Have FTX and ASX killed the promise of Blockchain?

You’d be forgiven for thinking blockchain is dead – or dying – given the grim news for crypto followers following the FTX implosion. And the failure of a project to modernize the Australian Stock Exchange has seriously damaged the “corporate blockchain” brand. There is no doubt more bad news on the horizon.

Yet, amidst the problems, but away from the limelight, other projects are succeeding brilliantly.

What’s up? How can 2022’s business results be so different?

First, the successes:

UBS issued the world’s first fully digital bond last month. It exists only in a “digital” CSD – on SDX, the Swiss Digital Exchange – and its issuance was oversubscribed.

Two blockchain platforms in Europe, HQLAx and Fnality, which run on completely different technology stacks, have now partnered with each other.

And a DLT-based startup called “Grow” disrupting the Australian “super-annuation” market has just gone live with one of the world’s largest fund managers, Vanguard.

And these events happened only in the last few weeks.

What I think these projects have in common is that these companies and projects exist to solve real business challenges, and it just so happens that they decided that the best way to do that was to build on blockchain-style architectures. A common thread is that they are focused on improving the operation of the whole markets, and does so by modernizing how the participants in these markets interact and trade with each other. (Disclosure: some, but by no means all, of the projects featured in this article use the company’s products.)

Business vision and technology architecture are connected, in other words. Boring, but important.

And it is worth observing that there have also been brilliant successes in the public crypto markets. Yes really.

Apart from the FTX, Celsius and BlockFi disasters, it is worth noting that the truly decentralized permissionless crypto protocols – such as Aave, Compound and Uniswap – worked just fine. Yes – DeFi protocols have been subject to hacks in the past – but in the most trying circumstances this year, they performed admirably.

In the case of these protocols, a fully decentralized business model was implemented on a completely permissionless architecture. Business and technology are also aligned in that area.

This is why it is so important to remember that it was the “faux crypto” companies like FTX that started the chaos. These firms went for a walk pretending to be adherents of the anarchic, ‘code is law’, decentralized crypto philosophy, when in reality they were financial institutions in disguise, completely unregulated.

It feels like FTX used crypto language to hide their real business and too many people were taken in and hurt as a result.

But note how the act of offering crypto-financial services is not in itself problematic: the banks that offer crypto custody, and well-regulated exchanges like Coinbase, also seem to have performed well.

We’re actually seeing real-life evidence that if you walk in the middle of the road, you’ll get run over.

The DeFi protocols show us that you can succeed on your own permissionless terms. And the well-managed exchanges show us that you can succeed as regulated financial institutions. But those who tried to see both ways, operating as banks while avoiding any associated regulation, exploded and took their customers’ money with them.

But what about the failures in the corporate blockchain space?

Here we have the benefit of an in-depth report on the failure of the ASX’s ‘CHESs replacement’ project. To its enormous credit, the ASX published in full Accenture’s analysis of what went wrong.

There is a lot to learn for all of us in the blockchain business. Yes, it is clear that there were software issues, but that is perhaps to be expected from a new technology. But it is also clear that stakeholder involvement and failure in governance was the root cause. Reading between the lines, it appears the project started out transforming the Australian stock market, and chose an architecture to match. But it ended up with a less ambitious, more centralized vision, but didn’t change its technical direction when that became clear.

Business and technology differed significantly, and failure was the inevitable result.

Perhaps we can say that this project also found itself walking in the middle of the road – in this case by re-implementing a traditional business model, but with transformational technology – and was eventually overrun.

So what can we learn from the most turbulent year – yet – in blockchain?

First, you can’t fool nature. Hope and hype (and alleged outright fraud in the FTX case) can get you far, but the brutal reality of engineering, accounting and finance will prevail in the end. So, whether you’re in public crypto or enterprise blockchain, challenge yourself—hard—about the business you’re in and the problem you’re solving. Are you building a legitimately useful product? And does your business model match your technology architecture? Yes or no?

Second, if you’re working on a project that hasn’t started yet, don’t lose hope! These things take time, effort and dedication. The success of the projects listed above – and more – shows that the right vision matched with relentless execution can succeed, even under the most difficult circumstances. As the CEO of Goldman Sachs observed this week, “Blockchain is much more than crypto, and regulated financial institutions are well positioned to take advantage of the revolutionary technology”

Finally, if the middle of the road is the wrong place to be, how do you do it? cross it? This is particularly interesting for those who want to bridge the gap between the worlds of regulated finance and the new decentralized ecosystems. I think the clear answer is interoperability. Keep the DeFi funds on their home network. Operate the financial institutions as diligently regulated entities. And link the two worlds using well-defined, well-tested technical protocols.

If I’m right, possibly the most important blockchain news of 2022 for business was the announcement that everyone missed: the world’s first live interoperability demonstration between two production-level enterprise DLT platforms!