Cryptofinance: Arrested Development

Hello and welcome to the latest edition of the FT’s Cryptofinance newsletter. This week, we’re looking at what happens when the show moves on.

I’ve spent time this week in Amsterdam, at the FT’s annual The Next Web conference, an event that sits at the intersection of technology and finance.

The past 12 months have been an unprecedented time of crisis for digital tokens so I expected crypto’s representatives to be fairly muted compared with last year, when Sam Bankman-Fried (remember him?) dialled in to preach the promise of crypto.

But the depth of pessimism among finance professionals, tech start-ups and C-suite executives surprised even this reporter with a fair share of pie-in-the-sky crypto conferences under his belt.

Most attendees told me crypto’s time has passed, surrendering its momentum to artificial intelligence or simply not recovering from its collapse last year.

The outlook was sobering. On a panel about central bank digital currencies, Stephen Boyle, head of strategic alignment in Lloyds Banking Group’s chief technology office, told me crypto had some nice ideas but they should reside with institutions better suited to it, like a central bank.

“I think what might stay behind is the idea of digital money . . . but in a much more regulated context than what we saw in the crypto space,” he said, adding the “instability in those currencies, high barriers to entry and frankly, some other problems in the sector like fraud and financial crime . . . meant that [crypto] wasn’t as widely adopted as a lot of the proponents were saying”.

I pressed Mark Foster, EU policy lead at the Crypto Council for Innovation, on what might be next for crypto and blockchain technology, or how it might finally achieve the standard of mainstream adoption its supporters have preached — unsuccessfully — for well over a decade now.

“In the first phase over the next five years or so . . . there’s going to be even more conversation around how can blockchain technology can be used . . . to improve back-office stuff,” he replied. He suggested it won’t be everyday people using “self-hosted wallets and all that kind of stuff”, but instead mainstream financial players quietly incorporating blockchain technology for their own internal functions.

It’s uninspiring stuff, especially in comparison to the promise of AI. In the past, venture capitalists and developers charged with building the crypto financial network could persuade themselves — perhaps naively — that their work would revolutionise the global financial system, bank the unbanked and fundamentally change how people own works of art or real estate.

The crypto bubble of the past few years relied on the faith and goodwill that it was building a better world, not to mention that there would be a huge pile of gold at the end of the rainbow. No more.

The tech VCs will naturally move on to the next fashion trend. But that also applies to the developers with highly transferable skills. Many will not want to be tarred by association with companies hit by the SEC or be the victims of rug-pulls or large-scale hacks that exploit their own coding mistakes.

Without fresh blood, that may leave the industry’s development in the hands of a smaller group of devoted developers. Their devotion to crypto is undeniable but development also runs the risk of being sidetracked by obscure technical arguments the world does not care about.

Bit Digital’s chief executive Samir Tabar blasted “centralised” crypto companies such as FTX that have betrayed the community’s faith, but still has a fiery passion for decentralised, permissionless technology.

“Trust code, not humans,” he said to close an afternoon panel on blockchain adoption. A fair position to hold, but my only question is: who will write the code we’re expected to trust?

What’s your take on the state of blockchain adoption in 2023? As always, email me your thoughts at [email protected].

Weekly highlights

• A few weeks ago I wondered if The Bahamas would throw sand in the American prosecution machine gunning for Sam Bankman-Fried. A court filing this week revealed the US had agreed to temporarily park some charges, which include allegedly bribing Chinese officials. But it’s only a reprieve. The government still wants to bring the charges separately and SBF is still facing eight criminal charges.

• Renowned venture capital firm Andreessen Horowitz this week announced a new London crypto office as its first major push beyond the US. Britain won out even though it has suffered a more than 50 per cent decline in tech investment this year. Prime Minister Rishi Sunak said he was “thrilled” (at the Andreessen move, not the UK’s lack of tech investment).

• You might recall last week’s news that the misfortunes of Atomic Wallet — the latest victim in a crypto industry riddled with compromised platforms — were attributed to Lazarus Group, the infamous North Korea-backed cyber crime syndicate. Blockchain analytics firm Elliptic, which first made the link between the hack and Lazarus — this week discovered the platform’s crypto losses had exceeded $100mn.

• Adding to Binance’s recent woes with regulators, the world’s largest exchange has had to call it quits in The Netherlands after being unable to register with the Dutch regulator. The news follows a fine levied against the crypto behemoth by the Dutch central bank last summer, which accused Binance of breaching its rules, benefiting from a “competitive advantage” from not paying levies to the bank and skipping out on compliance costs.

Soundbite of the week: 3AC founders slammed by liquidators

Crypto has had its fair share of villains in the past year. For some, top of the list are Kyle Davies and Su Zhu, the co-founders of collapsed crypto hedge fund Three Arrows Capital (3AC).

Since the fund’s collapse last summer, the pair have allegedly not complied with liquidators, and have kick-started a new crypto exchange called GTX where users can trade bankruptcy claims. An interview with the New York Times last week also revealed how they have spent time in Bali, travelling, painting, drinking, surfing and meditating. Very nice for them, but enraging for others.

The liquidator for 3AC this week filed a motion arguing Davies should be held in contempt of court for ignoring a subpoena connected to bankruptcy proceedings and fined $10,000 a day until he is in compliance.

“They have not only thumbed their nose at the Foreign Representatives, this Court, and their creditors, but they now seek to profit from this very bankruptcy.”

Data mining: Unstable stablecoins

Tether, the world’s largest stablecoin by market cap, became untethered from the US dollar. It is supposed to be pegged 1-for-1.

Its value fell to $0.99, with the latest peg break representing a year-to-date low for the stablecoin, according to CCData.

The chart below serves as a reminder that tether’s peg broke in May and November last year, the months crypto was hit by the collapse of Terra and FTX respectively. Taken together with the brief de-peg of Circle’s USDC stablecoin in the wake of the Silicon Valley Bank collapse, stablecoins are frequently proving to be anything but stable.

Cryptofinance is edited by Philip Stafford. Please send any thoughts and feedback to [email protected].