Crypto's Identity Crisis
Crypto's Identity Crisis
The crypto industry is in its biggest crisis yet. Turmoil and inner conflict prevail. What's the way forward? A few observations from recent weeks in search of an answer.
Throughout the past few weeks, I've come across a lot of troubling material that conveys turmoil and inner conflict. As I reflected on the FTX scandal four weeks ago, I wrote that “what currently shakes the crypto industry is unprecedented in scale, reach and gravity”. Today, I’m feeling this even more strongly.
It’s not just about FTX, a giant fraud and millions of betrayed clients, stakeholders and a pinch of “bad luck” anymore.
It’s about large-scale deceptive practices and bad actors that have infested the whole space in the last years. It's a struggle to find answers to how it got this far. It’s a search for the original principles on which this space was built.
The industry is in an identity crisis and there is no obvious way out.
Turmoil
Let’s look a bit closer at what’s happening:
Bitcoiners fight the “crypto” people. They see recent events as a a living proof that centralization is dangerous. No one is happier about Sam Bankman-Fried’s downfall than the bitcoin people. They see Bitcoin is the only truly decentralized, independent crypto-asset, living up to vision it was originally conceived by Satoshi Nakatomo. They want everything else to be a security and be regulated. They want to clear the space of all the “shitcoins”.
The crypto people fight Bitcoiners. They say it should be banned because of its energy usage.1
Class action lawsuits against celebrities (Jimmy Fallon, Paris Hilton, Justin Bieber, etc.) promoting pump and dump schemes or NFTs (e.g. BAYC) are filed.
The Block, one of the biggest crypto media outlets, was secretly funded by SBF. “Secretly” means that no one knew, not even the employees themselves, except the CEO.
The most reputable VCs and investors who blindly jumped on the Solana- and FTX-hype-train look like fools. Solana was manipulated/inflated by SBF too. Crypto OGs have been sceptical all along.
Again, it’s not just bad luck anymore.
Meanwhile, Changpeng Zhao (CZ), now the most powerful CEO in the cryptoverse, publicly bashes SBF as a “fraudster”. He wants to step into the void, making sure that Binance shines in the best light possible (cf. industry fund).2
BUT:
CZ also single-handedly suspended a user because he didn’t agree with him on Twitter. Users being “deplatformed” by overly powerful CEOs we’ve only known from the web2 world. Now it’s becoming a thing in crypto too.
Like FTX, Binance is also registered overseas (on the Cayman Islands).
Like FTX, Binance also created an “exchange token”, BNB, for which they artificially inflate demand and let users leverage against it, while subsidizing the financing cost.
Now, the WSJ questions the solvency of CZ’s company and the viability of its proof-of-reserves. Users have withdrawn over $2 billion in last 24 hours from the exchange.
On top of that, CZ has a case being built against him by the Department of Justice.3
If that wasn’t enough, SBF is entertaining the crypto community on Twitter spaces. Or gives hypocritical remote interviews almost on a daily basis, e.g. for the New York Times where he earned a resounding applause (Wait, what…?).
SBF has been arrested in the Bahamas hours ago, reports claim.
Millions of betrayed clients are still standing in the rain searching for answers.
Search for identity
What brought us here?
Too many bad actors.
Too much greed.
Too much ignorance.
Too much trust.
Too much power concentrated in the hands of a few.
Too little transparency & oversight.
Too little accountability.
Too little decentralization.
Crypto-finance is in the process of rebooting itself. A serious clean-up and reflection is needed.
Collectively, we need to ask ourselves: What’s the way forward?
At the start of the last crypto winter four years ago, the space was less conflicted. The dichotomies overheard in the debates are much bigger today:
“We need “better” regulation, but more decentralization.” Fragility vs. antifragility.
“We need more trust in central actors (e.g. proof of reserves), but less trust in the system”
“We want to build the antithesis of the current financial system, but to build that, we also have to learn from it.”
Regulation will likely come back stronger. G20 governments want to create a unified cryptocurrency policy. The UK is finalizing plans for crypto regulation. The SEC faces calls to boost crypto-exchange enforcement. U.S. Treasury's Yellen says cryptocurrencies need regulation. In this weeks hearings in front of the Senate Committee the need for regulation of some sort became a running theme.
A second FTX-3AC-Celsius-etc. cannot happen again.
The space will need clear answers and a new identity. For that, it will have to overcome those dichotomies. Only then it will emerge stronger.
Bitcoin will be fine. The hodlers keep hodling.
Web3 will be fine. The builders keep building.
And the optimists keep dreaming…
…of an internet of value in which ownership and value is distributed more equally.
Onwards! 🚀
– Marc
PS: What do you think is the right way forward? Comment below!
Further Reading:
Last week, Michael Saylor delivers one of the best explanations I’ve come across on the FTX saga:
The recent article I wrote on the bigger picture behind the downfall of FTX.
Flitter, E., & Yaffe-bellany, D. (2022, December 13). In FTX collapse, Binance sees a chance to become the new face of crypto. The New York Times. Retrieved December 13, 2022, from https://www.nytimes.com/2022/12/12/business/binance-crypto-ftx-collapse.html
Pahwa, N. (2022, December 15). No one is happier about Sam Bankman-Fried's downfall than the Bitcoin people. Slate Magazine. Retrieved December 16, 2022, from https://slate.com/technology/2022/12/ftx-sam-bankman-fried-bitcoin-vs-crypto.html
Pilgrim, J. (2022, December 15). After FTX, let's get back to hiring crypto people for the job. CoinDesk Latest Headlines RSS. Retrieved December 16, 2022, from https://www.coindesk.com/consensus-magazine/2022/12/14/after-ftx-letss-get-back-to-hiring-the-crypto-people-for-the-job/?outputType=amp
Here’s an excellent piece by Nitish Pahwa for The Slate on the widening divide between Bitcoiners and the rest.
More about the energy usage of Bitcoin in my other article here.
The NYT recently published a story about this.
Reuters reports on Dec 12, 2022:
The investigation began in 2018 and is focused on Binance's compliance with U.S. anti-money laundering laws and sanctions, these people said. Some of the at least half dozen federal prosecutors involved in the case believe the evidence already gathered justifies moving aggressively against the exchange and filing criminal charges against individual executives including founder Changpeng Zhao, said two of the sources. Others have argued taking time to review more evidence, the sources said.