So what happened to crypto? —Harvard Gazette

Recent high-profile financial meltdowns at Bitcoin, Celsius and Terraform Labs, which together wiped out hundreds of billions in market capitalization, helped spark a flight from the cryptocurrency market, driving its value from $2.9 trillion last fall to under $900 billion today. This “cryptocrash” has reinforced critics’ view that markets for the digital currency – used primarily as an investment vehicle as it is not widely accepted as payment for goods and services – are little more than global casinos operating with virtually no rules or accountability. .

Scott Duke Kominers ’09, AM ’10, Ph.D. ’11, is a professor of business administration at Harvard Business School and a faculty affiliate of Harvard’s Department of Economics and the Harvard Center of Mathematical Sciences and Applications. Kominer spoke to the Gazette about why the crypto market has plunged in value in recent months and how a wave of upcoming international regulation could affect the market. The interview has been edited for clarity and length.

GAZETTE: What triggered the cryptocurrency slide?

COMMENTS: For the past six months, we have tipped into a state of general economic uncertainty. Crypto-assets are highly volatile, in part because there is so much uncertainty about which crypto-technologies are likely to be most useful in the long run – such as which the market can coordinate for mediums of exchange, and many of the applications are technological in nature and new (or in the least unproven). And then there’s a lot of uncertainty and a lot of the value of returns is downstream, just like with technology companies.

Note that there has been a broader pullback for tech companies. Many technology companies make large investments in growth in advance, and then the gain is long-term in the future. In our current macroeconomic climate, it is more difficult for them to find money for such investments, and so that type of business may become more difficult to operate.

Crypto can have the same dynamic. On top of that, it is more uncertain which technologies will succeed in the long term. And then, on top of that, there’s the speculation related to new asset classes and the like. And then there is a lot of uncertainty around crypto; and in times of general uncertainty in the financial market, people withdraw from riskier assets.

At the same time, much of the fundamental technology investment and entrepreneurship in crypto is still ongoing. We saw this with previous crypto cycles as well. At the end of 2017-2018, there was a significant downturn, and many of today’s top crypto companies came out of it. So I think from an entrepreneurial perspective, there are many layers that are still building, and there is an opportunity here when things are a little less crazy, when there is less attention and especially energy around speculation and trading – this gives an entrepreneur more time to focus and actually develop their product carefully without constantly having to face the market.

GAZETTE: In November, the global crypto market cap was $2.9 trillion. Today, it is $870 billion, according to CoinMarketCap. Bitcoin, the oldest, most established cryptocurrency, has fallen over 70 percent in value during that period. What changed?

COMMENTS: There was still uncertainty. We were just in much more of a financial boom and a crypto boom, specifically. Even during that period, the market prices of various cryptocurrencies moved up and down – massive swings – 30 percent swings in a week, sometimes. I advise a bunch of entrepreneurs, and the feeling of a lot of people at the time was that it was very difficult to build in that environment because things were changing so quickly, and there was so much attention and pressure from the boom. When all of this slows down, it washes out many of the projects that were somehow unsustainable. It means that there has been lost value — there has been a loss for the founders; it is a loss for the investors. And that goes back to retail investors too.

But at the same time, the entrepreneurs who are still out there get a lot of leverage and create a lot of value. And remember: not all crypto products are purely financial. For example, many more consumer-oriented products are systems for coordinating group decisions or managing event tickets. The long-term view is that there is real fundamental technological value here, and what really matters to the market is whether we can realize that value through entrepreneurship and supportive regulation. And I think the current environment is one where we have a lot of potential to do that.

We still don’t know what the long-term, successful business models and infrastructure solutions will look like. We don’t know if it’s the things we have right now, in some variation, or if there will be completely new platforms and crypto products. In the early days of the internet, many of the platforms and business models did not survive. What I’m really interested in seeing is which crypto projects come out of this “bear” market phase much stronger.

GAZETTE: The flurry of bad news involving high-profile firms such as Bitcoin, Terra and Celsius has renewed calls for regulators to protect consumers from fly-by-night currency operators, scammers and theft. How vulnerable are crypto investors, especially retail amateur investors?

COMMENTS: I definitely think there is a need for more consumer protection in this area across the board. There needs to be more transparency and not just transparency at an abstract level, but the technology needs to be made transparent to consumers in ways they can understand. This is a problem across crypto, and it’s one that companies are starting to try to solve. It is very difficult for a consumer to manage his own position in the central crypto market with today’s tools. As a result, if you’re a retail consumer, you often end up on one of these intermediary platforms where the lack of transparency means you may not understand what’s going on. As we’ve seen, people can choose to enter these platforms during a boom, and that’s very exciting. However, if you do not understand the risk you are taking, it can be very damaging as soon as the market condition changes.

There must be much more transparency and better messaging and clearer definitions of the various asset classes. Everything from taxation – it’s still very difficult to figure out how to pay tax on crypto assets even if you understand exactly what they are – to information that will help people assess which markets they want to be in and how much risk they are . takes again. Highlight it in the same way we provide information about other asset classes and products. There are no uniform disclosure standards for crypto platforms; there are no standardized rules or formats for publication. And there are two layers of non-transparency: You don’t necessarily have a clear sense of what platforms can do, and on top of that, a consumer may not understand the overall volatility of the crypto market, and so they can’t make a overall risk assessment.

GAZETTE: This week, a panel of banking regulators and financial officials from G20 countries said they will put forward “robust” new regulations in October in response to the “inherent volatility and structural vulnerabilities of cryptocurrencies. Earlier this month, the US Treasury Department presented to President Biden the called a “framework” to oversee digital financial assets across government and internationally, while the EU and European Parliament agreed to sweep new crypto rules that include a licensing requirement expected to take effect next year. How will this wave of regulation affect the market?

COMMENTS: Some regulation is probably good for the industry because for crypto to reach mainstream adoption and use, it needs to be in a market and technology context where the consumer can access and do so in a way that is valuable and much lower risk than today. Frameworks, when well developed and directly responding to the kinds of problems the market sees, can make a market more efficient and more valuable for everyone to participate in. So some degree of improved structure and framework building is good. The challenge, of course, is that these cryptocurrencies and other crypto-assets are often both financial assets and technology platforms – which means you have to think about two different categories of regulation that work alongside each other.

On the one hand, licensing and controlling an asset to be able to trade it in a centralized system – that sounds like a very good thing from a stability and oversight perspective. But at the same time, it can limit competition to a large extent. If it’s difficult to introduce new types of tokens, you can block innovation and you reduce the possibility of new platforms emerging, which means you don’t necessarily end up with the most efficient technology. These are difficult trade-offs. One of the major challenges we have faced in regulating crypto to this point, and will face going forward, is balancing the need to achieve platform stability with the need to maintain platform competition and interoperability.

Editor’s note: Kominers is a research partner at a16z crypto, and advises a number of marketplaces and crypto projects. He has some crypto assets – notably a number of non-fungible tokens.