MIT professor believes DeFi can reduce the power of banks: Interview

I always find it interesting when people who are very successful in their respective fields start to learn about cryptocurrencies. One such case is Catherine Tuckerthe Sloan Distinguished Professor of Management and a professor of marketing at MIT Sloan.

I am looking forward to your excellent Work encountered, Antitrust and Costless Verification: An Optimistic and a Pessimistic View of the Implications of Blockchain Technology, which was way ahead of its time, written in 2018 and still highly relevant today. In fact, she suspects that her academic colleagues at the time thought digital currencies were just a “flash in the pan”.

When I sat down to ask Catherine about the paper and the changes in the landscape that have occurred since the paper was written four years ago, I received some answers on topics that piqued my curiosity.

CoinJournal (CJ): It was quite early to write academic papers about cryptocurrencies in 2018 – how did you first come into contact with crypto and decide to write the paper? What was the first reaction of your professional colleagues?

Catherine Tucker (CT): As a researcher, I started working on cryptoeconomics issues in 2014 when I was part of the team that helped run the MIT Bitcoin Experiment, where we gave every MIT student $100 in Bitcoin.

Back then, my academic colleagues thought digital currencies were a flash in the pan.

CJ: Have your views on the impact of blockchain technology changed since 2018?

CT : No. Although I think more people understand that blockchain is not Bitcoin.

CJ: In 2018, would you have expected that formal regulation around crypto would be more advanced at this stage, both in terms of antitrust and other areas?

CT : I think regulation has been slow and backwards so far. I think we still have a lot of work to do in creating laws that reflect the nature of crypto, rather than instead being laws that try to make crypto technologies function like previous vintages of technologies.

CJ: One area that immediately springs to mind when reading your (excellent) paper is central bank-issued digital currencies (CBDCs). The power this would give to either a large corporation (e.g. Apple, Google) or a government could be enormous – do you have any thoughts on this, particularly from an antitrust perspective?

CT : Well, central banks already have jurisdiction over fiat currencies! And we exchange any market power due to trade-offs in stability and credibility. I don’t think it will be any different here. I also think that in general, due to the low cost of exchange, it is unlikely that a cryptocurrency sponsored by a technology company will have significant market power in the traditional economic sense.

CJ: Big tech companies have become even more powerful in recent years. Do you still believe that blockchain alternatives could theoretically provide more democratic platforms and impact growing antitrust law, as discussed in the 2018 paper?

CT : Blockchain, by making things less physical and more digital, reduces switching costs, which are the traditional source of market power. So I remain optimistic.

CJ: You’ve written about open source code and how it’s a key factor in blockchain platforms and antitrust, but do you think a lot of pump-and-dumps or scams are because simple copy-paste forks of existing blockchains are so easy to set up?

CT : I think that crypto as a technology space has been unusual in terms of the amount of fraud that has occurred. I think that’s the combination of so much investment, new unproven technologies, and that there have been unusually high returns compared to other sectors of the economy. That combination has unfortunately led to fraud. I don’t think that necessarily reflects the ease of fraud particularly.

CJ: Since you wrote this paper, decentralized finance (DeFi) has grown rapidly in 2020. Could this have a major impact on the potential antitrust and control that major institutions currently exert over financial markets?

CT : I’m excited about decentralized finance. If you think about it, especially in economies outside of the US, banking tends to be unusually concentrated and there are high switching costs when you leave a bank. DeFi as a movement promises to change that pattern of concentration.

CJ: You write in the paper that “while the market is nascent and no cryptocurrency or blockchain project has currently achieved significant market power, some of the projects at scale will have sufficient market share to influence prices and consumer welfare.” Do you think Bitcoin’s large lead in terms of influence and market capitalization does not represent significant market power, given its ability to influence the markets of all other cryptocurrencies?

CT : No. I think that Bitcoin had an advantage as a first mover in a sector where there is untested technology to attract attention. I am not aware of any switching costs, but that would mean in particular that the large market share implies monopoly power. As many traders know, it is easy to switch between Bitcoin and other competitors.