Hello and welcome to the FT Cryptofinance newsletter. This week we’re looking back at our annual May conference, held in London.
A recurring theme in the digital assets market is the mantra that the future of crypto is in decentralisation. Pursuing it sometimes seems like chasing the pot of gold at the end of the rainbow.
Like crypto itself, decentralisation leans heavily on the language and ideas from the computer industry about the most efficient way to organise networks, but it is applied to financial services.
Ethereum, the biggest blockchain for decentralised finance, was not conceived as a money but new foundation for trust in financial markets, said Joseph Lubin, one of its co-founders said.
“Ethereum represents profound disintermediation of financial systems as it matures.”
It aims to do away with the services of a centralised intermediary, such as a bank or an exchange, to carry out trusted tasks such as decision-making and record-keeping, and hand the jobs over to a broader network of actors, running on open source networks that are not controlled by any entity.
That should mean that those actors do not have to put as much trust in each other, because their more limited power means there are fewer incentives to try to corrupt the network.
The collapse of exchanges like FTX and Mt Gox has shown the pitfalls of concentrating so much crypto trading and custody activity in one entity, and these serve as ironic examples of the sort of hazards and frauds that crypto seeks to remove.
But if one side potentially gains power, someone else loses it. This calculation was the basis for the Securities and Exchange Commission’s warning last week that Lubin’s blockchain software group Consensys may be the next to face an enforcement action.
The regulator thinks that the company’s Metamask wallet for storing crypto could come under its definition of a broker-dealer, a label that Lubin called “preposterous”.
Lubin, who co-founded the Ethereum blockchain, said the US government liked to assert its authority around the world using banks as its intermediaries.
“Our technology is one which will enable us to build better systems that don’t rely on intermediaries, that enable people to have direct access to, and control over, their own assets, [and] enable people and communities to have direct access to financial innovation and other forms of innovation.
“The SEC is concerned that so much attention and capital will flow to our ecosystem . . . The SEC probably doesn’t want to see a wave of innovation that will really transform the landscape.”
But that broad-brush clash of approaches only goes so far. Human systems can be gamed; fraud, money laundering and criminal payments are endemic to all financial history.
Candace Kelly, chief legal officer for the Stellar Development Foundation, pointed out that a decentralised world consisted of many layers, with many actors holding different levels of responsibilities. The SDF promotes Stellar, a blockchain network for payments and tokenised assets.
Some actors were responsible for ensuring the underlying protocol works, others oversaw the wallets that store assets, and others issue financial assets on a blockchain, she noted.
“It’s very similar to the internet. Nobody owns or controls the internet and it’s OK,” she said. “One of the things people are missing is the power of the decentralised, underlying permissionless networks and the value that that brings . . . in terms of safety, security, transparency and that it’s open and public and so it’s constantly being ‘tended to’, as opposed to a private permissioned chain in which you still have a centralised actor.”
But the further into the practicalities one delves, the higher the obstacles to achieving decentralisation appear. As Yuval Rooz, chief executive of tokenisation platform Digital Asset, noted: “I don’t think regulators would be comfortable if JPMorgan put their website on the internet and everybody on the internet could access their services and see all the account information of their clients.”
He added: “The internet is a good analogy because it has technical standards that allow information to interoperate with one another, assuming you want it to interoperate.
“The chain of tomorrow will have to have public infrastructure that everyone can access but you have to give the application creators the sovereignty to comply with existing regulation and to have control over what they want to offer to the world.”
The exchange of views, and other conversations, pointed to a broader consensus that is emerging: decentralisation is more of a sliding scale than an end state. Some things may end up more centralised than others.
But with this approach, the market structure bears more than a passing resemblance to global over-the-counter financial markets, many of which specialise in trading bonds, swaps or hard-to-shift or bespoke assets.
They don’t run through exchanges; deals are instead privately negotiated but they still meet common standards on regulation. Moreover, they have been operating for decades without using distributed ledgers or blockchains.
It’s often said that the crypto market is relearning all the lessons that traditional finance has had to learn. If there is one lesson here, it is that it’s not possible to apply the decentralised label to everything.
It’s much more problematic to decentralise governance than it is to decentralise technology. To build the most efficient system that works for everyone, trade-offs are needed. Putting something on a blockchain doesn’t make it decentralised; equally, as the existence of the internet shows, services can be decentralised without a blockchain.
What’s your take? Email me at philip.stafford@ft.com
Weekly highlights
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Some better news for account holders at bankrupt cryptocurrency exchange FTX. Most of them are in line to receive cash worth more than 100 per cent of their official claims, the administrators said on Tuesday. The likely total was pretty much as my colleague Ellesheva Kissin revealed in late March. The extra money comes mainly from selling venture capital investments in AI and cryptocurrencies that have risen considerably in value since FTX went under in November 2022.
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Consensys isn’t the only company receiving unwanted post from the SEC. Robinhood said its crypto unit had been sent a so-called Wells notice, which warns a company that it faces legal action and potential civil litigation, monetary penalties and limits on business activities. Robinhood said the regulator was assessing whether certain assets on its platform were securities. “We look forward to engaging with the SEC to make clear just how weak any case against Robinhood Crypto would be on both the facts and the law,” it said.
Soundbite of the week: Existential threat
Joseph Lubin called the SEC’s pursuit of Consensys’s MetaMask wallet “preposterous”. The Consensys boss had laid out why it mattered to him.
“If we have to register our wallet as a broker-dealer, then virtually every application on Ethereum that does similar things with tokens will have to register themselves as a broker-dealer. And so an entire tech industry would be profoundly killed in the United States.”
Data mining: Fair value
Coinbase Global reported stronger first-quarter numbers, with turnover up from $773mn to $1.6bn year on year. One quirk though: net income soared to $1.2bn from a loss of $79mn a year ago. Most of the gains were driven by a new accounting standard brought in late last year, which requires companies to measure crypto assets at fair value each reporting period — with the changes in fair value recognised in net income, the FASB decreed. Result: a $650mn upswing for Coinbase’s net income. Nice! Still, its shares haven’t performed badly this year, although not as well as putting your money in bitcoin or ether.
Cryptofinance is edited by Laurence Fletcher. To view previous editions of the newsletter click here. Your comments are welcome.
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