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The digital assets sector has evolved from a fringe financial industry into a technology governments and institutions are implementing into their transactional systems. Legislation regulating the sector has accelerated globally, and the use of assets like stablecoins is becoming more prominent across both DeFi and TradFi.
Despite blockchain’s growing prominence, it remains an oft-maligned topic among certain circles. A large reason for this is several misconceptions that are attributed to digital assets – some of which were once true, but are no longer applicable.
Diving into these criticisms of the industry can help shed some light on how crypto has matured over the years, and the areas it still has room for improvement as it aims to become a serious financial solution.
Crypto is a scam
One of the more common, and perhaps more superficial arguments, against crypto is that ‘it’s a scam’.
There’s no doubt the industry's past hasn't exactly done a great job of abating this conception. Events like the billion-dollar collapse of FTX, or the fall of Terra Luna, have scarred many both inside and outside the industry.
However, crypto is not just one ‘thing’. It is a sprawling ecosystem comprising hundreds of thousands of different products, from some that are scams, some that are backed by physical commodities, to others built and used by the world's biggest financial institutions.
It’s a bit like saying email is a scam because people have unfortunately been phished by a fraudulent ‘lost relative’ asking for money.
In fairness, suggesting that several cryptocurrency projects are a scam is a different, and arguably more accurate critique that targets the sector’s ‘permissionless’, wild west nature, rather than its underlying technology.
Crypto is used for money laundering and crime because it’s untraceable
Cryptocurrency has had an unfortunately murky history with crime. For much of its span, sitting in a regulatory grey zone, some have exploited the sector for illicit purposes. Additionally, the decentralised, tamper-proof nature of the asset class can make it more difficult to undo fraudulent activity, the way a centralised power like a bank or payment provider can.
However, critics may operate under the assumption that sending cryptocurrency is entirely anonymous and therefore untraceable. This is fundamentally false.
Most major blockchains (Bitcoin, Ethereum etc.,) are public, and therefore actually pseudonymous. Every single transaction in history is etched onto a transparent database, accessible to anyone who can use a block explorer.
So, while the lack of individual verification can make it more difficult to identify criminal transactions, cryptocurrency spending isn’t untraceable – in fact, the opposite is true.
There are several firms, such as Chainalysis and TRM Labs, dedicated to following the trail of illegal cryptocurrency transactions and linking them to a source. The very nature of publicised, decentralised data can actually give investigators a leg up in identifying illicit transactional flows and combat crime.
To put it into perspective: according to the United Nations, approximately 2-5% of global fiat currency is associated with money laundering activities. Within the crypto sphere, this number is typically 1% or lower.
So while there are still challenges for the maturing digital assets ecosystem to navigate when it comes to crime, it is far from the criminal haven that some make it out to be.
Crypto has no real-world use case
The tag ‘utility’ has become a bit of a dirty word in the crypto sphere. As projects new and old are at odds over which can have the best ‘real world use case’, the reality is; this misconception has been disproven for several years.
Digital assets are becoming increasingly entrenched in the current financial ecosystem. We only have to look as far as BlackRock – a trillion-dollar US institution – to see the ‘real-world’ value of cryptocurrency. The team developed BUIDL, a platform supporting 24/7, on-chain settlement of tokenised US Treasuries.
We have also seen tokenised gold increase in market cap over the past 24 months as some investors target precious metal price exposure through digital asset rails.
This is just one example of many in the tokenised asset space, where some businesses and governments are utilising the efficiency of blockchain and decentralised finance to finalise transactions at scale.
Payment giants like Mastercard are also creating interoperable payment rails to allow traditional digital banking to settle transactions on-chain.
Outside of the financial world, DePIN projects like Helium Mobile support physical infrastructure to improve efficiency and potentially de-monopolise certain industries.
For example, Helium works by rewarding individuals with HNT tokens to host 5G and Wi-Fi hotspots in their homes or businesses. In doing so, they’re intending to build a 'people-powered' network that offers a community-owned alternative to traditional Telecom coverage. The project currently has a client base of over 600k, with 350k+ active hotspots.
Crypto’s value is based on thin air
It is a reasonable argument to make that crypto is overpriced – if nobody believed this, then the market would always go up.
However, it is occasionally asserted that digital assets' entire value proposition is based on thin air.
There are several reasons this isn’t the case.
At a fundamental level, all assets and commodities are simply worth what people are willing to pay for it. This can include tangible necessities like food, or collectables where the primary utility is investor nostalgia.
In a basic sense, most cryptocurrency assets infer at least some value from the underpinning technology. Whether prominent projects like Bitcoin and Ethereum become core to our financial future is uncertain – but for now, it appears that some distributed ledgers are already having a say in the evolution of fintech.
This technology isn’t particularly cheap to run, and at a minimum requires upfront capital to host servers and keep copies of the blockchain running across a decentralised web of hardware/software.
With the blockchain acting as a settlement layer, the theoretical value of a cryptocurrency can also come in the form of revenue capturing. Think of it like paying a 1% fee on Visa transactions at the pub – that money goes somewhere, right? Well, when using a blockchain, the fees are typically distributed using a digital asset of some kind. If the distributed ledger is to continue making an impact on modern financial rails, there is a case to be made that fee captures provide a tangible value.
So, like how certain equities pay dividends to shareholders, certain cryptocurrencies may provide value through revenue distribution to investors.