Crypto Enthusiasts Bet the House on Creative Destruction

Earlier this year, an Irish company hosting an annual tech conference in Toronto called Collision to celebrate cryptocurrency’s “day in the sun,” as the blurb put it, decided to invite its celebrities to speak. †

oops. By the time Collision finally took place 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 braved winter. The industry’s market capitalization has shrunk $2 billion or 70% since November last year; bitcoin price dropped below $20,000, stablecoins terra and luna imploded; cryptocurrency lenders like Babel and Celsius stopped withdrawals; and hedge funds like Three Arrows Capital are dealing with margin calls.

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Moreover, the carnage would be even worse were it not for Sam Bankman-Fried, the 30-year-old billionaire founder of crypto platform FTX, bailing out cryptocurrency lenders such as Voyager and BlockFi with large loans. This reflects the actions John Pierpont Morgan took during the US banking crisis of 1907 to bail out other lenders in the absence of central bank support.

All of this is clearly embarrassing for crypto evangelists. And it inevitably sparked glee from cryptocritics like Bill Gates and Warren Buffett. It has also caused some regulators to cast doubt on whether private cryptocurrencies have any real social – future benefit.

This week officials at the Monetary Authority of Singapore said they plan to be “ruthless” on crypto — and believe private digital currencies could soon be supplanted if central banks issue their own digital tokens. This is important, especially since the MAS was once quite crypto-friendly. The establishment is hitting back.

But I’m not willing to bet private digital money will actually die – the mutation seems more likely. After all, the crypto world has gone through major crises before, but – like the proverbial hydra – has always responded to beheading 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 just as importantly in the idea of ​​creative destruction.

“There will be more casualties in the coming weeks, but this natural rollover is healthy for the industry as it removes the excess,” Brian Shroder, head of US 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 reiterated, “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 turn of events. But if you look closely, you can already see creative destruction wandering around. Companies that implode are those with any or all of the following: high leverage, regulatory resistance, overly complex innovations, and large expansion expenditures. Others do better.

Take Binance itself. One of the reasons Shroder felt confident enough to take the stage in Toronto, unlike some of the 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 into his past promotion of the now-defunct Terra coin.)

Another important factor is that Binance recently raised $200 million in fresh capital, which it uses to diversify into new niches. So it’s hiring more staff now, Shroder says, even if rivals like Coinbase employees.

Or think of 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 defiantly anti-establishment stance that was popular among libertarians, while horrifying regulators. (Last year, regulators in New York settled the matter 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 the desire to get a banking license and courting major financial players.

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

By 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 stages of developing this [Web3] Technology”.

But the main point is this: Just as no one expected in 2001 that Amazon would become a global giant two decades later, or that the power of Silicon Valley would continue to grow, the world of cryptography in 2042 could be radically different from what we see now. . Therein lies the future promise of Web3 – and the present danger.

gillian.tett@ft.com

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