Wednesday, February 28

Opinion: Cryptocurrency’s risks prove too high to fully trust it as a form of banking

(Rachel Bai/Daily Bruin)

Cryptocurrency is swiftly emerging as technological and financial developments skyrocket to new horizons, presenting risky implications.

Recent years have witnessed a rise in digital assets, with the University of California beginning to accept donations in the form of cryptocurrency payments. However, in the wake of the 2022 crypto crisis, it may be wise to consider the risks when putting our trust in the crypto world.

First introduced in 2009 by a group of anonymous developers called Satoshi Nakamoto, Bitcoin is a decentralized form of virtual currency. Put simply, Bitcoin and other cryptocurrencies, such as Ethereum and Tether, are currencies that aren’t mediated by a government – their value is at the mercy of market demand.

Unlike fiat money, such as the US dollar, cryptocurrencies are backed by a virtual blockchain. This shared database permanently records every transaction that occurs on a network, serving as a form of trust for the cryptocurrency system and allowing people to record non-monetary transactions, including trade involving non-fungible tokens.

Due to its seemingly trustworthy network and Bitcoin’s astonishing 962% increase in dollar value – from around $7k to $69k between 2019 and 2021 – many people have used it as an investment asset. That is, until 2022, when Sam Bankman-Fried, the CEO of Futures Exchange, commonly known as FTX, and founder of Alameda Research, was arrested for fraud.

Until then, FTX was an incredibly successful cryptocurrency exchange firm, while Alameda Research was a hedge fund, a company of private investors that tend to use risky tactics to increase monetary returns. Bankman-Fried took an estimated $10 billion in customer funds from FTX to support his side gig, resulting in his arrest.

While many are quick to jump on board for the next new technological and financial development, this series of events has increased skepticism in cryptocurrency – and rightfully so. Especially looking back at the aftermath of the 2008 recession and the lack of accountability in its wake, people should be more cautious of what, and who, they choose to invest in.

In an event unrelated to Bankman-Fried’s arrest, Bitcoin’s extremely volatile value is a risk factor, demonstrated by cryptocurrency’s value dropping 30% in one day.

How are regular, risk-averse people supposed to agree to use cryptocurrency in their day-to-day lives if there’s a chance they wake up to a decimated bank account?

Cryptocurrency is completely unregulated. It’s not backed by a government bank that can regulate its financial system, so the value currencies like Bitcoin hold rely completely on the viewpoint and educated guesses of the public.

Jinyuan Zhang, an assistant professor at the Anderson School of Management, said currencies of all forms are built on trust systems. While the US government relies on its authority to gain the trust of its citizens, cryptocurrencies must still earn the public’s trust.

“For the people to gain trust (in cryptocurrencies), they rely on this general consensus of mining systems, and it’s expensive,” Zhang said.

While mining systems and blockchains do provide a form of public regulation, they still haven’t resolved the fundamental issue of volatility.

However, cryptocurrencies can be appealing to avid investors yearning for a new industry or people who are skeptical of governmental monetary systems.

Zhang added that there is a future where the two systems, centralized and decentralized, will continue to coexist.

On the contrary, Ramesh Srinivasan, a professor in the School of Education and Information Studies, said cryptocurrencies need to be centralized to solve the issue of volatility.

“Almost anything that’s decentralized tends to have volatility because it depends on the conditions associated with wherever the currency is,” said Srinivasan. “Decentralized currencies are volatile because they’re not guaranteed or grounded by forces that are outside of the currency. … It’s about the forces associated with that technology.”

Srinivasan added that the cryptocurrency market resembles a bubble – an economic period when prices of assets surpass their intrinsic value.

But even if we were to solve the problem of volatility and crypto’s overestimation, the risk of the misappropriation of funds remains.

Alan Wu, a fourth-year computer science student and the treasurer of Blockchain at UCLA, said patterns similar to the FTX situation had already occurred years earlier with a company called Mt. Gox.

“There was a lot of misappropriation of those funds happening, but it’s not the first time that it’s happened,” Wu said. “This theme will continue because there’s always going to be fewer people learning about the space.”

The fact that only a few people really know how all this works is alarming, to say the least. As more people become educated about how cryptocurrencies and blockchains work, we can progress toward maintaining accountability and establishing trust.

This is especially true since the blockchain can be used to document data in many different instances, like helping distribute revenues between YouTube creators and the platform itself. Furthermore, it could help resolve the problem of reposting stolen content, Zhang added.

“The technology should be able to solve the issues because it should have the unique identifier link to the file, and every time the file appears in any places, you should be able to track it,” Zhang said.

Therefore, the technology cryptocurrency uses may provide useful applications in the future.

As the UC delves into the realm of accepting donations in the form of cryptocurrency payments, they should be aware of the risks involving volatility and misappropriation. While it’s beneficial to allow donors yet another method of payment, the UC must propagate a more thorough understanding of the technology to ensure accountability.

However dubious cryptocurrency may seem, at the end of the day, it’s technology. Therefore, it can only really be used as a tool – you can use it however you want. But at what cost and who uses it, is an entirely different story.

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