Crypto Enthusiasts Bet The House On Creative Destruction

Earlier this year, an Irish company that hosts an annual tech conference in Toronto called Collision decided to celebrate cryptocurrency’s “day in the sun,” as the blurb put it, by inviting its luminaries to speak. .

Oops. By the time Collision finally happened this week, 35,000 attendees showed up, but eight of the few dozen crypto speakers suddenly dropped out, citing “family” and “health” reasons.

And instead of basking in the sun, crypto enthusiasts were braving the winter. The sector’s market capitalization has shrunk by $2 billion, or 70%, since last November; bitcoin price fell below $20,000, stablecoins terra and luna imploded; crypto lenders such as Babel and Celsius halted withdrawals; and hedge funds like Three Arrows Capital are facing margin calls.

Advertising

Plus, the carnage would be even worse were it not for the fact that Sam Bankman-Fried, the 30-year-old billionaire founder of crypto platform FTX, is bailing out crypto lenders such as Voyager and BlockFi with big loans. This echoes the actions taken by John Pierpont Morgan during the American banking crisis of 1907 to bail out other lenders, in the absence of any central banking support.

All of this is clearly embarrassing for crypto evangelists. And it inevitably sparked schadenfreude from crypto critics like Bill Gates and Warren Buffett. It has also left some regulators expressing doubts about whether private cryptocurrencies really have social – future utility.

This week, officials from the Monetary Authority of Singapore said they plan to be “relentless” on crypto – and believe private digital currency could soon be displaced if central banks issue their own digital tokens. This is significant, especially since the MAS was once quite crypto-friendly. The establishment strikes back.

But I wouldn’t bet that private digital money will actually die – the mutation seems more likely. After all, the crypto world has suffered big crises before, but – like the proverbial hydra – it has always responded to decapitation by growing new heads. And the industry still has a large pool of players who are not only convinced of the revolutionary potential of their distributed ledger (or “Web3”) technology, but who believe in the idea of ​​creative destruction just as important.

“Over the next few weeks there will be more casualties, but this natural rollover is healthy for the industry because it cuts out the excess,” Brian Shroder, US head of crypto exchange Binance, told Collision. “Out of the dotcom bubble (and crash), Amazon has emerged, and we want to be an Amazon.” Or, as Edith Yeung of crypto fund Race Capital echoed: “This is the third time I’ve seen this [type of crypto crash]. It’s a good thing for the industry. »

Maybe it’s just a desperate twist. But if you look closely, you can already see creative destruction jostling around. Businesses that implode are those that exhibit one or all of the following traits: high leverage, opposition to regulation, overly complex innovations, and large expansion expenditures. Others do better.

Take Binance itself. One of the reasons Shroder felt confident enough to appear on stage in Toronto, unlike some other speakers, is that Binance’s business is not based on margin trading or crypto lending. This makes it less vulnerable than some rivals. (Although he is the subject of US regulatory investigations over his past promotion of the now-defunct Terra coin.)

Another important factor is that Binance recently raised $200 million in fresh capital, which it is using to diversify into new niches. So it is now hiring more staff, says Shroder, even as rivals such as Coinbase workers.

Or consider Circle, the company that runs the USDC stablecoin. In recent years, USDC has attracted far less attention – and influx – than rival Tether, in part because the latter’s creators took a defiant anti-establishment stance that was popular among libertarians, while horrifying regulators. (Last year, New York regulators settled the issue with the company after accusing it of providing misleading information in its accounts.)

Circle, on the other hand, has tried to keep regulators soft by producing audited accounts, talking about its desire to obtain a banking license and courting major financial players.

But while that made USDC less attractive to crypto players, its market capitalization has fallen from $48 billion to $56 billion in recent weeks due to strong inflows. Tether, on the other hand, saw outflows that reduced its market capitalization from $83 billion to $67 billion, and if this trend continues, it could be eclipsed by USDC. “We are seeing a global flight to safety and quality,” says Jeremy Allaire, founder of Circle.

In pointing out these nuances, I am not trying to pick future winners. As Gavin Wood, the co-founder of Ethereum, noted in Toronto, “We are still in the early days of developing this [Web3] Technology”.

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

gillian.tett@ft.com

Similar Posts

Leave a Reply

Your email address will not be published.

This site uses Akismet to reduce spam. Learn how your comment data is processed.