Billy Preston unknowingly described the theory of cryptocurrencies in his 1974 song “Nothing from Nothing.” Like many of the financial fades in history, crypto dominated for a while. But the recent collision between FTX and the rules of financial gravity have forged a new crypto reality with new rules. Like Gaul in the second century B.C., the kingdom of crypto is now divided into three parts.
The first group consists of crypto diehards — the cryptonites. They bet on crypto as being the road to fame and fortune. They will soldier on, hoping that crypto finds some intrinsic market value and consumer confidence rebounds. The astute members of this group point out that every financial revolution has its ups and downs, and like a forest fire, this crypto winter will weed out the feeble and inept and make the digital forest stronger in the long run. They admit that some regulation of the crypto market was always inevitable.
The more ethereal members of this group, the crypto illuminati, were hypnotized by the cultural hype and financial independence that cryptocurrencies offer. They will not easily shake that off. Digital currency is their financial fountain of youth, offering them an alternative to tired and stale forms of money and investment strategies. They will fight financial rationality until it flattens them, dismissing FTX as the failure of a rogue operator instead of a canary in the digital coal mine. They believe that the FTX fiasco simply requires advocates to ratchet up crypto happy talk.
The second group are hardened cryptodeniers. They never understood or cared about cryptocurrencies, and their lives are unaffected by FTX, Sam Bankman-Fried and however anyone wishes to define the metaverse. They are comfortable with cash, credit cards, online banking and an occasional wire transfer, and they don’t understand why the speed and efficiencies that decentralized financial services offer make any difference. They are accustomed to the financial float in their lives.
Somewhere between these two groups are the Monday morning cryptobacks, those who understand the intricacies and economic peaks and valleys of cryptocurrencies and the business of financial services. Many of them are now busy reminding us in tones that range from anger to hilarity that they told us so. Like the 1966 film “The King of Hearts,” they saw crypto mania as the patients running the asylum. And perhaps they were correct.
One description of crypto I have come across suggests that anyone foolish enough to pay real money for the privilege of moving nothing around inside nowhere to accomplish no purpose deserves to lose the real money. The author Dave Barry has similarly remarked with his tongue firmly planted in his check that stunned FTX investors discovered that perhaps it was not a great idea to trust their money to a company with a meaningless name and an incomprehensible business model headed by “the fourth runner-up in a John Belushi look-alike contest.”
An article by Martin C.W. Walker characterizes crypto firms as “buying and selling nothing for so long, mostly in return for different lumps of nothing, that they many have genuinely come to believe that taking nothing, giving it a name – and sometimes a story – combined with a little bit of trading back and forth with friends, gives that nothing enormous value.” Perhaps it was natural, he speculates, that some crypto players would come to believe that it was permissible to manipulate the price of nothing and take it to use for their own purposes.
The future of cryptocurrencies likely lies somewhere between the worlds that cryptonites, cryptodeniers and cryptobacks occupy. There will be a market for them — after all, there is a market for lottery tickets. But that market will be seen through a more realistic prism grounded in a financial reality that balances real risks with rational rewards. And it will be subject to shiny new rules and regulations that are sure to come as hundreds of federal, state and international legislatures and regulators pounce on the crisis and bolt the barn door as the horse gallops away.
Most importantly, classic due diligence will once again be resurrected, meaning that attracting Wall Street and Silicon Valley money will become significantly more complicated — just like in the real world. And if past is prologue to the future, Congress, the states and foreign jurisdictions will knee-jerk themselves into unwieldly, cumbersome pieces of crypto legislation, only a fraction of which will be necessary or useful. But everyone will feel good about having done so much something about so little nothing.
There will be survivors of this crypto winter. They will be the companies that knew that the business of selling nothing would eventually blow up into something. Those that built traditional risk management controls and created audited financial statements may make it if they are prepared to adapt to stringent new laws and regulations. They will have to look, feel and dress like serious companies. The rest will likely go the way of Gaul.
Thomas P. Vartanian is the executive director of the Financial Technology & Cybersecurity Center and a former regulator and lawyer in the financial services industry. His latest book is “The Unhackable Internet: How Rebuilding Cyberspace Can Create Real Security and Prevent Financial Collapse.”