There Will Be No Lessons Learned From FTX

As a new year gets underway I know that I don’t need to buy anything for the crypto-skeptic in my life. As an industry we’ve already bought them, at a cost of billions of dollars, a gift that’s genuinely priceless and always in style: the smug self-satisfaction of knowing they were always right.

After all that happened in 2022, it would be nice to know that we’re busy learning all the right and important lessons. Don’t count on it. Thanks to the miracle of confirmation bias, those advocating proof of reserves, auditing or just the end of the crypto will see the events of the year as confirmation that we need to do whatever it was they were already pitching. I’m no exception: ya’ll need more audits.

Paul Brody is EY’s global blockchain leader and a CoinDesk columnist. This op-ed is part of CoinDesk’s Crypto 2023 package.

As for myself, I write this in a dark mood not because exchanges and hedge funds have collapsed, nor because bad people are going free, having fully apologized on Twitter, and I’m not frustrated by the possibility that caution by customers and regulators could slow the growth of this amazing technology. No indeed. What I’m frustrated with is the slow progress of public blockchains, privacy technology and industrial applications. There’s so much more to blockchain than crypto and we’re just not getting there fast enough.

As we move forward I see three challenges that we should have progressed past but somehow haven’t managed to do. The first is the blockchain program of speed-running the history of financial regulation by making all the mistakes and skipping any useful lessons that former Federal Reserve Chair Ben Bernanke may have learned, and for which he won a Nobel Prize. Over and over again we have seen compelling evidence that poorly regulated or unregulated financial entities are at risk for bank runs and that financial services pose systemic risks to the rest of the economic ecosystem.

Every time one of these events happens the response of crypto purists is to declare that only decentralized finance works and that must be the path ahead. This is folly. Creating an ultra-low-risk financial system that runs only on-chain will defeat the entire purpose of capital markets: to channel capital to risk-takers who can use it to build businesses. The moment you take risk you enter in the space of human judgment and away from strict algorithms.

Read more: Paul Brody — Why Blockchains Are as Important as ERP for the Future of Companies

The second disappointment is our slow progress around the world on well-organized blockchain and cryptocurrency regulations. Enforcement actions against bad actors make sense, but in the absence of positive rules they also have a chilling effect on good actors who would like to enter the business but are afraid of finding themselves on the wrong side of rules that have yet to be set. I’m not speculating here. I know. EY serves multiple blue chip financial institutions that are waiting for clarity before they enter the stablecoin and crypto space.

So, we’re now in a less than ideal situation. Bad actors are undeterred by the lack of regulation, but good actors are. The result: Bad actors face far less competition. It’s not, thankfully, zero competition. There are quite a lot of good actors in this space, but due to absent regulatory clarity and standards even those players are having a hard time differentiating themselves from the bad guys. Every bad actor claims they’re audited, professionally run and take compliance seriously, and few end-users know enough to tell the truth from fiction.

Blue chip financial institutions are waiting for clarity before they enter the stablecoin and crypto space.

Lastly, a looming recession and an endless stream of crypto failures is trimming budgets and enthusiasm for risk-takers in the industrial space. It’s hard enough convincing risk-averse chief investment officers to bet on emerging technologies; it gets even harder as they contemplate slashing budgets in the face of a potential recession.

Read more: Jeff Wilser and Xinyi Luo — 10 Predictions for the Future of Crypto in 2023

If there is a silver lining to the probability that we will learn no useful lessons from this difficult time, it is that progress for public blockchains, for Ethereum and for privacy technology is inevitable. Nothing that has happened this year has made private and permissioned blockchains any more useful or interesting. Along the way, lots of good things are happening as well. I want to pick out three from 2022:

First, the Merge. The people of Ethereum put to rest any more ideas that they can’t run globally important infrastructure. The orderly shift from proof-of-work to proof-of-stake blew away, with one stroke, two of the biggest complaints enterprises had about Ethereum: that there is no clear accountability to responsibly manage the system and that it generates too large a carbon footprint. The battle for layer one is over and Ethereum won.

Second, non-fungible tokens. The market for speculative generative art has largely deflated, but the market for enduring and transferable personal digital trophies, proof of attendance and collectibles is just getting started. NFTs will soon be everywhere for everything from concert tickets to race medals. It’s not about making money. It’s about collecting the story of your life and accomplishments and sharing them with the world. NFTs have immense industrial applications as well. Most things companies make are unique, even if that’s just the batch number or serial number. That’s still an NFT, not a fungible token.

Finally, DAOs. Decentralized autonomous organizations are a ray of sunshine in the blockchain ecosystem. They are emerging as a vehicle for people to build and organize just about everything, from new companies to shared investment vehicles to non-profit charities. This year they started to accelerate, with a wide range of tools and services making it easy for just about anyone to set up and start managing a DAO.

2022 is over, and that’s a relief. The building goes on and the bad actors of this year will soon just be quiz show trivia questions. Onwards.

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