From the rapid growth of crypto to the dramatic volatility of the asset class, governments around the world are responding through regulatory and legislative actions. Some jurisdictions have announced clear and accommodating frameworks in the hope to create the crypto hubs […]
“To build may have to be the slow and laborious task of years. To destroy can be the thoughtless act of a single day.”
Crypto’s Real MVP: The Fed
The Mississippi Bubble that burst in 1720 marked the end of a wildly ambitious attempt to remake the antiquated financial system of France’s Ancien Régime.
Its failure set back the cause of financial progress in France for nearly a century: Distrust of banking was so high in the aftermath, it was 80 years before the government dared to issue paper money again.
In England, the bursting of the South Sea Bubble resulted in a government ban of that bedrock of modern finance: the joint-stock, limited liability company.
And, following the 1929 US stock market crash, plain vanilla mutual funds were considered toxic for a generation.
In each case, the backlash against financial innovation was so fierce because the collateral damage spread far outside of the traditional investor class.
The Mississippi Bubble sparked an inflationary spiral that affected every French citizen; crashing South Sea shares had replaced dependable government debt, including pensions owed to retirees and veterans; Wall Street’s 1929 crash bankrupted the first generation of mainstream stock market investors.
The scale of popular and government response to those market failures was a function of the breadth of those affected — the wider the effect, the more punitive the response.
Wall Street’s 1929 crash was not much worse than its 1893 crash, for example. But while 1929 led to the hyper-active interventions of the FDR era, there were no real consequences in 1893.
That’s because the stock market was still a niche pursuit in 1893 — much like the crypto market in 2022.
For that reason, I think the crash of 2022 may have been the best thing that could have happened to crypto — because it happened before the market got big enough to cause any significant damage.
The real, possibly existential danger to crypto was the bubble that was inflating at the start of the year.
And the real MVP is the Fed — for popping it.
Saving Us From Ourselves
How big might Terra Luna have gotten if the crypto bubble was still now inflating?
Losing $40 billion of market cap was bad, but things could have been exponentially worse. Not just because more money would have been lost, but because of who was going to lose it: Anchor’s 20% yields on UST was rapidly drawing in first-time retail investors as unwitting creditors to Terra Luna.
CeFi neo-banks like Celsisus were similarly attracting retail depositors with their user-friendly, no-seed-phrase-necessary Web2 offerings.
It seemed like a good thing at the time: They’re winning converts to crypto!
In retrospect, it was putting the whole industry at risk.
If retail losses were more widespread, the regulatory response may have been crippling: Instead of a thoughtful Lummis-Gilibrand bill, we’d have had a blanket ban on crypto.
With sufficiently widespread losses, everything would have been declared a security and the on- and off-ramps to TradFi would have been summarily shut down.
Worse still, the word “crypto” would have become as anathema as the word “bank” became in 18th century France (with potentially 80 years of crypto winter to follow).
The Fed saved us from that fate by popping the bubble when it did.
That’s allowed builders to get back to building more useful things: Coder resources have been reallocated from semi-fraudulent ponzinomic schemes to financial-rails DeFi building blocks.
Traditional angel and VC investors can now commit new money at seed-round valuations that give them some small prospect of turning a profit.
And fully algorithmic stablecoins have (hopefully) been consigned to the dustbins of history.
DeFi needs a few more years out of the limelight, however: Regulation will be more sensible if it develops while the stakes remain low.
Ideally, DeFi will have enough time to build things that are self-evidently useful — and useful to people who don’t care one way or another about DeFi.
And crypto will have time to win converts in ESG, gaming, TradFi, the art world, law enforcement and government.
More usefulness and better PR will result in friendlier regulation.
And if you're a true believer in crypto as a democratizing force in finance — or even if you just think bitcoin is going to the moon — you can be happy the Fed has given everyone more time to get on board.
We of course don’t want to be forever dependent on a central bank to curb our worst excesses. But in 2022, it was probably what we needed.
Celsius needed to go away; Everyone needed to stop lending to 3AC.
And we all needed a lesson in risk management.
Much like FDR saved capitalism from the capitalists, the Fed has saved crypto from the cryptopians.
Don’t miss Circle’s first annual crypto ecosystem conference, taking place September 27th-30th in San Francisco
Featuring wide-ranging demos and developer workshops, plus high-powered guest speakers including Ethereum's Vitalik Buterin, Aave’s Stani Kulechov, Mary-Catherine Lader of Uniswap Labs, Anatoly Yakovenko of Solana, and dozens more.