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The Future of Crypto: Will It Survive?

The epic collapse of the amazing Sam Bankman-Fried’s $32 billion FTX crypto empire appears to be going down as one of the great financial meltdowns of all time. 

The story is full of celebrities, politicians, sex, and drugs, so the future looks bright for film and documentary producers. But to paraphrase Mark Twain, rumors of the death of crypto itself are greatly exaggerated.

It is true that a loss of confidence in “exchanges” like FTX—mainly crypto-financial brokers—will almost certainly mean a continued sharp decline in underlying assets. Most Bitcoin transactions are done “off-chain” on exchanges, not on the Bitcoin blockchain itself. These financial intermediaries are significantly more convenient, require much less complexity to use, and do not waste nearly as much energy.

The emergence of exchanges has been a major factor in the growth of cryptocurrency prices, and when regulators reject them, the price of the underlying tokens will fall. Similarly, the prices of Bitcoin and Ethereum collapsed.

But a mere price change is not the end of the world. The important question is whether crypto lobbyists can contain the damage. So far, their money has spoken volumes. According to reports, Bankman-Fried contributed $40 million to support US Democrats, and her FTX colleague Ryan Salame gave $23 million to Republicans. 

Such a large number has certainly helped regulators around the world take a wait-and-see approach to crypto regulation rather than stifle innovation. Well, they waited, and after the FTX crash, we have to hope they did.

But what do they decide? The most likely way is to improve the regulation of centralized exchanges—companies that help individuals hold and trade cryptocurrencies “off-chain.” The fact that a multibillion-dollar financial broker was not subject to normal accounting requirements is amazing, regardless of what you think about the future of crypto.

Of course, there are compliance costs for companies, but effective regulation could restore confidence that would benefit honest companies, which are certainly the majority, at least when these exchanges are weighted by size. Increased confidence in the rest of the exchanges could even lead to an increase in crypto prices, although much would depend on the extent to which regulatory requirements, especially for individuals, eventually dampened demand. 

After all, the most important transactions in the field of cryptography now may be money transfers from rich countries to developing economies and emerging markets and the outflow of capital in the other direction. In both cases, the parties desire to avoid currency regulation and increase payment anonymity means.

On the other hand, Vitalik Buterin, the founder of the Ethereum blockchain and one of the most influential thinkers in the crypto industry, argued that the real lesson of the FTX collapse is that crypto needs to return to its decentralized roots. 

Centralized exchanges like FTX make it easy to own and trade cryptocurrencies, but at a cost: they open the door to management corruption, just like any traditional financial company. Decentralization can mean greater vulnerability to attack, but so far the biggest cryptocurrencies like Bitcoin and Ethereum have proven resilient.

The only problem with decentralized currency exchanges is their inefficiency compared to, for example, Visa and Mastercard cards or standard bank transactions in developed economies. Centralized exchanges like FTX democratize the crypto domain, allowing ordinary people without technical skills to invest and practice. 

On the other hand, Vitalik Buterin, founder of the Ethereum blockchain and one of crypto’s most influential thinkers, argued that the real lesson of the FTX collapse is that crypto needs to return to its decentralized roots. Centralized exchanges like FTX make it easy to own and trade cryptocurrencies, but at a cost: they open the door to management corruption, just like any traditional financial company. Decentralization can mean greater vulnerability to attack, but so far the biggest cryptocurrencies like Bitcoin and Ethereum have proven resilient

 

bitcoin crypto

The problem with decentralized exchanges alone is their inefficiency compared to, for example, Visa and Mastercard cards or standard banking transactions in developed economies. Centralized exchanges like FTX democratize the crypto domain, allowing ordinary people without technical skills to invest and operate. On the other hand, Vitalik Buterin, founder of the Ethereum blockchain and one of the most influential crypto thinkers, argued that the real lesson of the FTX failure is that crypto must return to its decentralized roots. Centralized exchanges like FTX make it easy to own and trade cryptocurrencies, but at a cost: they open the door to management corruption, just like in any traditional financial company. Decentralization can mean greater vulnerability to attack, but so far the biggest cryptocurrencies like Bitcoin and Ethereum have proven resilient.


The problem with decentralized exchanges alone is their inefficiency compared to, for example, Visa and Mastercard cards or standard banking transactions in developed economies. Centralized exchanges like FTX democratize the crypto domain by allowing ordinary people without technical skills to invest and trade. It is entirely possible that methods of replicating the speed and cost advantages of centralized switching will be discovered in the future.But that seems unlikely in the near future, so it’s hard to see why anyone not involved in tax evasion and evasion (not to mention crime) would use crypto, which I’ve long emphasized.


Perhaps regulators should move to a decentralized system, requiring exchanges to know every identity they trade, including the blockchain. While this may sound innocent, it would make it difficult to trade on an anonymous blockchain on behalf of the exchange’s customers.
It is true that there are options that include “chain analysis,” which allows an algorithmic examination of transactions in and out of a Bitcoin wallet (account), in some cases revealing the underlying identity. But if this approach were always sufficient and the appearance of anonymity could always be removed, it is hard to see how crypto could compete with more efficient financial intermediary options.
Finally, many countries may try to ban all crypto transactions instead of just banning crypto brokers.

 

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