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 the cryptocurrency’s “day in the sun,” as the text put it, by inviting its fixtures to speak. .

Oops. When 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 braved the winter. The market value of the sector has fallen by $ 2 billion or 70% since November last year; bitcoin price fell below $ 20,000, stablecoins terra and luna imploded; crypto borrowers like Babel and Celsius halted withdrawals; and hedge funds such as Three Arrows Capital face margin calls.

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Plus, the carnage would be even worse if it were not for the fact that Sam Bankman-Fried, the 30-year-old billionaire founder of the crypto platform FTX, rescues crypto borrowers like Voyager and BlockFi with large loans. This reflects the actions taken by John Pierpont Morgan during the US banking crisis of 1907 to save other lenders, in the absence of central bank support.

All of this is clearly embarrassing for crypto evangelists. And it inevitably triggered hurtful joy 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 benefits.

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

But I would not bet that private digital money is actually dying – the mutation seems more likely. After all, the crypto world has previously been exposed to major crises, but – like the proverbial hydra – it has always responded to beheadings 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 victims, but this natural rollover is healthy for the industry because it cuts profits,” Brian Shroder, head of the US cryptocurrency 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 the crypto fund Race Capital echoed: “This is the third time I’ve seen this [type of crypto crash]. That’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 pushing around. Imploding companies are those with one or all of the following characteristics: high leverage, resistance to regulation, overly complex innovations, and large expansion costs. Others do it better.

Take Binance yourself. One of the reasons Shroder felt confident enough to perform on stage in Toronto, unlike some other speakers, is that Binance’s business is not based on margin trading or cryptocurrency lending. This makes it less vulnerable than some rivals. (Although he is the subject of U.S. regulatory investigations into his previous 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 is now hiring more staff, Shroder says, even as rivals like Coinbase workers.

Or consider Circle, the company that operates USDC stablecoin. In recent years, the 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 with libertarians while appalling regulators. (Last year, New York regulators resolved 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 get a banking license and courting major financial players.

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

When I point out these nuances, I am not trying to pick future winners. As Gavin Wood, 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 that Silicon Valley’s power continued 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 danger.

gillian.tett@ft.com

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