Crypto Finance: Bitcoin Faces Mainstream Rejection

Welcome to this week’s FT’s Cryptofinance newsletter. Still in the dark after FTX’s collapse, bitcoiners are fighting familiar foes.

Crypto is living through a golden age of kicks.

It’s been a tough year for crypto advocates as their brave new world manifesto has been repeatedly undermined by falling coin prices and failures such as 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. Each revelation of the laxity that permeated the stock market has deepened the suspicion that crypto is fundamentally rotten. Skeptics and those who are outright hostile are in excess. For weeks friends have been asking me if FTX is the last nail in the crypto coffin.

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

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

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

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

“The belief that room for innovation must be made at all costs persists stubbornly,” 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 around the clock to convince “normies” that FTX does not represent the industry.

The strategy has been to distance oneself as much as possible from Sam Bankman-Fried. Others have said that the problem lies with centralized exchanges and argue that this crisis should accelerate the transition to decentralized finance. Or that bitcoin is not the problem.

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

But instead of grappling with the authors’ arguments, most responders on social media have tried to disqualify Bindseil and Schaaf by virtue of their association with a central bank that oversees their own digital currency (but didn’t get that far).

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

Admittedly, no one expects the ECB to openly advocate attempts to build a private currency, but the industry now more than ever needs to convince the doubters rather than to photoshop a clown nose on Christine Lagarde’s face and replies with “have fun being poor”.

The jokes may have worked when the numbers went up, but the crypto world is facing an existential crisis. Playing to a social media crowd doesn’t cut it.

The industry must accept that it created Bankman-Fried. Fans of decentralized finance need to take a closer look at why it is the source of so many hacks, and how it will function without a centralized exchange to set prices or provide customers with 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, CEO of investment research firm New Constructs:

“Too many of these assets are tied together — as we see with FTX . . . a very incestuous situation. Now that one of the dominoes has fallen, we expect it’s only a matter of time before they all fall.”

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

Weekly Highlights:

• Temasek, the Singaporean sovereign wealth fund, has opened a review of 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 once 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 just a year after regulators warned consumers in recent years about the legality of the exchange’s activity in the country.

• Europe’s Markets in Crypto-Assets regulation, hailed as a watershed moment for lawmakers 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 disaster from taking place in the bloc. My colleague Akila Quinio and I take a look here.

• Yesterday, the Senate Committee on Agriculture, Nutrition and Forestry held a hearing on FTX, and CFTC Chairman Rostin Behnam said the current US system has “gaps, gaps, gaps”. He added that a stock exchange could not act as a dealer, lender and manager at the same time. “It just doesn’t exist in our traditional financial system, and I think the same principles and regulations should apply to crypto.” (H/T to my colleague Joshua Oliver, who sat through it so you escaped)

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 that FTX was not that relevant to the future of crypto.

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

OK.

Data mining: The Kraken shuts down

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

The cutting is not over. This week, Kraken announced that it would cut 30 percent of its workforce, amounting to more than 1,000 people. Why it would have 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.