The great cryptic crisis is imminent

The author is the business consultant and research manager at the bank for international payment compensation

There is a bitter irony in the turbulence that currently capture the crypto universe. Krypto was born in the depths of the great financial crisis in 2008 as a counter -reaction to the failure of the conventional financial system with its over -indebted shadow banks and the chain of leverage and running time congruence. The original Bitcoin-WhitePaper, which was published in the same year, sold a vision in which money was redesigned as a self-preserved system of peer-to-peer transfers without the need for intermediaries. However, today's upheaval bears all the license plates exactly the mistake against which the early supporters of the industry have been kneading. When companies collapse and crashes, the dissolution of this new daisy chain of over-indebted shadow cryptics is now in full swing.

While we examine the debris and draw up a course for the reaction of politics to curb the sector, we have to keep an eye on some important facts. Krypto works under the banner of decentralization, but is strongly centralized in two decisive points.

Firstly, many supposedly decentralized protocols prove to be highly concentrated in relation to who actually rules and control things. Often it is the founder and a small number of risk capitalists who are in charge - as the implosion of the stablecoin terra shows in May. In most cases, Krypto is only decentralized.

Secondly, centralized intermediaries such as Sam Bankman-Frieds FTX play a central role as a goal in the crypto world from the conventional financial system. They channel the stream of new investors what the oxygen is that gives this speculative dynamic alive. BIS research in this area has shown that crypto only works when this happens. To the extent that the recruitment of new investors is the key to surviving crypto, centralized agents are crucial to support the building.

The current collapse of FTX and other falling domino stones in the industry has led to an intensive search for the soul among the crypto supporters. As predictable, we hear calls to the industry to "return to their roots" and to be reborn in a purer form. The vision is to turn the clock back into time when crypto was reserved for a small group of enthusiasts and was not marketed as a mainstream finance product. In this vision, it would be more of a niche hobby for a small minority of supporters than to get into our living room through television advertising to attract small investors.

This pure form of crypto, which imagines to get rid of central intermediaries, would only have a very low footprint. But crypto would not have grown to its current size without these companies having led funds into the sector. Instead of standing in opposition, centralized agents and crypto nourish each other. For this reason, every political intervention that is now being taken must take into account the effects of crypto, this mutual dependency and the role that stable coins play as a goal for conventional financial system.

some say "just let crypto burn", but the idea that it disappears itself may be wishful thinking. If the financial conditions change, even a greatly reduced sector that is reserved for the purist could still provide the embers for the re -entry of centralized intermediaries.

Every intervention would have to overcome a central challenge: If politics allows the fact that crypto interweaves with the mainstream financial system, this will initiate something that has been avoided so far. Especially when stable coins are brought into the regulatory perimeter, their role as an entry point for the rest of the crypto ecosystem must be addressed. Politicians should be careful not to make them “cuckoo in the nest”. The new standards of the Basel Committee on Banking Supervision for activities of the banking sector in Krypto are an important step in the right direction.

more generally, the regulatory approach must distinguish the underlying economic function of crypto from what it looks like on the surface. Even during the worst excesses of the subprime mortgage boom, the daisy chain of leverage ultimately led to activities in the real world-most obviously to buy a house with money. Crypto, on the other hand, is largely self -referential; His activities deal with the trade in other types of crypto and have little reference to concrete economic activities.

Ultimately, every reaction of politics must begin with a realistic assessment of the economic value, which results from blockchain technology. The returns of blockchain were remarkably lean in view of the early hype. One project after the other that has explored its potential advantages has ended empty.

A more promising approach is digital central bank currencies that operate within the wider digital monetary system. This is an approach that builds on the trust embedded in central bank money and could serve the public interest in a future monetary system. The technological advantages flow into real economic activities and not just in other types of crypto. The economic benefits of decentralization should also be questioned more. We now see what happens when an industry simply relies on a belief.