With a capital value exceeding $3 trillion and growing, cryptocurrencies and other digital assets are becoming an integral part of the financial landscape and are increasingly included in traditional financial portfolios. Large banks, financial institutions, and corporations hold digital assets, and many are reportedly considering issuing their own digital coins, including Amazon and Walmart. Given that Bitcoin, the most famous of the 20,000-plus cryptocurrencies (the number constantly changes and is difficult to narrow down with certainty), was launched in 2009, this category of asset has had a meteoric rise in a very short time. Yet, despite the vast amount of wealth already tied up in digital assets, questions remain about their lasting value and practicality.

Sulolit “Raj” Mukherjee ’00, the CEO of Bodin Advisory LLC, is a lawyer and former IRS' Head of Digital Assets Office specializing in blockchain and digital assets. He believes that these assets are not only here to stay but will also be a significant driver of wealth and innovation. That doesn’t mean that he is saying that any one specific cryptocurrency or digital token has inherent or guaranteed value. 

“If you’re only talking about Bitcoin, Ethereum, or other digital tokens, it’s a high-risk, high-reward investment strategy that works for some people and doesn’t work for others,” he said. “But I believe what comes out of this is the blockchain technology and the implementation of the blockchain technology in the future.”

Austin Lobo, professor of mathematics at Washington, agrees that blockchain is an important emerging technology that will be adopted by many industries, not just companies in the digital assets world. He says that because each “block” of Bitcoin’s ledger, which records every transaction, is public and viewable, combined with the computational challenges required to add each block, it is very secure in terms of preventing hacking or other forms of deception. As with Mukherjee, he is not saying that Bitcoin or any other cryptocurrency will maintain its value; he is saying that blockchain technology has solid mathematical foundations that make it a secure way of storing data. 

“It’s not the technology that needs to be understood,” Lobo said. “We need the sociologists, economists, philosophers, poets, and artists to tell us what these things are.” 

Adalbert Mayer, economics professor and co-chair of the Department of Economics at Washington, believes that cryptocurrency is unlikely to replace fiat currency (the legal tender issued by governments) and that it is more of a speculative investment than a replacement currency. He recognizes that in countries with authoritarian or unstable regimes, cryptocurrencies can serve as a means of trading or a way to store wealth beyond the reach of the regime. However, he views these countries as outliers. 

“In a well-functioning modern economy, we like that central banks have the ability to control the money supply. During recessions, you want to increase the money supply, and when the economy overheats, you want to limit the money supply growth,” he said. “Managing money supply is a tool that we use to manage economic fluctuations. If we were to adopt a cryptocurrency, we would eliminate this tool. On the other hand, the downside of managing money supply is that if we mismanage it, like Germany in the 1920s, you have hyperinflation, which is probably worse than having a fixed money supply.” 

HOW IT WORKS

To understand the potential of digital assets, start by examining the blockchain technology that underpins them. Bitcoin was created by Satoshi Nakamoto (a pseudonym; their identity is unknown) in 2009 as a decentralized application that issues currency, records transactions, and operates independently on a network of decentralized computers. Lobo explained that the first challenge for Bitcoin, or any cryptocurrency, is known as the “two coin problem.” A currency only holds value so long as there is a set amount of the currency and it cannot be easily replicated. Fiat currency solves this problem by being a physical thing printed at a known rate by a government. Once you hand over a dollar to a cashier, you cannot buy something else with that same dollar. And governments go to great lengths to make counterfeiting their bills difficult and financially prohibitive. With a digital coin, how can you be sure that if a person trades one Bitcoin with one person, he can’t trade the same coin with someone else? 

Bitcoin solves this by encrypting all transactions on the “blockchain,” a running ledger Lobo said harkens back to the famed running ledgers kept by the Medici banking family of Florence, Italy. If the blockchain is the ledger, the “blocks” are the most recent entries and the updated totals. Each new block is like a new page in the Medicis’ books, recording all the transactions that have taken place since the last block was added. 

Of course, the Medicis’ books were kept under lock and key, with only trusted employees allowed to add or subtract from them. The creators of Bitcoin solved the problem of securing transactions by making them public and viewable. Every Bitcoin transaction is sent to every computer, known as a node, in the network simultaneously. Every new block, where these transactions are verified and collated, is also viewable and stored on every node. Furthermore, each block contains an encrypted hash linking it to the previous block. In other words, all the blocks in the chain are linked to all the previous transactions, which cannot be changed retroactively. And because all these blocks are held on a vast number of independent computers, an independent and decentralized network, changing any recorded transaction would require modifying it simultaneously on all the nodes. In practical terms, this is impossible.

Lobo said another simple way to think of the blockchain is as a series of steps. Each step is built upon the one below. You cannot remove or change a step without undermining the ones above and being immediately found out.

Mukherjee said that he often hears people say that Bitcoin is a convenient place for criminals to hide their assets because it is not controlled by an organization that could be subpoenaed for its records, but they are wrong. The fact that it is a public and viewable ledger means all transactions can be viewed and potentially traced. It’s true that the transactions don’t include the individuals’ names, but increasingly sophisticated tools adopted by law enforcement agencies have had great success in tracking suspicious transactions and identifying perpetrators and locations. Mukherjee stated that the immutable record of every transaction makes the blockchain a poor place to hide illicit assets.

With Bitcoin, a block is added approximately every 10 minutes. This raises the question of trust and accounting. Who can verify and add all the transactions recorded in a block if there is no organization running the currency? Again, as Lobo explained, the original Bitcoin program is designed to make it lucrative but expensive to verify and record transactions, and it is virtually mathematically impossible to cheat. This is where Bitcoin miners come in. To earn the right to add a block and receive a payment in Bitcoins for doing it, a miner has to solve a mathematical puzzle before anyone else. Lobo described this as similar to finding the combination to a lock by trying each possible permutation of numbers. However, the number of possible Bitcoin permutations is so large that it might take a regular computer thousands of years to find the correct combination. Therefore, a successful miner needs vast computing power to compete with the other miners and solve the problem. Given the enormous costs in hardware, software, and electricity, never mind staffing and maintenance, and the fact that the winner—the first person to solve the problem—is paid in Bitcoin, as well as the transactions being public and verifiable by the users, it is in the miner’s self-interest to maintain the integrity of the system.

THE VALUE OF THE TECHNOLOGY

If the Bitcoin blockchain is secure and operating successfully without an issuing authority controlling it, is it or one of the other cryptocurrencies the perfect currency for the modern world? After all, consumers buy things online all the time. Does it really matter if they are paying in U.S. dollars, another national currency, or Bitcoin? 

As Mayer notes, there are advocates for absolutely no government or other controls over personal assets; however, he is skeptical that any cryptocurrency could handle the volume of trade, and even if it could, he doesn’t believe this would be beneficial for society.

“Humans developed money on many different occasions in societies that had no contact with each other,” Mayer said. “So, the idea of having a common trading tool that everything is sold for has evolved in many, many different historical places over time.” 

Typically, a society used something that was valued, durable, easily transported, and could be divided into units. Additionally, it had to be somewhat scarce because if everyone could access it easily, there’d be no reason to trade for it. That’s why gold and other valuable metals often became currencies. Eventually, after centuries of financial evolution, we ended up with fiat currencies—money issued by and managed by an authority, normally a government.

Mayer said that cryptocurrencies can satisfy many of the elements of traditional currencies and may have advantages in that their supply is not controlled by an issuing authority that might be tempted to enrich itself or try to get out of a financial pickle by printing more currency. Bitcoin is capped at 21 million Bitcoins. The value of each coin is somewhat determined by its scarcity. Again, this could be considered an advantage over fiat currencies, as there is a finite quantity, and each Bitcoin’s value can be directly related to demand, without a government trying to artificially raise or lower a currency’s value. 

While he recognizes that cryptocurrencies do have some advantages, Mayer thinks their downsides make them unlikely to replace fiat currencies. He said the mechanics of trading coins are clunky, time-consuming, and expensive (read about the costs of crypto mining at the end of this article). While some of the newer coins are quicker and require less energy to mine, they are still more difficult than fiat currencies, especially for small daily expenditures like buying a cup of coffee. He also believes that, on some level, the value of any cryptocurrency is based on the belief that it has value. If that belief is shaken, they could become worthless overnight. This makes them inherently unstable, and they have the potential to be a bubble.

Lobo doesn’t completely agree with this. He argued that fiat currencies are also a matter of belief. They are no longer tied to a real commodity like gold, as they were when the gold standard linked a currency to a country’s physical gold reserves. Once a currency is no longer bound to something tangible, he would argue that it is not fundamentally different than belief in a cryptocurrency. 

“Humans developed money on many different occasions in societies that had no contact with each other. So, the idea of having a common trading tool that everything is sold for has evolved in many, many different historical places over time.”

Adalbert Mayer, professor of economics

Another reservation Mayer has about cryptocurrencies is that their adoption could arbitrarily redistribute wealth by rewarding the wealthy and those who were lucky enough to get in early. When more fiat currency is printed, the government gets a little wealthier. For example, if there is $100 in circulation and the government prints one dollar more, then the government is marginally wealthier because the original $100 is worth slightly less. This is known as seigniorage and is considered beneficial for a society because the government, ideally, represents the interests of its citizens. If more cryptocurrency coins are released, the benefits accrue to those who release the coins and those already holding them. 

Mayer is not totally against cryptocurrencies. He can see how they might work as a tool to store wealth, much like owning gold or some other commodity. He can also see the value in using them for transferring funds globally, especially if the costs are reduced and the mechanisms made easier, but he remains skeptical about their overall benefits. 

“From a societal perspective, [cryptocurrencies are] probably bad because they use all this energy, undermine our ability to conduct monetary policy, and lead to this arbitrary redistribution of wealth,” he said.

Mukherjee believes that the benefits of digital assets are only just beginning to be explored, and it will take innovation and investment, as well as policy and legal shifts, to help practitioners and consumers realize their full potential. He arrived at this view after years of working in the field and observing the evolution of digital assets and their widespread adoption. And he did not enter the field as a tech advocate who believed absolutely in the power of technology. Instead, his early career focused on international tax law at traditional financial institutions, and he took the leap into the world of cryptocurrencies as a tax lawyer hired to develop ways to apply tax policies and strategies in this new realm.

FROM INDIA TO CYBERSPACE, BY WAY OF CHESTERTOWN

Born in India, Mukherjee emigrated with his family to England when he was 7 and spent the equivalent of high school there. When his parents moved to Kansas for work, he came to Washington College, where he majored in international studies and English literature. Upon graduation, he earned a law degree from the University of Kansas School of Law. Drawn to international law, he worked in the international divisions of well-known companies, including HSBC, Ernst & Young, and JPMorganChase. There, he discovered that he enjoyed tax law, particularly international tax information reporting. He found the complexity of reporting income and losses across different national jurisdictions to be both challenging and engaging.

In 2019, while working at JPMorgan, he met someone from Coinbase, now one of the world’s largest digital asset exchanges, but at the time had only around 200 employees. She told him that they were looking for “somebody who was entrenched in the traditional finance world, was a lawyer, but understood structuring and understood how to create regulatory infrastructure within a technology company that makes financial products.” He was hesitant to take up the offer because digital assets were so new that they posed an enormous risk for someone already advancing in traditional banking. He spoke with a couple of his mentors, who told him that even if this business failed, he would emerge from it with a wealth of knowledge about a new financial world. 

“Taking this job would break me out of sort of the niche that I was very comfortable in,” he said, “and force me to do things that would actually be intellectually stimulating.”

Mukherjee joined Coinbase, where he headed their tax division, developing their tax reporting mechanisms and policies, and had a front-row seat as the industry went from an obscure tech- and outsider-dominated field to a mainstream financial player. His experience there led to him being recruited by the IRS to lead its Digital Assets Office, where he helped develop policy for assessing digital assets for tax purposes. Having laid the foundations for new tax and legislative policies, he resigned this summer to found Bodin Advisory LLC, a consulting firm specializing in digital assets and blockchain technology.

POTENTIAL STILL GROWING

Mukherjee is excited about blockchain technology and what it can do. His ability to see and build connections between the past and the future, the law and policy, the latest technology and traditional banking tools, is what gives him a unique perspective on how the digital assets industry will mesh with the traditional financial sectors. 

The first and still the biggest use of blockchain is the retail consumer space where people buy and sell assets. Mukherjee stated that 85% of users in the United States use large currency exchanges, where they can create digital wallets and trade and purchase through them. These are, in his opinion, regulated and well-established. “They’re a safe bet,” he said. “I call them the Charles Schwabs of the digital finance world.”

Another application of blockchain technology that he finds interesting is as a means to preserve and protect important data in such a way that it cannot be tampered with. He gave the example of people at a nonprofit organization he recently met, who are visiting libraries around the world, scanning the books, and storing them on the blockchain. The idea is that in a time of book banning, they will create a record of all the literature that exists today, and it will be preserved for future generations. He can envision blockchain being used to preserve data across various industries, from medicine to supply chain logistics.

The third use of blockchain technology that has really excited him is DeFi, which stands for Decentralized Finance. In this sphere, users manage their own digital wallets instead of relying on those held by large currency exchanges. Mukherjee described it as where “more exotic sort of protocols” exist and as “more experimental.” He said that DeFi protocols enable more borderless global transactions and often use “smart contracts,” in which the terms of an agreement are written into the code. People can share, loan, or exchange their digital assets without going through exchanges or other institutions. At the same time, the public visibility of the blockchain makes the transactions transparent.

Mukherjee admits he doesn’t know where this DeFi world will go. “There are good applications of DeFi protocols,” he said, “and then for every good application, someone’s got to think of something nefarious to do. But that’s just human nature.” He observed that “technology always drives ahead of regulation,” and one day DeFi protocols, innovations, and experimental uses will have some sort of regulation that makes the playing field clearer and safer. Given the transnational nature of many DeFi transactions, this will require internationally agreed-upon rules, which will take some time. For the moment, Mukherjee is happy to be a pioneer in what he believes will be a transformative technology.