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Cryptofinance: Bitcoin meets mainstream rejection

Welcome to this week’s FT’s Cryptofinance newsletter. Still reeling from FTX’s collapse, bitcoiners battle familiar foes.

Crypto is living through a golden age for kickings.

It’s been a tough year for crypto advocates as their brave new world manifesto has been repeatedly undermined by tumbling coin prices and failures like the TerraUSD stablecoin, hedge fund Three Arrows Capital and lenders Voyager, BlockFi and Celsius.

But the collapse of poster child FTX has really cut to the core. Every revelation over the laxity that pervaded the exchange has deepened the suspicion that crypto is fundamentally rotten. Sceptics and those that are outright hostile are in the ascendancy. For weeks friends have been asking me if FTX is the final nail in the crypto coffin.

Questions are now being asked about whether crypto should be regulated as finance since it would give it a legitimacy sceptics say it doesn’t deserve. Formal rules would open crypto’s door to traditional institutions, potentially infecting financial markets in a way it has not so far.

Academics Stephen Cecchetti and Kim Schoenholtz say it’s time to “let crypto burn”. During this week’s FT crypto summit in London, renowned sceptic Stephen Diehl told a panel of industry members their businesses were based on economic and technological absurdity.

At the FT’s adjacent banking summit this week, I asked bankers including from JPMorgan and Société Générale whether reputations were at risk when serious firms flirted with blockchain tech. There was an awkward 10-second silence before discussing long-term aims.

And if you ask the European Central Bank, it’s finally time to stop waiting for the no-longer-nascent (it’s been more than a decade, folks) industry to find a purpose.

“The belief that space must be given to innovation at all costs stubbornly persists,” the ECB’s Ulrich Bindseil and Jürgen Schaaf said in a blog post on Wednesday. Bitcoin stubbornly clinging to around $20,000 is, in their eyes, nothing more than “an artificially induced last gasp before the road to irrelevance”.

The industry’s reaction has been frustrating. If my inbox is anything to go by, the crypto PR machine is working round the clock to convince “normies” that FTX doesn’t represent the industry.

The strategy has been to distance themselves as much as possible from Sam Bankman-Fried. Others have said the problem lies in centralised exchanges and argue that this crisis should accelerate a move to decentralised finance. Or that bitcoin isn’t the problem.

As to the ECB blog, well, yes the central bank went for the jugular on bitcoin, and rounded off its blog post with a series of Crypto Critic™ greatest hits: bitcoin’s value is “based purely on speculation”, it is an “unprecedented polluter”, and a “reputational risk for banks.”

But instead of wrestling with the authors’ arguments, most responders on social media have tried to disqualify Bindseil and Schaaf by virtue of their association to a central bank looking at their own digital currency (but not getting very far).

Brian Armstrong, chief executive of US-based Coinbase and, in my view, Sam Bankman-Fried’s likely successor as crypto’s chief advocate in Congress, simply responded with a laughing emoji.

Granted, nobody expects the ECB to be openly advocating attempts to build a private currency, but the industry needs now more than ever to convince its doubters instead of photoshopping a clown nose on to Christine Lagarde’s face and responding with “have fun staying poor”.

The in-jokes may have worked when the numbers went up but the crypto world faces an existential crisis. Playing to the audience on social media doesn’t cut it.

The industry needs to accept that it spawned Bankman-Fried. Fans of decentralised finance need to look harder at why it’s the source of so many hacks, and how it will function without a centralised exchange to set prices or offer customers entrances and exits to the crypto world.

If the crypto industry cannot answer these crucial issues, it may never recover. I’ll leave you with the thoughts of David Trainer, chief executive of investment research firm New Constructs:

“Too many of these assets are linked — as we are seeing with FTX . . . a very incestuous situation. Now that one of the dominoes has fallen, we expect it is only a matter of time for them all to fall.”

Is David Trainer wrong? As always, feel free to email me at [email protected]

Weekly highlights:

  • Temasek, the Singaporean state-owned investment fund, has opened a review into its ill-fated FTX investment. Singapore’s sovereign wealth fund GIC also has egg on its face as an investor in beleaguered crypto broker Genesis. Both questionable decisions have again made a mockery of Singapore’s ambitions to be a hub for digital assets. Funny how it never seems to work out. Mercedes Ruehl and I covered the story here.

  • Binance is re-entering Japan only a year after regulators warned consumers in recent years over the legality of the exchange’s activity in the country.

  • Europe’s Markets in Crypto-Assets regulation, hailed as a watershed moment for legislators trying to get a grip on this volatile industry, has also come under fire in the wake of FTX’s collapse. In a hearing this week several European lawmakers questioned Mica’s ability to prevent an FTX-like catastrophe taking place in the bloc. My colleague Akila Quinio and I take a look here.

  • Just yesterday, the Senate committee on agriculture, nutrition and forestry held a hearing on FTX, and CFTC chair Rostin Behnam said the current US system has “gaps, gaps, gaps”. He added an exchange could not act as a dealer, lender and custodian at the same time. “It just doesn’t exist in our traditional financial system and I think those same principles and regulations should apply to crypto.” (H/T to my colleague Joshua Oliver, who sat through it so you didn’t have to)

Soundbite of the week: FTX, the company you’ve never heard of

This week’s FT Crypto and Digital Assets Summit was packed with fascinating insights, many of which are shared in this Twitter thread.

One audience member surprised everyone when he suggested FTX wasn’t that relevant to crypto’s future.

“I’ve worked in the blockchain space for eight years and I only heard about FTX two weeks ago.”

OK.

Data mining: The Kraken powers down

This summer I spent a chunk of time writing about the extensive job cuts across the industry, particularly at exchanges that expanded too quickly during last year’s record-setting crypto bull run.

The cutting isn’t over. This week Kraken announced it would slash 30 per cent of its workforce, amounting to more than 1,000 people. Why it had needed 3,000 people is a good question.

Predictably, Kraken cited “market conditions” as the problem. As you can see, trading volumes have stagnated since May.



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