Crypto crashes will continue, but innovation can survive

The crypto crash is on, and complaining about it won’t make it stop; smart innovation will.

It’s safe to say that the crypto space is in the midst of a crackdown, with the Commodities and Futures Trading Commission joining the Securities and Exchange Commission in suing both Binance and CEO Changpeng Zhao on multiple counts. Advocacy and trade groups have, rightly, expressed ongoing outrage, disappointment, and general dissatisfaction with the current state of crypto regulation in the United States. This reaction is understandable, but will certainly do nothing to deter what appears to be a determined effort by regulators like Gary Gensler to enforce rules on their own via an avalanche of enforcement actions and litigation.

Well-intentioned organizations, including Coinbase that spent millions of dollars and years of management time proactively engaging with regulators and policymakers, find themselves lumped together with bad actors as the shadow of FTX casts doubt across the sector. As an additional blow to the industry, the collapse of Silicon Valley Bank and Signature Bank, and general banking fears at large, have been attributed (in part) to the crypto winter. In addition, some of the more obvious speculation and get-rich-quick products that proliferated during the 2021 bull market did not make the sector policymakers or regulators, leaving a sour taste for many.

Fair or not, these are the attitudes crypto developers and entrepreneurs are facing for the foreseeable future. Moving and headquarters abroad is an option some firms take, but the fact is that the US remains the deepest, most liquid and most easily accessible financial market in the world; This is not a viable option for all businesses.

As with any new space, peaks and troughs come and go, so let’s take a look at a few things entrepreneurs should keep in mind when developing, building and promoting the next stage of crypto applications.

Transparency is key. Creating and developing a culture of transparency is always good advice for any startup or new business, and crypto is no exception to this rule. While not a cure for the problems that continue to serve as headwinds for the sector, building a culture of openness is critical to future success. Although it can come in many forms, transparency should be centered around a few core pillars when new tokens (for example) enter the market; what is the token intended and designed to do, who are the primary parties involved in the development and distribution of the token, and what are the financial risks/opportunities associated with this token?

Looking at the stablecoin sector, which is in the midst of its own regulatory breach, the importance of transparency has never been more prominent. In particular, questions are being asked (although perhaps it should have been asked earlier) about exactly how reserves are accounted for, reported and controlled. These are tough questions, but should be welcomed by up-and-coming players in the space; ignoring them or brushing them off will only voice doubts that have come to the fore.

Non-economic use cases. Accurately or not, the entire cryptoasset sector has become synonymous with price volatility, rapid value creation and even more dramatic value destruction. These trends are a major reason why retail investors have been attracted to the crypto space, but are also a driving force behind many of the current regulatory breaches and enforcement actions. Profit is always something that any business or group will strive to produce, but it is important to balance the desire for profit and return with the potential downside if this effort fails.

While not as exciting as generating huge financial returns, it’s worth noting that many of the business applications of blockchain and cryptoassets—performed by many of the world’s largest companies—often have little to do with coins or tokens. Rather, these applications tend to focus on leveraging the capabilities of blockchain and tokenized assets to facilitate the exchange and transfer of information. In other words, enterprise applications have tended to go back to the origins of blockchain and cryptoassets, versus focusing on increasing valuations as quickly as possible.

To trust the untrustworthy. Although many advocates and supporters of the sector have long advocated the trustless nature of both blockchain and cryptoassets, the reality is more nuanced. Especially after the collapse of FTX, enforcement actions against Kraken, Binance, Coinbase and others, trust and faith in the sector is much reduced. Compounding this are the many cases of scams, fraud and other unethical actors that have led to billions in investor losses. Either way, the broader blockchain and crypto space needs a reputational reset.

Whatever form it ultimately takes, there is definitely a growing need and desire for more trust and confidence in both the technologies themselves as well as the organizations operating in the space. They may have started as a trustless alternative, but companies in this area need to focus on rebuilding and increasing the market’s trust in them.

Smart innovation, building products with real value for individuals and institutions, and a focus on the long term will lay the foundation for a stronger and more sustainable crypto sector going forward.

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