Crypto enthusiasts are betting the house on creative destruction


Earlier this year, an Irish company hosting an annual technology conference in Toronto called Collision decided to celebrate cryptocurrency’s “day in the sun,” as the announcement said, inviting its luminaries to speak.

Wow. When the collision finally occurred this week, 35,000 attendees showed up, but eight of the dozens of cryptographic speakers suddenly dropped out, citing “family” and “health” reasons.

And instead of sunbathing, cryptography enthusiasts faced winter. The sector’s market capitalization has shrunk by $ 2 trillion, or 70 percent, since last November; the price of bitcoin fell below $ 20,000, stable earth and moon currencies imploded; cryptographic lenders such as Babel and Celsius halted withdrawals; and hedge funds like Three Arrows Capital face margin calls.

Also, the carnage would be even worse if it weren’t for the fact that Sam Bankman-Fried, the billionaire founder of the 30-year-old FTX cryptographic platform, is bailing out crypto lenders like Voyager and BlockFi with big loans. This echoes the moves John Pierpont Morgan made during the 1907 US banking crisis to bail out other lenders, in the absence of any central bank backing.

All of this is clearly embarrassing to cryptographic evangelists. And it inevitably provoked schadenfreude from cryptocurrencies like Bill Gates and Warren Buffett. He also left some regulators expressing doubts about whether private cryptocurrencies really have any social utility: the future.

This week, Singapore Monetary Authority officials said they planned to be “incessantly tough” with cryptography and thought private digital money could be shifted soon if central banks issued their own digital tokens. This is significant, especially considering that the MAS was previously quite willing towards cryptography. The establishment is struggling.

But I wouldn’t be prepared to bet that private digital money will actually die: the mutation seems more likely. After all, the world of cryptography has already suffered some big busts, although, like the proverbial hydra, it has always responded to beheading by growing new heads. And the industry still has a large group of players who are not only convinced of the revolutionary potential of their distributed account book technology (or “Web3”), but also believe in the idea of ​​creative destruction.

“Over the next few weeks there will be more casualties, but this natural rotation is healthy for the industry as it is eliminating the excess,” Brian Shroder, U.S. head of cryptocurrency exchange Binance, told Collision. “Out of the dotcom bubble (and the accident) Amazon came up and we want to be Amazon.” Or, as Edith Yeung of the Race Capital cryptocurrency fund echoed: “This is the third time I’ve seen this. [type of crypto crash]. It’s a good thing for the industry. “

Maybe this is just a desperate turn. But if you look closely, you can already see the creative destruction. The companies that implode are those that present one or all of the following traits: high leverage, opposition to regulation, overly complex innovations, and large expanding expenditures. Others are doing better.

Take Binance himself. One of the reasons Shroder felt safe enough to appear on stage in Toronto, unlike other speakers, is that Binance’s business does not depend on margin trading or cryptocurrency lending. That makes him less vulnerable than some rivals. (Although it faces U.S. regulatory investigations for its past promotion of the now defunct Earth currency).

Another important factor is that Binance recently raised $ 200 million in new capital, which it is using to diversify into new niches. So now it’s hiring more staff, Shroder says, though rivals like Coinbase are cutting back on workers.

Or consider Circle, the company that manages the USDC stablecoin. In recent years, the USDC has attracted far less attention – and input – than its rival Tether, in part because the creators of the latter have taken a challenging stance against the system that was popular among libertarians, while horrifying regulators. (Last year, New York regulators agreed with the company after accusing it of providing misleading information in their accounts).

Circle, on the other hand, tried to keep regulators sweet by producing audited accounts, talking about their desire to get a banking license and courting major financial agents.

But while this used to make the USDC less attractive to crypto players, its market capitalization has gone from $ 48 billion to $ 56 billion in recent weeks due to strong inflows. Tether, by contrast, has seen outflows that have reduced its market capitalization from $ 83 billion to $ 67 billion, and if this trend continues, it could be overshadowed by the USDC. “We’re seeing a global flight to safety and quality,” says Jeremy Allaire, founder of Circle.

By pointing out these nuances, I am not trying to pick future winners. As Gavin Wood, the co – founder of Ethereum, pointed out in Toronto, “we are still in the early days of its development [Web3] technology ”.

But the key point is this: just as no one in 2001 expected Amazon to be a global giant two decades later, or Silicon Valley’s power would continue to expand, so the cryptographic world in 2042 could be radically different from what we see now . Therein lies the future promise of Web3 and the current danger.

gillian.tett@ft.com



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