Cryptocurrency markets are not for the faint of heart, yet even by the industry’s short but volatile history, the last 18 months have been extraordinary. A bear market wiped $2 trillion off the market’s overall value at its worst point; the ensuing turmoil caused the collapse of the Terra-Luna stablecoin system, crypto lenders Celsius Network and Voyager Digital, hedge fund Three Arrows Capital, and the once-mighty FTX exchange group; and US regulators have stepped up their crackdown on the industry by suing Binance and Coinbase, even as governments and traditional financial institutions step up efforts to launch digital currencies and tokenize assets.
Notwithstanding the turmoil, don’t bet against the industry’s ability to reinvent itself again, says crypto journalist and podcaster Laura Shin. She knows the crypto world and its colorful characters well, having covered the crypto space as a senior editor at Forbes and authored “The Cryptopians.” The book recounts the struggles behind the 2015 creation of the Ethereum blockchain, a seminal development that enabled the subsequent launch of thousands of cryptocurrencies and decentralized financial apps run by smart contracts.
The recent crisis revealed how many in the industry had drifted away from crypto’s idealistic roots, Shin says. That realization, and the regulatory crackdown on crypto, should spur fresh innovation into decentralized applications of blockchain technology that can benefit consumers around the worlds, she says. Shin spoke recently with Larissa de Lima, a senior fellow at the Oliver Wyman Forum and co-lead of its Future of Money initiative.
The crypto space has experienced major collapses, big price swings, and pushback from regulators of late. How do you think these events are reshaping the ecosystem?
It’s been a year since the beginning of the Terra-Luna collapse. I look back and feel like the crypto community had strayed from its ideals of decentralization and the cypherpunk ethos, and created all these different centralized entities. Celsius, Voyager, 3AC, FTX – all of those are examples of centralized entities in crypto. And when there is contagion, it can take a while for events to play out.
I think this year will cause the crypto industry to correct course. When I ask people about their thoughts post-FTX, they say things like, “I'm doubling down on decentralization,” or they talk about things like resiliency. The fact that this past year of bankruptcies has caused US regulators and lawmakers to become more negative on crypto is only going to further decentralize the industry. So, I feel like this will be the year when crypto really starts living up to its ideals, and when the benefits of this technology get dispersed around the globe.
How do you think investment is evolving?
My guess is that venture capitalists (VCs) have the upper hand right now. They can be a lot choosier, and they're probably getting a lot better deals than they were a year ago, when developers could use FOMO (fear of missing out) to get money. Right now, I think there's more due diligence on both sides. Entrepreneurs are figuring out who it is they really want as their VC partner. It's not just about the name of the firm, but government contacts and knowledge of the regulatory landscape.
What locations do you expect to attract talent and investment in this environment? Will the European Union’s new MiCA law regulating crypto activity be a game changer?
I've heard more about Asia than Europe. I think Singapore and Hong Kong are at or near the top of the list for a lot of people, and a lot of that has to do with regulatory clarity. Hong Kong is actually opening its arms to crypto entrepreneurs, apparently with the blessing of Beijing.
Countries like Russia and China have a vested interest in the US having less power and are looking to reduce their reliance on the US dollar. There's concern that China will use the digital yuan in a place like Africa, where they have put so much investment into building roads and infrastructure. They could maybe leverage that to say, we want you to transact with us in our digital yuan. And that would potentially lead those countries to hold reserves in the digital yuan, and chip away at the dollar’s dominance as the global reserve currency.
Crypto markets need institutional flow to gain scale, and institutions like regulation. Does that favor centralized entities, or is there a way for institutional investors and regulators to get comfortable with decentralized finance (DeFi) structures?
The way things are going in the US, regulators seem to indicate they want everything to have an intermediary that they can regulate. On the other hand, every time there's any regulation that the crypto community doesn't agree with, they fight it tooth and nail. And what will happen with lawmakers -- will crypto become a partisan issue? We don't really know how things are going to play out.
As for institutions, Fidelity has been mining Bitcoin since 2014. It launched crypto custody and trading services in 2018, its digital assets platform is hiring, and they established a presence in the metaverse in 2022. They're all in, so at a certain point I feel that other institutions are going to want to catch up. And the other thing I would look at is the lawsuit by Grayscale demanding that a court review the SEC’s rejection of its application to convert the company’s Bitcoin Trust into an exchange-traded fund. If the firm succeeds, that's going to be a big signal for institutions.
What did you learn in writing your book about decentralized autonomous organizations, or DAOs, and what should policymakers understand about them?
I'd want policymakers to understand there should be some kind of flexibility in how they look at DAOs because they have many different purposes. They're just a way to organize people, like LLCs. They're definitely not autonomous. There's only so much decentralization you can have because there have to be certain people who are tasked with certain roles. And you run the risk of whales who hold large quantities of tokens dominating governance votes. I would like to see more discussion around the best ways to mitigate those types of issues. One solution that intrigues me is quadratic voting, which uses a mathematical formula to effectively dilute the voting power of large token holders and give more weight to the number of entities voting for a given proposal.
What developments in the evolution of the crypto space have surprised you? And what has surprised you for not changing?
Wow, let's see. I didn't expect NFTs (non-fungible tokens) to take off on Bitcoin. That has been really fun to watch. I view the crypto space as comprising two different communities: the money crypto people, largely Bitcoiners, and the tech crypto people, who like Ethereum and smart contracts. Many Bitcoiners were unhappy with the growth of ordinals, but it has been a boon – Bitcoin fees are at all-time highs and transactions are way up. There’s a lot of activity and interest in new applications on the Bitcoin blockchain.
As for things staying the same, I would have hoped that we would see fewer scams and less general shadiness, but that hasn't happened. I expect that will happen at a certain point, when the crypto use cases are clearer and this becomes more adopted in everyday life.
What are some of the misconceptions people have about crypto?
I often hear people making blanket statements about crypto. And I would want to remind people that it's just a technology. It's neutral in and of itself, and people can do good or bad things with it.
People complain about crypto’s impact on the environment, and I explain that Bitcoin is the only major token that uses a proof-of-stake consensus mechanism that requires a lot of computing power and energy consumption. Other coins don't have this issue.
When I hear (SEC Chair) Gary Gensler say that nearly all tokens are securities, that doesn't make sense to me. Under the Howey test (which defines a security as an investment in a common enterprise in expectation of earning a profit from the efforts of others), many tokens probably will be securities, but many of them probably won't be. The vast majority of coins are really different, so it doesn't make sense that they would all just be under one bucket. By the same notion, what Sam Bankman-Fried did with FTX looks to me like a fraud. But that doesn't mean all crypto entrepreneurs are bad. When I see regulators coming down really hard on the crypto industry, it feels like they're doing that to compensate for the fact that they missed FTX.