What’s next for digital currencies after “Crypto Crash”?
Recent high-profile financial crashes at Bitcoin, Celsius and Terraform Labs, which together wiped out hundreds of billions in market value, helped trigger an escape from the cryptocurrency market, driving the value from $ 2.9 trillion last fall to below $ 900 billion today.
This “cryptocurrency” has reinforced critics’ perception that digital currency markets – used primarily as an investment tool 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.
Professor Scott Duke Kominers at the Harvard Business School spoke to the Harvard Gazette about why the crypto market has plummeted in recent months and how a wave of forthcoming international regulation could affect the market. The interview is edited for clarity and length.
Gazette: What triggered the cryptocurrency slide?
Kominere: In the last 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 – for example, which markets can coordinate for exchange media, and many of the applications are technological in nature and new (or at least untried). And then there is 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 withdrawal for technology companies. Many technology companies make large investments in growth in advance, and so 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 run.
“The entrepreneurs who are still out there swinging get a lot done and create a lot of value.”
Crypto can have the same dynamics. On top of that, it is more uncertain which technologies will succeed in the long run. And then, on top of that, there are the speculations 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 are moving away from riskier assets.
At the same time, a lot of basic technology investments and entrepreneurship in crypto are still going on. We saw this with previous cryptocycles as well. At the end of 2017-2018, there was a significant downturn, and many of today’s leading crypto companies came out of it. So I think from an entrepreneurship perspective, there are many teams 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 in fact, develop their product carefully without constantly having to face the market.
Gazette: In November, the global crypto market value was $ 2.9 trillion. Today, that is $ 870 billion, according to CoinMarketCap. Bitcoin, the oldest, most established cryptocurrency, has fallen over 70 percent in value during that period. What changed?
Kominere: There was still uncertainty. We were just in much more of a financial boom and a crypto boom, to be exact. Even during that period, market prices of various cryptocurrencies moved up and down – massive fluctuations – 30 percent fluctuations over the course of a week, sometimes. I give advice to a bunch of entrepreneurs, and the feeling of many at that time was that it was very difficult to build in that environment because things changed so quickly, and there was so much attention and pressure from the boom. When all this slows down, it washes out many of the projects that were somehow unsustainable. This means that there has been a loss of value – there has been a loss for the entrepreneurs; it is a loss for investors. And it goes back to retail investors as well.
But at the same time, the entrepreneurs who are still out there get a lot of swings and create a lot of value. And remember: not all cryptocurrencies are purely economical. For example, many are more consumer-oriented products such as systems for coordinating group decisions or managing event tickets. The long-term view is that there is real basic 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 do not know what the long-term, successful business models and infrastructure solutions will look like. We do not know if these are 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 am really interested in seeing is which crypto projects come out of this “bear” market phase much stronger.
Gazette: The storm of bad news involving high-profile companies such as Bitcoin, Terra and Celsius has renewed calls for regulators to protect consumers from fly-by-night currency operators, fraudsters and theft. How vulnerable are crypto investors, especially amateur investors at the retail level?
Kominere: I definitely think there is a need for more consumer protection in this area across the board. There must be more openness and not just openness at the abstract level, but technology must be made transparent to consumers in ways they can understand. This is a problem across cryptocurrencies, and it is one that companies are beginning 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 are a retail consumer, you often end up on one of these intermediate platforms where the lack of transparency means you may not understand what is happening. As we have seen, people can choose to enter these platforms during a boom, and it is very exciting. However, if you do not understand the risk you are taking, it can be very harmful as soon as the market situation changes.
“It’s still very difficult to figure out how to pay taxes on cryptocurrencies, even if you understand exactly what they are.”
There must be much more transparency and better messages and clearer definitions of the various asset classes. Everything from taxation – it’s still very difficult to figure out how to pay taxes on cryptocurrencies even if you understand exactly what they are – to information that will help people assess what markets they want to be in and how big a 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 do not 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 then they can not make a overall risk assessment.
Gazette: This week, a panel of G20 regulators and financial officials said they would present “robust” new regulations in October in response to the “inherent volatility and structural vulnerabilities in cryptocurrencies.” Earlier this month, the US Treasury Department presented to President Biden what they called a “framework” for overseeing digital financial assets across government and internationally, while the EU and the European Parliament agreed to sweep new crypto rules that include a licensing requirement that is expected . enters into force next year. How will this regulatory wave affect the market?
Kominere: Some regulation is probably good for the industry because for crypto to reach mainstream adoption and use, it must 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 they are well developed and respond directly to the type 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 cryptocurrencies are often simultaneously financial assets and technological platforms – which means you have to think of two different categories of regulation that work in conjunction with each other.
On the one hand, licensing and controlling an asset in order to trade it in a centralized system – that sounds like a very good thing from a stability and monitoring perspective. But at the same time, it can greatly restrict competition. 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 do not necessarily get to the most efficient technology. These are difficult trade-offs. One of the major challenges we have faced in regulating crypto to this point, and we will meet in the future, is to balance the need to achieve platform stability with the need to maintain platform competition and interoperability.
Editor’s note: Kominer is a research partner at a16z crypto, and provides advice on a number of marketplaces and crypto projects. He has some crypto assets – especially a number of non-fungible tokens.
This article originally appeared in Harvard Gazette.
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