Having curated the Future Blockchain Summit since 2019, I have seen the industry completely reinvent itself each year. The Blockchain and Crypto community is different from any industry I have come across: open-minded, optimistic, yet critically thinking people who are on a mission to revolutionize the communications infrastructure of all sectors by increasing information access and transparency. The question constantly asked is the use case of Blockchain. Having dedicated my life to being an undercover pseudo-social anthropologist studying human behavior, these have been the most satisfying years of my career. Nothing compares to the perpetually unpredictable roller-coaster ride that is Blockchain. If I had to compare it, it’s like the series Breaking Bad.
Constant plot twists keep surpassing what your imagination can fathom to come up with. Bringing this cast of characters together each year for our event is certainly a privilege. What is most entertaining is seeing how the industry is able to reinvent itself and rebound in new incarnations year after year. Each season in Crypto feels like a series finale; last year certainly felt like it. Yet, somehow, the show that must always go on does just that. It just keeps going on with a more intriguing plot featuring ever more colorful yet credible characters. Since the beginning of Blockchain, the main narrative has been that it is a revolutionary technology that will increase transparency, efficiency, and democratization throughout practically all sectors. However, most activities relating to Blockchain have been finance related, reinventing what the community now derogatorily refers to as ‘trad-fi’. For all the benefits that Blockchain may offer the world of finance, it is probably also wise to look at what lessons traditional finance can offer the world of crypto. I will suggest three that will likely aid in our industry’s quest to innovate and win acceptance and adoption of virtual assets and cryptocurrencies. With the science of finance largely centered around managing risk, let’s start there. They say fortune favors the bold. Yet there is a point when boldness becomes plain stupidity. The tricky part is to know where this point is! Simply put, for a venture to be profitable requires the ability to calculate the risk premium correctly. Market theory dictates that the profits one hopes to make exceed the value of the resources and capital invested. These profits are determined by market prices according to supply and demand. For a market economy to function and benefit society, the mechanisms rewarding risk must be accurate and reflect the contributions made to value creation. I am certainly no expert, but it’s unclear to me how, or if, resources, risk, and value are calculated in the world of virtual assets.
Technology’s overall impact on the financial system has been to increase efficiency through cheaper, faster, and better financial services. At the same time, new technology has also enabled the circumvention of rules and regulations as well as committing fraud through the confusion caused in the wake of its introduction. This has especially been the case for Crypto, where authorities and investors, retail and institutional alike, have been unable to gauge risks and structural weaknesses properly.
I don’t know what has failed that hasn’t been due to an inadequate understanding of the risk involved, mostly the risk of trusting the wrong people. Yet, even since the downfall of Terra Luna, Three Arrows Capital, Celsius, FTX, and Genesis, Crypto markets have bounced back and the interest to focus on risk appears to be secondary at best. Maybe this is a sign of the strength of Crypto, like the adage that a second marriage is a triumph of hope over experience. Crypto derives from Latin and means secret, hidden, or concealed. It is a fitting descriptor for the industry and leads me to my second lesson on transparency. Traditional banking has clear operational guidelines for reporting and auditing, using complete and verifiable information for the sake of providing fair and competitive market analysis to all investors and preventing asymmetric market information. Such frameworks are needed, not least to combat insider trading by means of seeing the off-chain trades, shadow banking with the existing leverage, off-the-table deals, lock-in terms to investors, trade latency impacting volatility, market-making, etc., all which impact risk, volatility and, ultimately, price. The third and final lesson is about consumer protection. The risks involved in Crypto trading need to be clearly and transparently communicated. Any trading platform where players compete on best predicting price volatility and doing leveraged trades is largely a zero-sum game. No more money will come out of the activity than what has been put in. This is all fine and well. People should be free to invest in whatever they want. But it should be clear what responsibility industry stakeholders must ensure a sufficient understanding of the nature of the game and prevent deceptive marketing. In closing, my intention in writing this comment piece is not for the sake of being critical of Crypto. My professional role is to promote Crypto. As such, stating these stark realities as I perceive them, the state of things as they are rather than as they are imagined, I hope that it will benefit Crypto to achieve its potential, whatever that may be.