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The issue is that it became a defacto tool of choice for average fraudster to rehash old scams.You're 100% right. And in theory bitcoin is fine and will still work. The problem is the underlying mechanisms that attract fraud and crime into unregulated spaces.
1) I never thought crypto had that much utility for the average person. It does have a lot of utility for drug dealers, human traffickers, and organized crime.
2) Lack of regulation is a warning sign. Con men and fraudsters are probably mentally primed to spider sense financial spaces and loopholes LEOs are not paying attention to.
3) The above two points make crypto a superconducting magnet for criminals. In retrospect it's no wonder the space is full of bad players. Buying drugs was bitcoins first killer app. Pump and dump frauds were it's second.
4) At this point (as you were saying) "crypto" isn't what it started out as, or wanted to be. But the harsh reality is that it's likely irrevocably tainted, and any attempt to reboot would have to still contend with the above points.
5) Any attempt to cover the above points, and you just get a regular digital payment system that doesn't work well for criminals. Technology aside, the utility is no different than the dozen or so phone app instant payment systems already out there. What's the incentive of average Joe already using Zelle to pay his bills (at no cost) to jump ship into a new unproven digital currency? The problems being solved here are already solved.
"Crypto technology" can power a fed digital dollar, or Bank of America tokens (which is all your balance there is anyway). Such currencies are arguably better in every way due to regulation and clawback protections.
Crypto's only real utility turned out to be acting as the currency of last resort for criminals. Anyone legit has better options with FDIC protections. Everyone left has no where else to go. So any unregulated space will naturally evolve towards being full of bad players and crime.
The key lesson here is that the primary utility of any extra-governmental currency will always be that it operates as the currency of last resort for criminals. So in my mind, that kills the dream of crypto-anarcho-capitalism. It was an interesting experiment while it lasted. I don't see how it can recover.
As one last point. I came to this line of thinking and conclusion once before, dealing with Freenet and crypto-information space. Freenet is arguably the crypto-anarcho version of the WWW. Same goals, no government involvement, no censorship.
If you haven't followed it's history (been around over 20 years), the space is entirely polluted with CSAM, so much so that many of the idealistic early adopters have fled the space in disgust. [1] Same analogy applies here, Freenet, being the storage space of last resort for data so repulsive no government will allow you to have it, is a haven for the worst kinds of data imaginable.
At this point I'm convinced crypto-anarcho-anything will eventually simply become a magnet for crimes and reprehensible people. There's no place else that's safe for them to go, while the rest of us have safer/regulated spaces.
It's humans that killed the crypto dream. Technology can't solve all of our problems. We presently need, and will always need, human accountability in the loop.
Ok my last-last point. Seeing this play out multiple times now, I'm convinced that total anonymity on the internet is a cancer that must eliminated if digital society wants to move forward. The real world maintains peace/order/justice because we have real identities and real reputations. A similar system is needed in the digital world if we're to evolve past this stage where average people run the daily risk of being waylaid by digital highwaymen. The digital world is still in the medieval ages. The solutions that have allowed society to evolve and scale in the real world need to be implemented in the digital world before we can take it's potential to the next level.
[1] https://news.ycombinator.com/item?id=28587220