Past, they say, is prologue. If you’re around long enough you’re bound to see patterns repeat. This isn’t my first crypto bear market. Hopefully wont be my last. While the events of the past year have been truly wild — the hacks, the collapse of Terra, the implosion of institutions like 3AC and Celsius — the demise of FTX takes the cake. It is, quite plainly, the worst event I’ve seen in a space I’ve been a part of for quite a while. While others may point to Mt. Gox or The DAO hack those don’t hold a candle to FTX. Now, unlike then, we have something to lose.
Crypto finally started to gain mainstream credibility. While skeptics remained, celebrities and politicians started taking this space seriously. NFTs proved to be the culturally relevant aspect of the blockchain and Ethereum’s true killer app, on boarding an entirely new type of user. It honestly felt like we’d turned the corner. Now we’re back to square one and vultures are circling. Any leverage we had to negotiate common sense regulations seems fleeting. Any progress made convincing the public at large that this isn’t just all one big scam feels fully eroded.
Lost in all the devastation of this year will be the nuance around the “why”. That these things happened sucks, big time. But, ultimately, these aren’t crypto problems. I’m not even sure they are regulatory problems per se. After all, crypto hardly has a monopoly on fraud, and committing fraud is already illegal. While some might point to stricter regulations and capital requirements for entities like centralized exchanges, FTX seemingly had committed to largely holding reserves for user deposits 1:1 unless they opted into certain lend products. Given this there is no reason why they should be in this position.
Bank runs can’t happen if you have all your customers deposits. Rumors of a 5 or 6 billion dollar hole in the balance sheet don’t just happen. While stronger regulations are likely needed to address specific problems in this space, the opacity by which traditional financial institutions operate writ large is the problem than policy makers won’t be talking about in the after math of this. And make no mistake about it, FTX, Celsius, BlockFi, 3AC are all much, much closer to traditional financial institutions than they are to crypto institutions. That they happened to trade crypto assets shouldn’t be enough to fool people here.
In all the case this year from Celsius, to 3AC, to Luna, to FTX the demagogues that lead these projects all lied to and defrauded investors with full knowledge that defrauding people is illegal. Why would tighter regulations changed that calculus? If you look back on the financial crisis of 2008 regulation didn’t stop rampant criminal fraud much — did it? In the end greedy and desperate people will always do the horrible things they think they can get away with, especially when they are painted into a corner. If we continue to allow the opaque systems continually yield these types of outcomes then we really shouldn’t be too surprised when these outcomes continue to happen.
Ironically blockchains, and the principles of permissionless and trustless systems, solves for this. Just like in 2008 with traditional finance, a lack of transparency is what allowed the devastation to hit such a crescendo. And, much like 2008, I fully expect policy makers to treat symptoms and not the disease. Reactionary policy from people who never really cared about the potential of blockchains in the first place, and who have been made to look like complete fools for trusting the likes of SBF in the first place, should come as no surprise.
I still believe crypto and blockchains have the power to change the world for the better. The events of 2022 further prove that transparent protocols that enable an open economy as a public good are absolutely essential to breaking this cycle. Obfuscation only ever benefits those with malicious intent at the expense of good actors. While greater transparency certainly won’t guarantee that bad things will never happen again it will, in this author’s view, make it much riskier for those who seek to bend and break the laws for their own greedy motives.
When the sun finally sets on the year 2022 there will be fewer of us here. The road ahead is long. Progress will be slow and success will be hard fought. But if you, like me, truly believe in the ideological underpinnings of crypto then buckle up anon. It’s time to put in the work. Win or lose, at least we can say we fought for what we believed in.
Until next time…
(Any views expressed in the below are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.)