Basic R&D in digital assets could lead to breakthroughs in innovation, competition

Entrepreneurial dynamism in America should not be captive to the fickle nature of news headlines, nor should innovation be permanently hampered by industry scandals. While FTX’s collapse has been a setback for the crypto industry, the downfall of the cryptocurrency exchange has thus far highlighted flaws in that business’s leadership rather than in the underlying technology or its long-term potential. We should not allow distractions like these to divert America’s scientific progress and undermine the country’s global leadership in technology and innovation.

Since FTX, crypto markets have crashed and burned, and private funding for crypto startups has dried up significantly. Yet in a report on U.S. competitiveness in digital assets, the Department of Commerce recommends increasing government investment in technological research and development (R&D) to facilitate its early access to research insights related to digital assets, FinTech and emerging technologies.

Should the government be involved in the resurrection of the crypto industry or should free markets prevail? Government-funded R&D is hotly debated, but investment in basic research may be worthwhile if it leads to new discoveries or evidence of greater societal benefits than previously realized.

The Founders envisioned a narrow government role in economic affairs — one limited to providing public goods and services that the private sector is either unable or unwilling to provide.

The expansion of this scope of activity, such as tax breaks for chosen industries, would likely fall outside of their intent. Research also shows that government-funded advanced R&D (think subsidies for certain companies) could act as a type of corporate welfare that rewards only a few private interests while taxpayers foot the bill.

But what about basic R&D, which differs from applied and advanced R&D in that the motivation is to expand knowledge rather than create something with commercial value? Basic R&D has a longer shelf life and can be leveraged in unusual and unpredictable ways. For example, data shows that scholarly articles citing basic research remain relevant for twice as long as applied research or patents. Scientific breakthroughs also originate from basic R&D. During the COVID-19 pandemic, scientists analyzed decades of accumulated interdisciplinary knowledge to develop mRNA vaccines.

Taking this into account, Commerce’s proposed agenda makes sense for several reasons:

First, the report acknowledges that R&D activities will ensure that privacy and security considerations are introduced early in the development of new technologies. These two specialized research areas, which have caused the digital asset sector numerous hiccups, would benefit from transformational academic inquiry.

Second, government-funded research is accessible to the public, meaning findings won’t be locked behind expensive subscription-based paywalls closely guarded by scientific publishers. Furthermore, recently issued guidance by the Office of Science and Technology Policy mandates that all government-funded research is available to the public immediately, without embargos or fees. These policies, in conjunction with sustained private-sector investment in R&D, are likely to contribute to an abundance of knowledge that promotes sustained innovation and competition.

Third, the proposed research agenda is not limited to digital assets; it encompasses other financial and emerging tech. This broad proposition rightly avoids the perception or reality of Washington picking winners and losers in any given industry.

Critics of the digital asset sector might lambast the idea of funding basic research in an industry that is supposedly riddled with scams, is driven by speculators, has no intrinsic value and has produced little-to-no tangible societal benefit. However, these criticisms are short-sighted. As Nobel laureate George Smoot of Lawrence Berkeley National Laboratory once explained, “People cannot foresee the future well enough to predict what’s going to develop from basic research. If we only did applied research, we would still be making better spears.”

National security is one reason to justify increased investment in basic R&D. The Defense Advanced Research Projects Agency, whose stated mission is to “create and prevent technological surprise,” has been studying the fundamental properties of blockchains and the cybersecurity risks associated with them. It has also contracted with a digital asset data and analytics provider to research related national security risks.

Technological progress derived from basic R&D in digital assets and related technologies could lead to breakthroughs as varied as stronger privacy protections for digital transactions, the freedom to transact securely without intermediaries and new avenues for competition in the banking and capital markets industries. It may even reveal new ways in which people, groups and communities can organize, govern themselves, interact, transact and socialize online — new understandings of mankind and advancements on a sociological scale.

Enacting the Department of Commerce’s recommendation for a crypto research agenda will provide researchers in multiple fields with new opportunities to experiment, fail and innovate. These are the types of opportunities that can lead to unexpected discoveries and serve as springboards for economic growth.

Agnes Gambill West is a visiting senior research fellow with the Mercatus Center at George Mason University.

*Disclaimer: The author is the co-chair of the North Carolina Blockchain Initiative and a member of the North Carolina Innovation Council. The author has been and is currently involved with blockchain startups.