The recent high-profile financial meltdowns of Bitcoin, Celsius, and Terraform Labs, which together wiped out hundreds of billions of market value, helped spark a leak in the cryptocurrency market, pushing its value from $2.9 trillion. dollars last fall to less than $900 billion today. This “crypto crash” has reinforced critics’ perception that digital currency markets – used primarily as an investment vehicle as it is not widely accepted as payment for goods and services – are little more than global casinos operating without rules or accountability. .
Scott Duke Kominers ’09, AM ’10, Ph.D. ’11, is Professor of Business Administration at Harvard Business School and a Harvard-affiliated faculty Department of Economics and the Harvard Center of Mathematical Sciences and Applications. Kominers explained to the Gazette why the crypto market has plunged in recent months and how an upcoming wave of international regulation could affect the market. The interview has been edited for clarity and length.
GAZETTE: What Triggered the Cryptocurrency Slide?
KOMINERS: Over the past six months, we have fallen into a state of global financial uncertainty. Crypto assets are highly volatile, in part because there is so much uncertainty about which crypto technologies are likely to be most useful over the long term – for example, which ones the market can coordinate on for the means of exchange, and many applications are technological in nature and new (or at least unproven). And so there’s a lot of uncertainty and a lot of the value of the return is downstream, just like with technology companies.
Note that there has been a broader pullback for tech companies. Many tech companies make large investments in growth up front and then the profits are long term in the future. In our current macroeconomic climate, it is more difficult for them to find money for these kinds of investments, and therefore this type of business can become more difficult to operate.
Crypto may have this same dynamic. On top of that, it’s more uncertain which technologies will succeed in the long run. And then, on top of that, there’s the speculation attached to new asset classes and the like. And so, there is a lot of uncertainty around crypto; and in times of overall uncertainty in financial markets, people shy away from riskier assets.
At the same time, much of the core technology investment and entrepreneurship in crypto is still happening. We have also seen this with previous crypto cycles. At the end of 2017-2018, there was a significant downturn, and many of today’s top crypto companies came out of it. So I think from an entrepreneurship perspective, there’s still a lot of teams being built, and there’s an opportunity here when things are a little less crazy, when there’s less attention and mostly energy around speculation and trading — it gives an entrepreneur more time to focus and really carefully develop their product without constantly having to face the market.
GAZETTE: In November, the global crypto market cap was $2.9 trillion. Today, it’s $870 billion, according to CoinMarketCap. Bitcoin, the oldest and most established cryptocurrency, lost over 70% of its value during this time. What changed?
KOMINERS: There was still uncertainty. We were just much more in a financial boom and a crypto boom, in particular. Even during this period, the market prices of various cryptocurrencies were going up and down – massive swings – 30% swings in a week, sometimes. I’m advising a group of entrepreneurs and the feeling of many at the time was that it was very difficult to build in that environment because things were moving so quickly, and there was so much attention and pressure from the cycle of boom. When all of that slows down, it eliminates a lot of projects that somehow weren’t sustainable. This means that there has been a loss of value — there have been losses for the contractors; there are losses for investors. And this also affects retail investors.
But at the same time, entrepreneurs who are still in business are doing a lot and creating a lot of value. And remember: not all crypto products are purely financial. For example, many are more consumer-oriented, such as systems for coordinating group decisions or managing event tickets. The long-term view is that there is real fundamental technology value here, and so what really matters to the market is whether we can realize that value through entrepreneurship and supportive regulation. And I think the current environment is one in which we have a lot of potential to do that.
We still don’t know what effective long-term business models and infrastructure solutions will look like. We don’t know if these are the things we have right now, in some variations, or if there will be completely new crypto platforms and products. In the early days of the Internet, many platforms and business models did not survive. What really interests me is to see which crypto projects emerge much stronger from this “bear” market phase.
GAZETTE: The flurry of bad news involving top companies like Bitcoin, Terra and Celsius has renewed calls for regulators to protect consumers from FX traders, scammers and theft. How vulnerable are crypto investors, especially amateur investors at the retail level?
KOMINERS: I really think there is a need for more consumer protection in this space at all levels. There needs to be more transparency and not just at the abstract level, but the technology needs to be made transparent to consumers in a way they can understand. It’s a problem in crypto, and it’s a problem that companies are starting to try to solve. It is very difficult for a consumer to manage their own position in the central crypto market with the current tools. Therefore, if you’re a retail consumer, you often find yourself on one of these intermediary platforms where the lack of transparency means you may not understand what’s going on. As we’ve seen, people can choose to enter these platforms during a boom, and that’s very exciting. But if you don’t understand the risk you are taking, it can be very detrimental as soon as the state of the market changes.
There needs to be a lot more transparency, better messaging and clearer definitions of different asset classes. Everything from taxation – it is still very difficult to understand how to pay taxes on your crypto assets even if you understand precisely what they are – to information that would help people assess the markets they want to be in and the risk that they’ support. Highlight it the same way we provide information on other asset classes and products. There are no unified disclosure standards for crypto platforms; there are no standard disclosure rules or formats. And that’s two layers of non-transparency: you don’t necessarily have a clear idea of what the platforms can do, and on top of that, a consumer may not understand the overall volatility of the crypto market. and therefore it can’t carry out an overall risk assessment.
GAZETTE: This week, a panel of banking regulators and treasury officials from G20 countries said it would propose “robust” new regulations in October in response to the “intrinsic volatility and structural vulnerabilities of cryptocurrencies.” Earlier this month, the US Treasury Department presented President Biden with what he called a “framework” to oversee digital financial assets within government and internationally, while the European Union and the European Parliament have agreed to sweep new crypto rules that include an expected license requirement. to come into force next year. How will this wave of regulation affect the market?
KOMINERS: Some regulations are probably good for the industry because for crypto to be adopted and used by the general public, it needs to be in a market and technology context where the consumer can access it and do so in a valuable way. and at less risk than today. Frameworks, when well-developed and directly addressing the types of issues faced by the market, can make a market more efficient and attractive to everyone. So, some degree of improvement in frame structure and construction is a good thing. The challenge, of course, is that these cryptocurrencies and other crypto-assets are often both financial assets and technology platforms, which means you have to think about two different categories of regulation working in concert.
On the one hand, the authorization and verification of an asset to be able to trade it in a centralized system – this seems like a very good thing from a stability and monitoring point of view. But at the same time, it could significantly limit competition. If it’s hard to introduce new types of tokens, you can block innovation and reduce the possibility of new platforms emerging, which means you don’t necessarily get the most efficient technology. These are difficult compromises. One of the big challenges we have faced in crypto regulation so far, and will face in the future, is balancing the need to achieve platform stability and the need to maintain platform competition and interoperability.
Editor’s note: Kominers is a research partner at a16z crypto and advises a number of crypto trading companies and projects. It holds crypto assets, specifically a variety of non-fungible tokens.