth inequality and corruption. Others are hesitant regarding its safety against hackers and tangible value or are critical of the technology’s impact on the environment.  

Last spring, Gov. Greg Abbott created the Work Group on Blockchain Matters “to develop a master plan for the expansion of the blockchain industry in Texas and recommend policies and state investments in connection with blockchain technology.” It will release a report of its findings in October.

Cesare Fracassi, director of the Blockchain Initiative and associate professor of finance at the University of Texas at Austin. Photo courtesy of Cesare Fracassi

In an interview with Reporting Texas, Cesare Fracassi, director of the Blockchain Initiative and associate professor of finance at the McCombs School of Business at UT Austin, shed light on cryptocurrency and the blockchain. Herewith excerpts, edited for clarity:

First things first, what are cryptocurrency and the blockchain? 

Bitcoin, Ethereum, Dogecoin … these are all cryptocurrencies. And blockchain is the backbone of cryptocurrency. It’s a decentralized ledger, which means no one owns it or decides what goes on it. Think about it as a database that’s accessible to everyone. 

In our current system, when you go to buy a cup of coffee, your bank approves or disapproves of the transaction. In a centralized system like this, you need to trust the main single entity, whether that be your bank, the state, Walmart, etc. With blockchain, the whole network comes together to decide if transactions using cryptocurrency are legitimate or not.

What are the advantages to blockchain technology? 

It’s hard for companies to coordinate around each other because they all have their own IT systems. For example, in a supply chain system, let’s say Walmart sells tomatoes to Costco and lettuce to HEB. That produce is tracked all the way from the farmers to the shelves. One of the issues with this is that Walmart has their own IT system, as does the distributor, the wholesaler, etc. So the question is, how can you coordinate so that everyone can interact with each other electronically? 

We can’t just have one database because then the question is, who would own it? Who would manage it? Who would approve or disapprove transactions? So, blockchain is helpful in this situation in which a whole network comes together to value the transactions so that people can collaborate with each other easier. There are situations where this is not needed, situations in which you have one single entity that makes all the decisions and you wouldn’t need a decentralized system like blockchain. 

And the disadvantages? 

It’s easier to just have one entity that approves transactions. Collaborating with multiple networks takes time, it’s slow and more expensive. It’s just a harder thing to do. If there are too many users, the technology becomes slow and expensive. That’s a trade-off with decentralization. 

Sometimes people say blockchain is better because it’s very transparent. All transactions using cryptocurrency are visible on the ledger. They’re not private but anonymous, meaning that you see the transactions but you don’t know who the people involved are. Now, for some of them, you can figure it out. On the other hand, if you’re concerned about privacy, you may not want to have all your transactions publicly exposed. So that’s another trade-off. 

What are the problems crypto and blockchain are trying to solve? 

There are several people who believe that the government should not be involved in any economic activity. Especially if you have a more libertarian view of the world, you want the government to be very limited in what they can control of people’s lives. And one of the biggest powers of the government is to print money. We elect the president, the president selects the chairman of the Federal Reserve, and they decide how much money to print based on economic activity. Sometimes, they get it right and sometimes they print too much and there’s inflation and it’s all part of the democratic process. But one view is that having a currency that strips the power of the printing press away from the government is a good thing.

Another view that I favor more has to do with our current financial sector. We know that the financial sector has issues surrounding inclusivity, inefficiency and lack of innovation. We have very large banks that are heavily concentrated and regulated, leaving them little incentive to innovate and they’re hard to enter into. Cryptocurrency, via blockchain, has the potential to create a more efficient financial system that is more democratic and less concentrated. 

And it’s not just about finance; it’s about all the largest tech companies, like Google, Apple, Amazon, Microsoft. Their business model is to become large enough as a platform to then extract monopoly rent. 

Initially, they spend a lot of money establishing their product — for example the iPhone — to be the main platform for their services. Then they extract a lot of value in the additional Apple apps and products you need. This type of closed system, where Apple allows only Apple products to work with each other, is called a walled garden. They claim it’s because the user experience is better but it’s also because they’re controlling and keeping a large part of the profits. 

In a decentralized system, no one owns Ethereum and no one can control it. This makes it a lot easier to create new companies and new protocols and applications that can better interact with each other, allowing for greater cooperation and a system without monopolies. 

Because of their dependence on vast computing power, do crypto and blockchain really require more energy than printing paper money? 

Over the last three to four years, there’s been a big effort to scale up these blockchains, making them faster, cheaper, more accessible and less carbon-emitting. Bitcoin and Ethereum still consume a lot of energy, more than it takes to print money. The latest numbers show that the Bitcoin network consumes as much energy as Italy, a country of approximately 60 million people, or 0.5% of the whole energy market.

What kind of jobs could crypto provide in our community? 

Austin has a vibrant crypto and blockchain community. As a tech-friendly city, it’s natural for the crypto community to come here. In fact, Miami and Austin are the two up and coming cities for crypto development. There are a lot of jobs available for students who are knowledgeable about this topic. Developers and lawyers are especially sought after if they have any experience in crypto. Computer science developers can develop protocols and chains, and nowadays, the largest law firms across the country have entire crypto divisions.

Correction: A previous version of this story incorrectly stated that Owen Robertson is president of the Blockchain Initiative UT-Austin. No such position exists. Robertson is president of a blockchain club at the university.