The crypto winter is upon us, hammering institutional and retail investors alike.
In a Barron’s Live webinar on 21 July, Financial News talked to Charles Allen, chief executive of blockchain infrastructure firm BTCS, to discuss the lasting consequences of the crash, the role of regulators, and what’s next for digital assets.
This excerpt has been edited for clarity and brevity.
What do you make of the crypto crash?
It is not just the crypto market. The whole economy, in general, is shaky. The backdrop of other issues is huge.
When you look at crypto, everything kicked off with terra and the algorithmic stablecoin crash. That set off certain events into motion. The positive is we’ve seen a bump in crypto prices over the last couple of days. It really creates opportunity, if you understand and are willing to take the time to learn the technology and what it can do.
The biggest thing you can do is take a step back and look over the past eight to 10 years. See where crypto was then and where it is now; this is just a blip.
Regulators are starting to cast a more watchful eye over the crypto market. How do you think it will play out?
It is a really positive thing for the industry. I got into crypto back in 2013. It was very different then. Goldman Sachs wasn’t looking at crypto and institutions weren’t looking at it.
When companies start using crypto or operating like a bank, or in the initial coin offering craze in 2017, these things were effectively securities for the most part. The regulators have been sitting on the sidelines.
It is really important to have good policy. If it is securities, you want the formation of capital and orderly markets. The protection of investors trumps formation of capital.
In this case, we don’t want to hinder technology; we want blockchain technologies to really grow, thrive and be a cornerstone of economic growth. In order to do that, sensible regulation makes a lot of sense. You have to get the bad actors out.
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Hopefully, the regulators get it right. It might be a little bit of a knee-jerk reaction. It tends to always happen that way, and then a pullback, but I think it is a positive.
It can’t only be left up to regulators to set everything right. What does the industry itself need to do to restore confidence in digital assets?
One thing you’ll probably see is a lot of retail investors and people that hold crypto start looking a little bit more seriously about who they are doing business with. They will probably start trying to hold their own private keys — if you’ve heard that expression: ‘not your keys, not your money’.
You don’t necessarily need with crypto the protections of the Federal Deposit Insurance Corporation. Just take your money and secure it yourself. If you have your own money, you don’t have to worry about a bank failure. What is this institution I have my money with? What are they doing? How are they giving me these returns?
I think people will hopefully start to get a bit smarter.
But on the flip side people have very short memories. If crypto starts going back up again people will forget, to some extent, why some of these things happened. Hopefully they take the lessons learned and start managing and keeping an eye on their own money in a more productive way.
Do you think they’ll be scarring from the crash? Will people be turned off crypto?
It depends on the individual. If someone lost a lot of money, it is going to be hard to swallow. One of the things that I find very interesting, when you look at either the stock market or even the crypto market, is there is a huge fear of missing out.
People tend to always buy at the top. They have fully invested at the top and not the bottom. That has happened in the stock market, that happens in the crypto market. It is a very peculiar human behaviour, where everything else in life you negotiate, but it tends not to happen that much when you are trying to get the best deal on the stock market unless you are a professional investor.
Hopefully the trust isn’t lost. The interesting thing is that blockchains really haven’t failed. Bitcoin’s blockchain has never been hacked, Ethereum is holding strong. Most of these blockchains have never had any issues. If you look at Celsius, it paid back its de-fi loans before it filed for bankruptcy.
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If you are an outsider learning about this space, it is a really interesting time to look at how robust the technology is.
Before the crash there was a major push to legitimise crypto with the inclusion of institutional investors. What impact have they played, and what impact will they play, if and when crypto recovers?
It is actually really impactful that institutions have come into crypto. It does change the dynamic a bit — the dollar flows, the amount of money has gone up, it has driven the price up.
Institutions also operate on a risk-on, risk-off approach. Crypto is almost trading like a tech stock. In 2014, in the early days, it wasn’t really mainstream and it did its own thing. It has now become its own asset class, which I think is a positive thing.
The more institutionalised it becomes, it will take volatility out of the market. As investors get more sophisticated, it just makes it more mainstream over time.
Many central banks are looking at developing a central bank digital currency, effectively a stablecoin backed by the central bank. What is your opinion of these efforts?
I hope we see central bank digital currencies. It would be huge. The way in which we move money, at least in the US, is very efficient, but if you look at the pipes, it is not a very good system. It has been piecemeal built on top of itself; you have Swift and all these financial technologies and solutions when we can just redo the rails. If governments redo it, I think that would be amazing.
You can listen to our full interview with Charles here, on Apple, or on Spotify
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