Celsius, the problem with crypto

There are two schools of thought in crypto: to regulate or not to regulate.

First, I want to say something that I consider to be key. It’s the idea that computing plus some basic human or technological activity is what drives enormous value.

Computer + calculation = Excel. Computer + typing = word processing. Computer + gossip = social media, and so on.

Crypto is particularly powerful because it can be seen as crypto = computing + politics. Money, governance, exchange, property, everything is under a core of politics. Obviously, money is right at the heart of it.

It is therefore not surprising that the government is terrified of crypto and at the same time fascinated by it, even though it is still a small market similar in scale to, say, beer.

So with this tension you have an arc of meaning that goes from anarchy to authoritarianism, maybe even totalitarianism. At one end, a group believes that it should not be controlled in any way beyond the crypto’s code, to at the other end a total ban on crypto.

Proscription simply cuts off the enormous benefits of this cutting-edge technology. The Romans forbidding machines to preserve the slavery system is an example, and that was probably the real reason their empire turned to dust. At the other end, the result of anarchy for all the efforts of its advocates to claim otherwise is, well, anarchy in the sense most people use the word, a world in which you and your property are not safe. The authorities normally sit uncomfortably somewhere between the bars and as such seek themselves to regulate at an optimal point.

At this point, crypto regulation is basically non-existent. In many cases, it is precluded from being properly regulated by regulators who are too terrified to deal with the situation, thus making it almost impossible for new businesses to operate at all. This is a delaying tactic because blockchain technology combined with encryption – the heart of crypto – threatens to destroy so many tenants that major economies cannot withstand a rapid rise of crypto that could disrupt the status quo and destroy much-loved “stability”.

The much-vaunted “disruption” loved by start-ups is not loved by the government. It may be loved by us, but not loved when it is we who are disturbed. Anarchy-loving crypto-fans are free-for-alls, but not so much when they get hacked or lose their shirt on some criminal project, and this clearly reflects the same dynamic with the government. People may complain about their government constantly interfering, but they rarely pick up sticks and go somewhere where their gun is the only thing between them and a nasty outcome.

Crypto is in a regulatory hiatus and the question is, which countries will seize the opportunity and which countries will ban?

The countries that embrace crypto have to be very smart to fix what’s broken with the system, and most of that work has to be squeezing the crooks out of the system without squeezing the public out at the same time.

All Celsius (CEL), the Three Arrows Capital (3AC) scandal is a perfect example of the problem that needs to be addressed. The solution now is decommissioning, but the real challenge is a system that will allow such a project to operate with it sliding down the slippery slope of questionable practices. This slippery slope is what so many financial services companies are lured down, and that gravity comes from proper business having to compete with fraudsters. Cheaters undermine decent businesses, forcing them to close or reduce what amounts to dumping.

Celsius was a DeFi platform that offered returns on deposits, and its failure lost a lot of money to a lot of normal people who badly miss that money. I avoided losing money in Celsius because their interest rates stayed high while Compounds had almost disappeared and BlockFi’s deposit rates fell hard. It looked like Celsius was trying to get deposits from the more conservative DeFi platforms and that red flag had me out of their platform weeks before the Celsius implosion. Paranoia is a good substitute for luck.

So this brings me to a point.

The Celsius token still has a market cap of $200 million. Gone is its utility as the symbol of a functioning business, so it’s worthless, but you can still sell it for money. There can be no “good” reason why it trades in the millions every day, and why the token of a bankrupt project is still worth more than 10% of its all-time high. It’s exactly the kind of dangerous anomalies that bring crypto into further disrepute, and it’s exactly the kind of problem that regulators need to tackle.

Problems will be solved and unfortunately there will be a lot of bans. The smartest crypto regulators will be a great asset to their economies, while lethal regulators will be a strategic disaster. Meanwhile, crypto will change.

But until crypto is made safe, it will not enter the mainstream, and that may be the strategy of many regulators. They plan to keep the rules inscrutable, projects impossible to get regulated while letting the villains go ahead of the public in an attempt to create an environment that keeps the technology niche. This would be a very short-term tactic that would see the countries that embrace crypto move forward economically with a tool that creates the critical component of economic progress, productivity.