Speaker 1: This is Bloomberg Crypto, a daily Bloomberg I Heart podcast,
Speaker 1: and I'm Stacy Marie Ishmael, Managing editor of Crypto for
Speaker 1: Bloomberg News. It's Monday, November twenty one. In a crisis,
Speaker 1: there are always losers, and in the aftermath of a crisis,
Speaker 1: some people will emerge in a stronger position than they
Speaker 1: were before. Who were some of the players who might
Speaker 1: emerge stronger from this crypto crisis and how much of
Speaker 1: that is even linked to the increasingly tense conversation around
Speaker 1: centralized dentities versus decentralized protocols. For more, I'm joined by
Speaker 1: Bloomberg reporter Saddartha Shukla. It's difficult for people to understand, Okay,
Speaker 1: how is a bad actor going to get punished by
Speaker 1: somebody who's not there to punish them? Said, it's been
Speaker 1: a minute. Welcome back to the podcast. Hey, thanks for
Speaker 1: having me. So. The funny thing is we're both recording
Speaker 1: this episode while we're in Singapore together. We are in
Speaker 1: the Singapore office because well why not, but also because
Speaker 1: you know you, me and the team have spent the
Speaker 1: past couple of weeks trying to figure out what is
Speaker 1: the long term of crypto in the aftermath of the
Speaker 1: bankruptcy filings of the ft X Empire, owned and co
Speaker 1: founded by Sam bankmun Freed. When we were talking about
Speaker 1: this in an interesting point about the debate between centralization
Speaker 1: and decentralization, I'd love for you to share with our
Speaker 1: audience a little bit of insight into the parts of
Speaker 1: the market that might actually benefit from some of the
Speaker 1: chaos that's happening right now. Before we get into the
Speaker 1: aftermath of fd X and who stands to gain and lose,
Speaker 1: I would like to give some context with regards to
Speaker 1: you know, what crypto currencies were all about and how
Speaker 1: the entire industry has evolved in the last decade. So
Speaker 1: it started with bitcoin being this decentralized um currency which
Speaker 1: anybody can use right um and the idea was to
Speaker 1: have no trusted third parties in this payment network. But
Speaker 1: the industry evolved in a way where if you wanted
Speaker 1: to get your hands on some cryptocurrencies, you either had
Speaker 1: to be take savvy enough to set up your own
Speaker 1: mining rig and then mind some bitcoins, or what you
Speaker 1: could have done you could have gone to a exchange
Speaker 1: and you could have just exchanged some of your freate
Speaker 1: currencies for some bitcoins, right, And that's how the exchange
Speaker 1: model evolved in the space, and the reliance on again
Speaker 1: trusted third parties, you know, gained prominence over the last
Speaker 1: one decade. So for a space that wanted nothing to
Speaker 1: do with trusted third parties, um, it started relying more
Speaker 1: and more on them because on ramping onto the crypto
Speaker 1: economy was not an easy fate, right, And that's how
Speaker 1: exchanges like f t X, finance for zerx in India,
Speaker 1: all of them grew into prominence, right. But one of
Speaker 1: the fundamental drawbacks of the entire business model was that
Speaker 1: these were centralized traditional businesses built on top of a
Speaker 1: new asset class, which is crypto, but they were heavily
Speaker 1: unregulated and continued to operate in a very opaid manner.
Speaker 1: And that's what we saw happening with f t X
Speaker 1: as well. I want to ask you a question about
Speaker 1: that before we go in. You know too much into
Speaker 1: the details, which is when you say they're operating, you know,
Speaker 1: these entities are operating in a way that's more opaque,
Speaker 1: that sounds like the traditional finance system, right, which I
Speaker 1: think is the point that you were making at the beginning.
Speaker 1: The idea is that inability to know the positions or
Speaker 1: the reliability of what somebody is saying about their positions
Speaker 1: was one of the things that made the financial crisis
Speaker 1: such a crisis. But I could say that the block
Speaker 1: chain is very transparent, and even so it can be
Speaker 1: hard to understand, right, Like that was the whole thing
Speaker 1: that people were saying about SBS Financials. They were like,
Speaker 1: we looked at the numbers that he was showing us,
Speaker 1: and we we were at all of the presentations and
Speaker 1: everything looks really good, and you know, the transactions mapped
Speaker 1: to the wallets that said they were the wallets that
Speaker 1: they had. So it seems to me like transparency alone
Speaker 1: isn't the solution to whatever this problem is. I think
Speaker 1: we need to like differentiate between centralized businesses like f
Speaker 1: t X and just plane solutions which are built on
Speaker 1: block chains like bitcoin eitherium. So if I had to, like,
Speaker 1: you know, explain in a sentence, I would say that
Speaker 1: businesses like f t X they came along with all
Speaker 1: the risks that were already there with traditional finance, and
Speaker 1: they also carried along all the risks that were there
Speaker 1: with decentralized applications. And cryptocurrencies, right, so you know, we
Speaker 1: they kind of carried the worst of both the worlds
Speaker 1: as well, right because they, uh you know, worked in
Speaker 1: such an opaque man of people had no idea with
Speaker 1: regards to how solvent and exchanges. Like, for example, if
Speaker 1: I transact on a decentralized lending protocol right now, over there,
Speaker 1: everything is on the blockchain with regards to the health
Speaker 1: of that decentralized application and of that lending platform. That
Speaker 1: was not the case with f t X. So what
Speaker 1: has happened since the collapse of f t X is
Speaker 1: that we've seen this renewed um interest among users to
Speaker 1: first of all, on their own tokens. So there has
Speaker 1: been this a year old cry um in the crypto
Speaker 1: space about not your keys, not your tokens, which basically
Speaker 1: means that if you don't hold your crypto assets in
Speaker 1: a private key which is owned by you, then eventually
Speaker 1: it doesn't belong to you. So what we have seen
Speaker 1: since the last week is that people have started moving
Speaker 1: their funds out of these trusted third parties exchanges to
Speaker 1: solutions where they hold access to their own keys. So
Speaker 1: gradually we are seeing that people are moving away from
Speaker 1: centralized parties like f t X two more decentralized platforms
Speaker 1: where at least the balance sheet, if you have to
Speaker 1: use the term, is visible for people to scrutinize. We
Speaker 1: can say things like just move to a hardware wallets,
Speaker 1: but the reality is, for like I don't know ninety
Speaker 1: or more percent of people, that is the equivalence of
Speaker 1: saying build your own iPhone, or host your email on
Speaker 1: your own servers, or self host your website. It is.
Speaker 1: It is a non trivial technical undertaking. Two engage in
Speaker 1: like the really actually decentralized business of crypto, which is
Speaker 1: one of the reasons that centralized densities like at X
Speaker 1: were so popular. Like, how are folks trying to overcome that?
Speaker 1: I agree with you on that I'm not going to
Speaker 1: completely centralized exchanges in this scenario because they've played a
Speaker 1: very important rule with regards to making it very easy
Speaker 1: for users to on TRAM and come onto the crypto economy.
Speaker 1: So I believe that going forward, centralized exchanges still have
Speaker 1: a very important role to play for this industry to grow.
Speaker 1: What we need right now is clear regulation because while
Speaker 1: it's a difficult task to regulate cryptocurrencies, all the businesses
Speaker 1: that have been built on top of these uh software,
Speaker 1: they can still be regulated because if you look at
Speaker 1: the business model of any exchange for that matter, like
Speaker 1: fd X, these are traditional age old business models for
Speaker 1: which we do have a decent amount of guidelines and
Speaker 1: regulations available. I think it's just that how do we
Speaker 1: gradually put that onto these businesses which are built on
Speaker 1: crypto asis and hence bring about more transparency, better disclosures,
Speaker 1: and better audits as well. That's going to be the
Speaker 1: key going forward, because I would say that self regulation
Speaker 1: in the space has failed over the last decade, and
Speaker 1: it's time that regulators did step in and brought about
Speaker 1: um more clear guidelines and regulations, especially around disclosures and
Speaker 1: how these exchanges, who are essentially custodians, how they handle
Speaker 1: the funds of their users. Now, this is very much
Speaker 1: the line obviously that regulators have. They're like, hey, we're regulators,
Speaker 1: we'd love to regulate. It is increasingly in you know,
Speaker 1: countries like India, a line that is not necessarily being
Speaker 1: achieved through regulation, for example, but through things like taxation.
Speaker 1: It is, but it's not necessarily the line that all
Speaker 1: of crypto is wholeheartedly embracing, because for every CEO who's
Speaker 1: going out there saying we get it, regulate us, there
Speaker 1: are entire telegram chats of people who are like, get
Speaker 1: your hands off my crypto. How dare you try to
Speaker 1: impose your Wall Street discipline on us where it's totally
Speaker 1: different asset class? Why are you trying to use things
Speaker 1: like you know, the how we test, which is what
Speaker 1: the U s SEC uses in part to assess whether
Speaker 1: something is the security on things like crypto. Based on
Speaker 1: your reporting so far and the folks that you're talking to,
Speaker 1: do you see these factions coming to any kind of
Speaker 1: middle ground. The crypto community tends to be very polarized
Speaker 1: and also that's an inderstation. And actually, but since the
Speaker 1: collapse of Luna earlier this year, USD and it's sister
Speaker 1: token Luna lost their peg to the dollar. In the
Speaker 1: last few weeks, they had a spectacular meltdown, sending prices
Speaker 1: to near zero and their market value doing followed by
Speaker 1: the collapse of many other centralized lenders in the space,
Speaker 1: we have seen that users themselves have started demanding for
Speaker 1: more and more transparency and disclosures from all these players. Right, um,
Speaker 1: so that is an organic movement that I would say
Speaker 1: that is coming from within the community, right, But users
Speaker 1: can only force a centralized business to do so much.
Speaker 1: At the end of the day, the regulators have to
Speaker 1: come and finally decide on, Okay, this is what we
Speaker 1: require from you in order to make sure that you're
Speaker 1: working in a compliant manner. Right. So that's where I
Speaker 1: think the difference has to be because in the last
Speaker 1: couple of months, we had have seen some regulatory action
Speaker 1: in this space, but the big ones have been around
Speaker 1: let's say, the sanctioning of tornado Cash, the virtual currency mixer.
Speaker 1: Tornado Cash was sanctioned by the U. S. Treasury Department
Speaker 1: after it was used to launder more than seven billion
Speaker 1: dollars worth of digital currency since its creation. The crypto
Speaker 1: community is disgrunted that regulators are acting more and more
Speaker 1: on just defining the underlying tokens or censoring the underlying products,
Speaker 1: rather than looking at these businesses which we're selling um
Speaker 1: investment products without you know, proper license, without proper disclosures,
Speaker 1: do you know people across the world. So I think
Speaker 1: that's where the divide is up next. More from Bloomberg
Speaker 1: REPORTA said Chukla on the sometimes factionalism of the crypto industry.
Speaker 1: Crypto was designed to not have to rely on trusted
Speaker 1: third parties, and for anybody, I'm just gonna shamelessly plug
Speaker 1: my colleague Matt Levine and the single story issue of
Speaker 1: Bloomberg Business Week that he wrote called The Crypto Story,
Speaker 1: which is also available online and you can listen to
Speaker 1: it on this very podcast. We air special audio episodes
Speaker 1: on weekend, so please do check that out. The point
Speaker 1: that I made so brilliantly is that people fundamentally want
Speaker 1: to trust each other, even if the system that they're
Speaker 1: designing is assumed to not require it. Like just we
Speaker 1: we have this tendency to move towards situations in which
Speaker 1: you can trust other people, and transparency doesn't necessarily solve
Speaker 1: for bad faith. And I think a lot of the
Speaker 1: response to Sam bankmun freed, and a lot of the
Speaker 1: response to the FTX bankruptcy filing has been people feeling
Speaker 1: betrayed by this guy who would get up on stage,
Speaker 1: including at conferences put on by Bloomberg and say things like,
Speaker 1: you know, we were trying to set a high standard
Speaker 1: for the kinds of companies that we were would say
Speaker 1: yes to to helping bail out or essentially making statements
Speaker 1: that presented them as the smartest guys in the room.
Speaker 1: A lot of the time. I'm not sure regulators are
Speaker 1: necessarily equipped to solve bad faith of the time. But
Speaker 1: I want you to just just tribe what's in that
Speaker 1: ideal world of crypto self policing and self regulating that
Speaker 1: so many people in the space think is possible. How
Speaker 1: do you deal with actors who are accused of operating
Speaker 1: in bad faith? What do you actually do? Two ways
Speaker 1: one can handle this. One is the traditional way of
Speaker 1: having regulations and making sure that they're enforced right. The
Speaker 1: other way, which some of the decentralized protocols already has
Speaker 1: in them, is have mechanisms built in which would penalize
Speaker 1: bad actors. Right. But the thing is the second way
Speaker 1: of doing is it's kind of complex, it is convoluted.
Speaker 1: It's difficult for people to understand, Okay, how is a
Speaker 1: bad actor going to get punished by somebody who's not
Speaker 1: there to punish them? Right? So I think there's a
Speaker 1: long road ahead for the sector to recover from here.
Speaker 1: The crisis of confidence is big this time around, and
Speaker 1: in order to gain back that confidence in order to
Speaker 1: establish some legitimacy. The first thing that all the major
Speaker 1: players in the space, the thought leaders, the businesses, that
Speaker 1: they have to do is to make sure that they
Speaker 1: act in a compliant manner without even having regulations. If
Speaker 1: they can act in a compliant manner, disclosed more than
Speaker 1: they should be disclosing. That is one way to bring
Speaker 1: about some confidence because still now the practice has been
Speaker 1: that we will do the bare minimum. The other thing
Speaker 1: which a lot of the purists should do is that
Speaker 1: they should communicate what their project is, what their product is,
Speaker 1: to the layman in a simpler manner, because let's be
Speaker 1: very honest, the UI, the user interface and the user
Speaker 1: experience for anybody who wants to interact in this space
Speaker 1: without a centralized party like ft X, if it's very cumbersome,
Speaker 1: you need to be really smart in order to like
Speaker 1: even make or just or just really tech savvy, because
Speaker 1: there are a lot of people were not tech savvy
Speaker 1: and vice versa. So exactly so those roadblocks need to
Speaker 1: be removed. I think people should work on improving the
Speaker 1: user experience and the user interface move as you know,
Speaker 1: things progress, because um, it doesn't matter how decent lize
Speaker 1: or secure. The underlying blockchain is all the product that's
Speaker 1: built on top of it. If people are not able
Speaker 1: to use it or understand it, they're going to fall
Speaker 1: back to platforms which they feel comfortable using, right and
Speaker 1: that information asymmetry always leaves a window for bad actors
Speaker 1: to exploit people who may be a bit cullible or
Speaker 1: maybe just be a bit ignorant about how the space works.
Speaker 1: So I think that's how the place in the space
Speaker 1: should move forward. Thank you said. You can find more
Speaker 1: of Sid's recording on the Bloomberg terminal and on Bloomberg
Speaker 1: dot com. This is Bloomberg Crypto, a daily podcast from
Speaker 1: Bloomberg and I Heart Radio. For more shows from I
Speaker 1: Heart Radio, visit the I Heart Radio app, Apple Podcasts,
Speaker 1: or wherever you get your podcasts. Send us your comments, questions,
Speaker 1: or suggestions for the show to Crypto at Bloomberg dot net.
Speaker 1: The supervising producer of Bloomberg Crypto is Vicky very Galina.
Speaker 1: Our senior producer is Janet Babin. Our producers are Mohammed
Speaker 1: Faruke and Sharon Barriro. Our associate producers are Ty Butler
Speaker 1: and Moses on The Desta wonder At is our engineer.
Speaker 1: Original music by Leo Sidron. I'm Stacy Maria Shmaal. We'll
Speaker 1: be back tomorrow.