Is crypto going extinct? | | Business and Economy

When the Los Angeles Rams defeated the Cincinnati Bengals in the National Football League championship game last February, unlikely players splashed off the field in living rooms across America.

One of the biggest nights of American television, with 99 million viewers, the Super Bowl broadcast was interrupted by a series of cryptocurrency ads. Social media has been buzzing about how digital tokens have matured, with mainstream giants such as Coca-Cola and General Motors winning prime-time slots previously dominated.

In one of that night’s ads, comedian Larry David played Luddite and scoffed at some of mankind’s greatest inventions, from wheels to Edison light bulbs to, as the commercial suggests, the FTX cryptocurrency exchange. Calling the platform a “safe and easy way to get into crypto,” David’s character said:

That ad isn’t old enough.

A sector that promised alternatives to the traditional global financial model now faces survival issues as several major cryptocurrency companies have gone bankrupt in recent months. Last May, TerraUSD and Luna coins crashed, wiping out almost all of their value overnight, taking his $45 billion out of the crypto market in a day. Singapore-based cryptocurrency hedge fund Three Arrows Capital has closed abruptly. Crypto lenders Voyager Digital and Celsius Network, which lent money to Three Arrows Capital, soon filed for bankruptcy.

And in November, FTX, a cryptocurrency trading platform popular with Super Bowl ads, collapsed. Its founder Sam Bankman-Fried said he was arrested in the Bahamas in December and charged with fraud. Bitcoin, the world’s most famous cryptocurrency, is currently worth only a third of what it was at its peak in October 2021.

David’s FTX commercial ends with the tagline “Don’t be like Larry.” Many of his 420 million people, estimated to have invested in cryptocurrencies today, may want to be like Larry.

So is crypto going extinct?

Short answer: As a concept, cryptocurrencies will likely survive, experts told Al Jazeera. However, the sector may face increased regulation and prolonged uncertainty. Many companies and currencies will perish. For the company to survive, he faces one challenge: regaining the trust of his customers.

Code “Ice Age”

Cryptocurrency trading platforms have traditionally lured customers with the promise of quick returns on their investments. The offer is to earn high interest rates, sometimes in the double digits, by depositing money in so-called cryptocurrency wallets, which are meant to work similarly to savings accounts. For those distrustful of traditional finance, the added appeal is the opportunity to execute transactions without worrying about regulators acting as intermediaries.

But as the U.S. Federal Reserve and other major central banks around the world raise interest rates significantly by 2022, this appeal has faded, making traditional investment options more profitable than they once were. . For example, interest rates in the United States will rise by more than 4 percent in 2022.

As TerraUSD and Luna enter a free fall, combined with safer alternatives and less confidence in cryptocurrencies, the crisis isn’t over yet, according to experts.

Tim Leung, director of the Computational Finance and Risk Management Program at the University of Washington in Seattle, told Al Jazeera:

Leung said cryptocurrency platforms are likely to see lower trading volumes for some time, as many potential customers are currently skeptical. The crypto sector prides itself on its independence but relies on funding from traditional markets. It’s unclear how long the funding will continue under the current circumstances, Leung suggested. He warned that many small businesses could go bankrupt due to fewer transactions and less funding.

Cryptocurrency mining companies that generate cryptocurrencies or coins using energy-hungry supercomputers will also suffer, Leung said. Declining demand for coins due to declining trading volumes and high energy prices will strain the viability of the business model. “I think this phase will last until 2023,” he said. “More Likely to be a Crypto Ice Age than a Crypto Winter”

A recession shouldn’t come as a surprise, experts suggest.

“This is an emerging industry with hundreds of companies and a lot of innovation,” said David Yermack, professor of finance at New York University’s Stern School of Business. He told Al Jazeera that he expects a chaotic era for cryptocurrencies in the foreseeable future, but believes that “best practices will eventually emerge through competition.”

Governments around the world have indicated plans to step in to protect their customers from the disruption. But regulators and analysts seem to disagree on how best to intervene.

Old laws for new technology?

U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler argued in September that existing laws are sufficient for the cryptocurrency sector. In his view, most cryptocurrencies are similar to traditional securities, tradable financial assets such as stocks and bonds, he said.

Hillary Allen, a law professor at the American University of Washington, DC, agrees with that approach. Cryptocurrencies and trading platforms must be shut down if they fail to meet the governance standards the SEC requires for traditional securities, including registering with regulators and demonstrating asset transparency, she said.

She said it would be wrong to create new rules for the crypto industry. Allen told Al Jazeera, “It would justify the notion that cryptocurrencies are unique in some way and cannot be expected to meet the same standards as mainstream financial assets.” “This is a dangerous message to send.”

However, many other experts disagree.

“There is a fundamental difference between securities and currencies,” said Bruno Bias, Professor of Finance at HEC Paris Business School. People invest in stocks and bonds based on the cash flow and assets of the company offering the stock or bond, he said. They buy currency, be it dollars, euros, or crypto tokens, with the confidence that the coin or banknote will be accepted by others at a later date.

Christian Catalini, founder of the Massachusetts Institute of Technology (MIT) Cryptoeconomics Lab, says trying to fit into the existing regulatory framework for cryptocurrencies without adapting to new technology will not work.

It does not guarantee consumer protection, Catalini told Al Jazeera. “Worse, it may kill the potential for innovation in this area without bringing meaningful benefits to the public,” he said.

Most analysts agree that regulation in this sector must focus specifically on one type of cryptocurrency, the so-called stablecoin.

Stabilize “stablecoins”

Unlike tokens like Bitcoin, whose prices can fluctuate wildly, stablecoins’ values ​​are pegged to regular currencies, such as the US dollar or other traditional assets such as gold. For example, Tether Coin, the world’s most popular stablecoin, is often traded more than Bitcoin and is worth $1. Due to their stability in value, stablecoins are positioned as tokens that are considered safer than other cryptocurrencies while still earning well through crypto wallets.

“The very word ‘stablecoin’ conjures up images of trustworthy currencies that give customers a false sense of security,” Biais told Al Jazeera. “Problem? Unlike regular currencies and banks, stablecoins are fundamentally completely unregulated.”

In theory, someone who owns $100 worth of stablecoin should be able to redeem that amount at any time, just like they can with paper money, but there is no guarantee that they will actually get that money back. there is no.

The Financial Stability Board (FSB), a global advisory body established by the G20 after the 2008 financial crisis, has issued a mandate to major economies to enable stablecoins to demonstrate their ability to pay back their customers. I have asked for regulation to be adopted. In its October 2022 report, the FSB warned that many existing stablecoins “are issued by unregistered and unlicensed institutions and do not have credible mechanisms to support their promise of price stability.” I’m here.

While U.S. regulators appear undecided about the need for new rules, many other countries and regions are moving toward legislation specifically designed to govern the crypto sector, especially stablecoins. These rules could help ensure that “good actors thrive and bad guys disappear from the crypto ecosystem,” said Catalini.

A new European Union regulation known as Markets in Crypto-Assets (MiCA) requires all cryptocurrency companies to register with the authorities. Stablecoins must guarantee assets that can be repaid to customers at any time. MiCA will enter into force in 2024.

Last June, Japan passed a law allowing only banks and other highly regulated financial institutions to offer stablecoins. The UK government has also proposed that the country’s top financial services regulator, the Financial Conduct Authority, oversee cryptocurrency companies.

Meanwhile, India’s finance minister said cryptocurrency regulation will be a priority for the 2023 G20 presidency. A global framework for regulating cryptocurrencies is certainly essential, said Leung of the University of Washington. Geography.

But for this to help revive the industry, crypto companies must first regain customer trust, experts say.

trust issues

Many cryptocurrency enthusiasts are likely to watch how a large-scale fraud case like the one involving FTX unfolds, says Biais of HEC Paris. If they can see justice and those who lost money because of such fraud can get it back, it will help rebuild trust, he said.

Some experts, like Allen of American University, believe that cryptocurrencies have little to offer the financial world meaningfully in the future. “When you strip away the rhetoric, there’s nothing you can’t do using traditional financial instruments,” she said.

Some believe that cryptocurrencies are a transformative technology with the potential to enable peer-to-peer decentralized financial transactions. MIT’s Catalini said, “Even if many early projects in the crypto space fail, the technology will survive.”

He described the moment as akin to the dot-com bubble that burst in the late 1990s when many early online companies collapsed. Companies that have survived or emerged in the afterlife, like Amazon, are one of the “Internet giants of today,” he said.

Still, until chaos calms down and credible regulation is put in place, University of Washington’s Leung says it’s best to be vigilant. “I don’t want to make decisions based on Super Bowl commercials,” he said. “This is not a game.”