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Posted on Jul 19th, 2022

The Crypto Crash: How Hard Times Are Paving the Way For A Brighter Future

CONTRIBUTING AUTHORS

Haan Palcu-Chang

Crypto Content Specialist

Well, if anybody had any doubts, the last six to eight weeks have surely been the final, irrefutable evidence that crypto winter is finally upon us. And it’s cold out there, folks, really cold. Brrr.

That being said, it’s not all doom and gloom. Yes, people’s portfolios have been hit hard, but there are already encouraging signs that this recent crypto crash is forcing the community to take a good, hard look at itself and rebuild better. Perhaps even more consequentially, recent events have turned up the pressure on regulators to draft clear and consistent crypto legislation and provide an increased amount of consumer protection for Web3 products and services.

Key Takeaways:

-The crypto crash is forcing the type of dialogue needed to move the industry forward in a positive way,

-Market turmoil has compelled companies to be more transparent about their business practices to reassure customers.

-Calls for clear and well-thought-out regulation are being taken increasingly seriously by lawmakers.

Crypto’s collapse, a recap

For months, the macro backdrop of a war in Europe, raising interest rates, and a looming recession were already driving investors away from riskier assets. This was evidenced broadly in the decline of equity markets and, more acutely, in cryptocurrencies, which are still viewed as highly speculative investments in most portfolios. (1)

However, this correction, which, for the most part, seemed consistent with historical crypto bear market cycles, rapidly escalated in severity over the course of May and June 2022.

The sudden and spectacular crash of the Terra Luna ecosystem in May has triggered a series of major insolvencies, liquidity issues, and bailouts involving some of crypto’s biggest names. 3 Arrows Capital has filed for bankruptcy. Lending platform, Celsius, has paused all customer withdrawals and transactions. BlockFi, a company that grew in prominence for its crypto savings accounts, had to get a $400 million credit facility from crypto exchange FTX in order to shore up its financial position. (1) (2)

Nestled not too far beneath these headline-grabbing events are the secondary stories of this crypto bear market: Coinbase, Crypto.com, and Gemini axing hundreds of staff. (3) Bitcoin miners frantically selling off bitcoin in order to pay off debt and break even. (4) In short, it’s a bit rough out there.

No crypto pain, no crypto gain

There’s no part of us that intends to diminish the severity of what has transgressed. Thousands of people are jobless. People’s savings have been wiped out. It’s no joke. And we get that. However, these hard lessons are already stimulating the type of discourse and introspection needed to course correct this crypto industry and push it more in the right direction.

The opacity by which many crypto firms operate has long been cited as an issue by people in the community. However, the scale by which the collapse of Terra Luna and the liquidity issues of Celsius have had on the industry are driving investors towards more transparent players and forcing a growing number of companies to prioritize open and honest communication about their business practices to their clients.

A move to stabler stablecoins

Case in point, is the market sentiment surrounding stablecoins. In light of the de-pegging and collapse of Terra Luna’s $40 billon algorithmic stablecoin, UST, investors have been flocking to stablecoin alternatives that are regulated and offer transparency over their reserves. (5)

The real winner has been Circle’s USDC, which has had an incredible rise in market share over May and June, growing 8.27% over the course of those two months. Unlike its nearest competitor Tether (USDT), which still holds the crown of the largest stablecoin in the world, USDC’s one-to-one peg to the U.S. dollar is backed by cash and short-term U.S. government bonds. (6) Its reserves are regularly audited by third-party accounting firms and it’s registered with 46 state regulators in the U.S. This transparency has proven to be a boon for its growth, as an increasing number of investors move away from USDT and its oft-questioned proof of reserves (5).

A more sustainable foundation for crypto “banks”

Celsius and BlockFi’s liquidity issues have forced their competitors into a level of openness surrounding their business practices that is encouraging, and if continued and expanded upon, will only benefit the industry and the consumer.

Though, of course, some of this transparency does have the air of people trying to avoid their own market-contagion-induced demise, the fact that these conversations are being had, and new systems are being put into place because of them, is heartening.

Nexo, which so far has seemed to exhibit responsible business practices within the crypto lending world, has made a very public showing about how its operations differ greatly from its competitors. They emphasized the over-collateralized nature of their loans and the fact that, because of this, clients who are earning interest with them are doing so almost “risk free.” The CEO, shared footage on social media of the digital wallets where their reserves are held, and outlined a plan to work with an auditor to offer real-time attestations of their proof of reserves. (7)

Canadian crypto lending platform, Ledn, has also been proactive about its transparency, reemphasizing its frequent audits by top 20 global accounting firm, Armanino, to reassure customers about its liquidity. (8)

While it remains to be seen which players in the field will yet be revealed as bad or irresponsible actors, it’s exciting that an increasing number of companies are being held to a higher standard of transparency and responsible business practices by both themselves and the community at large.

Bring on the regulation

As much as there is a vocal contingent of crypto libertarians who want the government’s hands out of their crypto wallets, the reality is that most investors want regulatory clarity and some type of well-defined government oversight of digital assets. They want to know that what they are investing in is legal and they want to have clear guidelines on how they or their companies can interact with these investments. To date, legislation surrounding crypto in most jurisdictions has not been particularly inspiring. (9)

However, the havoc that this recent crash has wrought is giving a new urgency to lawmakers. We can see this in the United States which, by a significant margin, is the most important country when it comes to laws that have the potential to shape crypto’s future. In a move that seems almost unbelievable given the current socio-political division in that country, a bi-partisan bill was put forward at the beginning of June by Republican senator Cynthia Lumis and Democrat Kirsten Gillibrand. The Responsible Financial Innovation Act aims to get regulatory clarity for digital assets, give companies a clear framework by which to create crypto-based products, and put in systems that will better protect investors. (9)

As Mark Basa, director of Hokk finance, stated in response to the recent crash: “Regulation is coming — there’s no stopping that. Regulators want to ensure that the backers of a cryptocurrency are not promoting the asset as a speculative one, but also want to ensure that the investor is not dumping their life savings with zero chance of getting it all back.” (10)

Final thoughts

The last few months have been challenging for crypto. There is no denying that. However, the way in which companies, investors and regulators are reacting to these difficult times is the silver lining story that has the potential to rebuild this space bigger and better in the future.

-Haan Palcu-Chang, Crypto Content Specialist

Sources

(1) “If the crypto crash is another “tulip bubble” that is really good news,” Forbes: https://www.forbes.com/sites/davidbirch/2022/06/19/if-the-crypto-crash-is-another-tulip-bubble-that-is-really-good-news/?sh=4d4fad8951f1

(2) “FTX US Gains 'Option to Acquire' BlockFi for Up to $240M,” Coin Desk: https://www.coindesk.com/business/2022/07/01/blockfi-reaches-deal-with-ftx-us/

(3) “Amid market turmoil, crypto exchange Kraken says it’s filling 500+ roles,” Tech Crunch: https://techcrunch.com/2022/06/15/market-turmoil-crypto-exchange-kraken-hiring/

(4) “Public Bitcoin Miners Are Selling Off BTC Reserves as Crypto Winter Sets In,” Decrypt: https://decrypt.co/103539/public-bitcoin-miners-selling-btc-reserves-crypto-winter

(5) “Circle's USDC on track to topple Tether USDT as the top stablecoin in 2022,” Coin Telegraph: https://cointelegraph.com/news/circle-s-usdc-on-track-to-topple-tether-usdt-as-the-top-stablecoin-in-2022

(6) “What Is Tether? How USDT Works and What Backs Its Value,” Coin Desk: https://www.coindesk.com/learn/2022/06/01/what-is-tether-how-usdt-works-and-what-backs-its-value/

(7) “Nexo Says It’s Nothing Like Celsius and Other Crypto Lenders. Here's What the Data Shows,” Decrypt: https://decrypt.co/104004/nexo-celsius-blockfi-crypto-lenders-what-data-shows

(8) “Proof of reserves,” Ledn: https://ledn.io/proof-of-reserve

(9) “'Bitcoin Senator' Lummis Says Her Crypto Bill Leaves Most SEC Oversight Intact,” Decrypt: https://decrypt.co/104391/bitcoin-senator-lummis-says-her-crypto-bill-leaves-most-sec-oversight-intact

(10) “Why the crypto crash is fueling calls for regulation,” Grid: https://www.grid.news/story/technology/2022/06/27/why-the-crypto-crash-is-fueling-calls-for-regulation/


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