Episode 6

Is Crypto Really a Revolution?

Crypto enables an open financial system for all. As regulators push back, is there any room for compromise?

By Zack Guzman

December 12, 2022


Identifying just how revolutionary a new technology might be is always easier with hindsight.

The telegraph, radio, television — all great iterations on a technology looking to improve man's ability to communicate and all revolutionary in their own eras. But none of those improvements feel quite as revolutionary as the dawn of the Internet.

The Internet opened up information for anyone and everyone at scale. And despite the best attempts from gatekeepers, it remained open in its access for all. In a very similar sense, that same revolution is playing out again as blockchain technology enables crypto and its users to power a completely open and permissionless system of money for the first time.

As with all revolutions, there will leaders who clash and there will be winners and losers. And there are very powerful players in the old guard who would very much hate to see their power usurped by a new system. But the rise of a new paradigm has incubated its own revolutionaries who have proven powerful enough in their own right.

Erik Voorhees is one of crypto's most celebrated revolutionaries. He has staunchly defended crypto's guiding ideals over his more than a decade in the industry as the founder of decentralized exchange ShapeShift. He's personally battled the Securities and Exchange Commission, and has even taken on calling out leaders within crypto for violating the movement's main tenets. His most recent victim? None other than FTX founder Sam Bankman-Fried.

ShapeShift founder and crypto pioneer Erik Voorhees joined Coinage to discuss the revolution crypto is enabling and why he fought Sam Bankman-Fried on so many points.
ShapeShift founder and crypto pioneer Erik Voorhees joined Coinage to discuss the revolution crypto is enabling and why he fought Sam Bankman-Fried on so many points.

Even before the details behind FTX's collapse came to light, Voorhees had begun actively calling out Bankman-Fried for a proposal he had written in favor of compromises the industry might have to make to appease regulators. At the core of the dispute was the idea of requiring licenses for people to interact with decentralized finance applications. Or, more loosely, the idea of gatekeeping or requiring identification for anyone looking to interact with crypto code that might enable automated borrowing or lending online.

Bankman-Fried and Voorhees publicly debated these points on a crypto podcast just weeks prior to the eventual FTX collapse, and somehow the two moments feel linked in time. As if opinion in crypto circles souring on Bankman-Fried's position was the canary in the coal mine. A figurative exposing just weeks before a rather literal financial one.

"I thought the debate was going to be kind of monumental because it was a demonstration of two very different world views when it comes to proper governance over the crypto ecosystem," Voorhees tells Coinage on the Season 1 finale. "I did not know, of course, that he was running like a $10 billion fraud and that soon after our debate all of it would fall apart and the craziest crypto calamity of all time would unfold so it's been a little surreal."

Of course, no charges of fraud have been filed in the aftermath of the FTX collapse just yet. And even with Bankman-Fried removed from his post as FTX CEO, the positions he defended in the debate with Voorhees around stepwise regulations and permissions are still ones the industry will need to address. Even if the crypto moderates' chosen voice is disgraced, the question still needs answering: Just how revolutionary does crypto think it can be?

"I feel like it was helpful for people to see the person who was on camera calling for regulations and who was generally supportive of top-down governmental surveillance and control of an industry, for that person to be revealed as like the greatest fraud in our ecosystem was certainly helpful to my case and hopefully will make people question this narrative that you know the the Wild West cowboys in crypto are the bad guys and the people who are buddy-buddy in Washington D.C. with regulators are the good guys," Voorhees said. "That's so obviously not true and this was a profound example of that."

From a libertarian perspective, Voorhees' stance on regulation begins with refuting the idea that consumers need protection from regulators at all.

"Forcing protection on an adult human if they don't want it is unethical, period," Voorhees says. "Does crypto need regulation? I mean, the correct answer to this is that it is regulated by math and code, which are really far better arbiters of outcomes than people are."

While that might be the case, crypto has seen its fair share of failures in 2022 that have wiped out unsuspecting users. The fact that users might be "unsuspecting" could either stem from a lack of financial transparency, or from a lack of completely understanding the risks with a project. Crypto purists, like Voorhees and Caitlin Long, are quick to point out that taking self-custody of your assets rather than storing them with a centralized lender or exchange removes the risk of losing funds in a bankruptcy.

But, what about the scenarios where people are doing everything right and they still get hurt? For example, consider Terra's collapse from Episode 0. As we documented then, the idea of a decentralized stablecoin failed in extraordinary fashion when the cryptocurrency LUNA evaporated $45 billion. Some might say regulators should have prevented it. Others, like Voorhees, say in a free market you will get burned sometimes.

Do Kwon, founder of Terraform Labs, sits down for an exclusive interview with Coinage at his company's office in Singapore.
Do Kwon, founder of Terraform Labs, sits down for an exclusive interview with Coinage at his company's office in Singapore.

"The people who lost money in FTX, yes it's sad and sucks and they were wronged. And the person to blame is Sam and his team for sure," Voorhees says. "But if you iterate through this, you realize that the people who leave money at untrustworthy institutions will tend to lose money, right? The people who owned Luna lost the money in Luna, right? There's a market feedback mechanism where if you if you bet on things that are bad either from fraud or because the mechanism was broken, you'll lose your money. And if you bet on things that are good, sound, you'll earn money. And so you get an iterative effect where a market improves capital over time."

It might sound harsh, but it's at least consistent with the idea of radical financial freedom to interact as any one person sees fit. It's also worth contrasting that idea with current financial system.

As crypto's great unwinding continues, there is no bailout coming. It's all in stark contrast to the Financial Crisis in 2008. Central banks are not going to step in to financially maneuver the crypto pain away, and more cash will not be printed to save the day. And on the margin, Voorhees sees it as much fairer to avoid inflation eating into the wealth of everyone who wasn't a bad actor.

"FTX is gone. Mt. Gox is gone. All the exchanges that didn't have good security practices are gone. That's good. That's called capitalism, right?" he says. "Compare that with a non-healthy market in which the institutions and companies that make mistakes not just don't go away, but are actually supported, bolstered, bailed out by taxpayers and all those bad players. ... So you iterate through these two worlds, one in which bad actors get supported by taxpayers and grow, and one in which bad actors tend to get weeded out and go away. Carry that through for a generation. And which system do you think is going to have a healthier foundation?"

But that also brings us to the trickiest part of crypto's revolution: The fact that crypto had scaled so much over the last few years as it attracted institutional capital and interest from traditional financial stalwarts. And those players have very strict rules in place for a reason. They follow the regulations of the banking system.

As regulators would be wont to remind you, those regulations are generally in place to protect retail customers. They are in place to prevent some of the very collapses we've seen in 2022 as user funds get wiped out in bankruptcy after bankruptcy. But if you already take the position that protecting adults is unethical, suddenly regulations don't look like protection. They look like ways to control and surveil.

This is particularly made clear by comparing back to the early days of the internet — and reveals why Voorhees fights so ferociously against caving on ever agreeing to require licenses or permissions in order to use crypto. Because if the crypto industry concedes on that point, it has already lost the war.

Voorhees often uses a very simple example to prove his point which stems from the reality of the Office of Foreign Assets Control, or OFAC. It's the arm of the U.S. Treasury in charge of enforcing the economic sanctions lists. As Voorhees points out, the entire country of Iran is on that list — making it illegal for most to support even just causes in the country.

"It is illegal for you as an American to send money to one of these brave women that is protesting the horrible treatment that's going on in Iran," he says. "I think that's absurdly unethical that if I actually donated money to some of these women, I would be committing a felony."

In the eyes of purists, crypto offers a separate financial system that does not control you through permissions, and thus, offers more freedom to the world. Moderates might agree, but also might contend that some compromises must be made in order to scale the space.

"I think all humans on earth should have access to an open, immutable financial system which does not depend on the jurisdiction in which they were born," Voorhees says. "That makes me a radical, which is weird, right? I feel like that just makes me a good human and hopefully more people will come around to that view over time."

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