Stern faculty have already begun exploring this vast, expanding, and unmarked terrain. Finance Department Chair Professor David Yermack designed and, along with NYU Law Professor Geoff Miller, teaches Stern’s first cryptocurrency course, which is jointly offered by both Stern and the Law School. Yermack shaped the University’s robust fintech curriculum. Fubon Center Director and Clinical Finance Professor Kathleen DeRose directs the Center’s fintech initiative and serves as the academic director of Stern’s new MS in Fintech Program. As DeRose notes, the School’s fintech effort began with a few champions and is now a robust team effort that includes many faculty, students, and alumni.
Professors Yermack and DeRose joined us to answer today’s most relevant cryptocurrency questions.
It's been reported that banking officials are sprinting to catch up with the many developments in crypto and are trying to slow the industry’s momentum. Are regulatory changes needed to protect investors?
David Yermack: There's a lot of interest in regulating cryptocurrency in areas such as tax collection, consumer protection, and money laundering. However, governments are much too overconfident about their ability to write and enforce laws in these areas. The technology of cryptocurrency is very different from other financial markets, and in general it's decentralized to the point that it can be difficult to hold anyone legally accountable the way that we do in traditional markets.
Central Bank Digital Currency
Government-issued cryptocurrency can theoretically offer the convenience of crypto with the reliability of money insured and controlled by a central bank. Many countries, including the US, are considering a central bank digital currency (CBDC). What are the benefits? The risks?
Kathleen DeRose: Governments are considering issuing their own central bank digital currencies (CBDCs) because they want to defend the monopoly they have on the printing press. Competition from proliferating cryptocurrencies, and competition from other sovereign CBDCs, challenge that monopoly. For example, the aim of China's digital currency, the e-CNY, is to maintain control over domestic monetary policy, but also to curb the power of payments apps like Ant Financial and Tencent, conduct surveillance, and eventually export the digital renminbi (RMB) as a competitor to the US dollar (USD). The US, that is, the Federal Reserve, naturally wants to offer its own CBDC. In addition, there are some "killer apps" for CBDCs, such as using them to deliver welfare benefits. That said, CBDC is a paradox, since digital money already exists and also has many design issues, like whether it will operate through the banking system or outside of it.
DY: Cash is very inconvenient and is disappearing quickly in most societies. It's a foregone conclusion that most money will be electronic in the future, and central banks have been pressured to create their own digital currencies because of potential competition from big online media and retail platforms. This has already occurred in China with AliPay and WeChatPay taking over much of the domestic payments business. Central bank digital currencies also give governments much more freedom to set optimal fiscal and monetary policies.
Why Fintech Matters
Why should one care about decentralized finance (DeFi) if you never intend to own Bitcoin? What does this mean for professionals working in financial services? For investors? For consumers?
KDR: DeFi is "mainstreaming." In addition to rising crypto values and venture investments, there are proliferating financial activities on various DeFi platforms. Meanwhile, JPMorgan plans a 26% increase in tech spending to $12 billion to compete with fintech, China piloted its digital RMB at the Beijing Olympics, Crypto.com now has a $700 million sports arena, and Coinbase advertised at the Super Bowl. You cannot get more mainstream than that!
Democratizing Access to Finance
According to a recent article, DeFi’s strongest potential is to democratize access to finance in emerging markets, taking down the gates that traditional centralized financial institutions have erected. Do you believe this is true for the US? Europe?
KDR: This is not so much about "democratization" or making finance cheaper, more accessible, and more transparent, which benefits citizens of both developed and developing markets. Rather, because cryptocurrencies eliminate oversight by any governmental or commercial authority, in some places where there is less trust in such traditional intermediaries, cryptocurrencies might offer a more stable and reliable alternative to sovereign fiat currencies, which is why they are getting used in places like Venezuela.
The cryptocurrency industry has a large carbon footprint, driving up global energy consumption and sparking support by some for bans on Bitcoin mining to stem climate change. Some companies have responded by attempting to go carbon-neutral and offset emissions by buying CO2 credits. Are these methods effective or are other regulatory measures needed to cut carbon emissions?
KDR: While Bitcoin mining receives a lot of well-deserved negative attention for its carbon footprint, a more complex question is whether other crypto currencies, and DeFi in general, are additive or subtractive to the effects of manmade climate change. In theory, automating financial activities should make them more efficient and by inference less energy-intensive.
DY: Cryptocurrency is bad for the climate because proof of work mining uses a lot of energy. However, many other things also use a lot of energy—air travel, drying your dishes, video gaming, and so forth. It seems likely that some sort of carbon tax or energy tax will be needed to combat global warming, but it's not obvious why crypto mining should be singled out and taxed any more or less heavily than other activities that also use energy.