WEBVTT - What Does FTX’s Fall Mean for the Future Of Crypto? 0:00:02.800 --> 0:00:05.760 This is Bloomberg Crypto, a daily Bloomberg I Heart podcast, 0:00:05.960 --> 0:00:08.880 and I'm Stacy Marie Ishmael, Managing editor of Crypto for 0:00:08.880 --> 0:00:25.440 Bloomberg News. It's Monday, November twenty one. In a crisis, 0:00:25.680 --> 0:00:28.920 there are always losers, and in the aftermath of a crisis, 0:00:29.560 --> 0:00:32.040 some people will emerge in a stronger position than they 0:00:32.040 --> 0:00:34.839 were before. Who were some of the players who might 0:00:34.880 --> 0:00:38.720 emerge stronger from this crypto crisis and how much of 0:00:38.760 --> 0:00:42.680 that is even linked to the increasingly tense conversation around 0:00:43.080 --> 0:00:48.879 centralized dentities versus decentralized protocols. For more, I'm joined by 0:00:48.880 --> 0:00:53.400 Bloomberg reporter Saddartha Shukla. It's difficult for people to understand, Okay, 0:00:53.400 --> 0:00:56.840 how is a bad actor going to get punished by 0:00:56.880 --> 0:01:06.600 somebody who's not there to punish them? Said, it's been 0:01:06.640 --> 0:01:09.480 a minute. Welcome back to the podcast. Hey, thanks for 0:01:09.520 --> 0:01:11.760 having me. So. The funny thing is we're both recording 0:01:11.760 --> 0:01:15.600 this episode while we're in Singapore together. We are in 0:01:15.680 --> 0:01:20.560 the Singapore office because well why not, but also because 0:01:21.000 --> 0:01:24.039 you know you, me and the team have spent the 0:01:24.040 --> 0:01:27.680 past couple of weeks trying to figure out what is 0:01:27.760 --> 0:01:31.319 the long term of crypto in the aftermath of the 0:01:31.319 --> 0:01:36.039 bankruptcy filings of the ft X Empire, owned and co 0:01:36.160 --> 0:01:39.880 founded by Sam bankmun Freed. When we were talking about 0:01:39.920 --> 0:01:44.840 this in an interesting point about the debate between centralization 0:01:44.880 --> 0:01:47.840 and decentralization, I'd love for you to share with our 0:01:47.880 --> 0:01:50.280 audience a little bit of insight into the parts of 0:01:50.320 --> 0:01:53.440 the market that might actually benefit from some of the 0:01:53.520 --> 0:01:58.160 chaos that's happening right now. Before we get into the 0:01:58.240 --> 0:02:01.600 aftermath of fd X and who stands to gain and lose, 0:02:02.360 --> 0:02:04.720 I would like to give some context with regards to 0:02:05.080 --> 0:02:09.079 you know, what crypto currencies were all about and how 0:02:09.520 --> 0:02:13.040 the entire industry has evolved in the last decade. So 0:02:13.919 --> 0:02:18.920 it started with bitcoin being this decentralized um currency which 0:02:18.960 --> 0:02:23.640 anybody can use right um and the idea was to 0:02:23.800 --> 0:02:28.000 have no trusted third parties in this payment network. But 0:02:28.360 --> 0:02:30.920 the industry evolved in a way where if you wanted 0:02:30.960 --> 0:02:35.040 to get your hands on some cryptocurrencies, you either had 0:02:35.080 --> 0:02:37.600 to be take savvy enough to set up your own 0:02:37.639 --> 0:02:41.280 mining rig and then mind some bitcoins, or what you 0:02:41.280 --> 0:02:44.160 could have done you could have gone to a exchange 0:02:44.880 --> 0:02:47.560 and you could have just exchanged some of your freate 0:02:47.600 --> 0:02:51.640 currencies for some bitcoins, right, And that's how the exchange 0:02:51.720 --> 0:02:55.960 model evolved in the space, and the reliance on again 0:02:56.360 --> 0:02:59.920 trusted third parties, you know, gained prominence over the last 0:03:00.200 --> 0:03:04.120 one decade. So for a space that wanted nothing to 0:03:04.160 --> 0:03:09.119 do with trusted third parties, um, it started relying more 0:03:09.160 --> 0:03:13.520 and more on them because on ramping onto the crypto 0:03:13.520 --> 0:03:17.840 economy was not an easy fate, right, And that's how 0:03:18.080 --> 0:03:23.320 exchanges like f t X, finance for zerx in India, 0:03:23.680 --> 0:03:27.080 all of them grew into prominence, right. But one of 0:03:27.080 --> 0:03:31.680 the fundamental drawbacks of the entire business model was that 0:03:32.440 --> 0:03:38.040 these were centralized traditional businesses built on top of a 0:03:38.080 --> 0:03:41.880 new asset class, which is crypto, but they were heavily 0:03:42.280 --> 0:03:46.080 unregulated and continued to operate in a very opaid manner. 0:03:46.280 --> 0:03:49.240 And that's what we saw happening with f t X 0:03:49.320 --> 0:03:55.080 as well. I want to ask you a question about 0:03:55.080 --> 0:03:57.000 that before we go in. You know too much into 0:03:57.040 --> 0:04:00.960 the details, which is when you say they're operating, you know, 0:04:01.000 --> 0:04:03.160 these entities are operating in a way that's more opaque, 0:04:03.400 --> 0:04:07.560 that sounds like the traditional finance system, right, which I 0:04:07.560 --> 0:04:09.280 think is the point that you were making at the beginning. 0:04:09.880 --> 0:04:14.240 The idea is that inability to know the positions or 0:04:14.240 --> 0:04:16.919 the reliability of what somebody is saying about their positions 0:04:17.000 --> 0:04:19.760 was one of the things that made the financial crisis 0:04:19.800 --> 0:04:24.200 such a crisis. But I could say that the block 0:04:24.279 --> 0:04:27.520 chain is very transparent, and even so it can be 0:04:27.560 --> 0:04:30.320 hard to understand, right, Like that was the whole thing 0:04:30.440 --> 0:04:33.560 that people were saying about SBS Financials. They were like, 0:04:33.600 --> 0:04:35.560 we looked at the numbers that he was showing us, 0:04:35.560 --> 0:04:37.880 and we we were at all of the presentations and 0:04:37.920 --> 0:04:40.960 everything looks really good, and you know, the transactions mapped 0:04:41.000 --> 0:04:42.719 to the wallets that said they were the wallets that 0:04:42.760 --> 0:04:45.919 they had. So it seems to me like transparency alone 0:04:46.240 --> 0:04:49.280 isn't the solution to whatever this problem is. I think 0:04:49.320 --> 0:04:53.080 we need to like differentiate between centralized businesses like f 0:04:53.240 --> 0:04:57.760 t X and just plane solutions which are built on 0:04:58.360 --> 0:05:01.680 block chains like bitcoin eitherium. So if I had to, like, 0:05:01.720 --> 0:05:03.920 you know, explain in a sentence, I would say that 0:05:04.360 --> 0:05:07.360 businesses like f t X they came along with all 0:05:07.400 --> 0:05:10.800 the risks that were already there with traditional finance, and 0:05:10.839 --> 0:05:14.039 they also carried along all the risks that were there 0:05:14.080 --> 0:05:18.080 with decentralized applications. And cryptocurrencies, right, so you know, we 0:05:18.320 --> 0:05:21.360 they kind of carried the worst of both the worlds 0:05:21.360 --> 0:05:25.760 as well, right because they, uh you know, worked in 0:05:25.839 --> 0:05:28.240 such an opaque man of people had no idea with 0:05:28.320 --> 0:05:32.080 regards to how solvent and exchanges. Like, for example, if 0:05:32.600 --> 0:05:37.880 I transact on a decentralized lending protocol right now, over there, 0:05:37.960 --> 0:05:41.680 everything is on the blockchain with regards to the health 0:05:41.800 --> 0:05:45.800 of that decentralized application and of that lending platform. That 0:05:45.920 --> 0:05:48.760 was not the case with f t X. So what 0:05:48.880 --> 0:05:51.839 has happened since the collapse of f t X is 0:05:51.880 --> 0:05:56.520 that we've seen this renewed um interest among users to 0:05:56.760 --> 0:06:00.480 first of all, on their own tokens. So there has 0:06:00.520 --> 0:06:03.919 been this a year old cry um in the crypto 0:06:03.960 --> 0:06:08.320 space about not your keys, not your tokens, which basically 0:06:08.320 --> 0:06:11.479 means that if you don't hold your crypto assets in 0:06:11.520 --> 0:06:15.400 a private key which is owned by you, then eventually 0:06:15.440 --> 0:06:17.400 it doesn't belong to you. So what we have seen 0:06:17.440 --> 0:06:21.640 since the last week is that people have started moving 0:06:21.680 --> 0:06:25.920 their funds out of these trusted third parties exchanges to 0:06:26.960 --> 0:06:30.640 solutions where they hold access to their own keys. So 0:06:30.920 --> 0:06:35.400 gradually we are seeing that people are moving away from 0:06:35.600 --> 0:06:39.960 centralized parties like f t X two more decentralized platforms 0:06:39.960 --> 0:06:42.719 where at least the balance sheet, if you have to 0:06:42.800 --> 0:06:46.240 use the term, is visible for people to scrutinize. We 0:06:46.279 --> 0:06:48.760 can say things like just move to a hardware wallets, 0:06:48.800 --> 0:06:52.640 but the reality is, for like I don't know ninety 0:06:53.000 --> 0:06:56.000 or more percent of people, that is the equivalence of 0:06:56.040 --> 0:07:02.159 saying build your own iPhone, or host your email on 0:07:02.200 --> 0:07:05.279 your own servers, or self host your website. It is. 0:07:05.360 --> 0:07:10.640 It is a non trivial technical undertaking. Two engage in 0:07:10.720 --> 0:07:14.920 like the really actually decentralized business of crypto, which is 0:07:14.960 --> 0:07:17.320 one of the reasons that centralized densities like at X 0:07:17.400 --> 0:07:19.760 were so popular. Like, how are folks trying to overcome that? 0:07:21.400 --> 0:07:23.480 I agree with you on that I'm not going to 0:07:23.560 --> 0:07:27.480 completely centralized exchanges in this scenario because they've played a 0:07:27.560 --> 0:07:31.560 very important rule with regards to making it very easy 0:07:31.680 --> 0:07:36.000 for users to on TRAM and come onto the crypto economy. 0:07:36.160 --> 0:07:40.680 So I believe that going forward, centralized exchanges still have 0:07:41.040 --> 0:07:45.160 a very important role to play for this industry to grow. 0:07:45.360 --> 0:07:51.600 What we need right now is clear regulation because while 0:07:51.880 --> 0:07:56.680 it's a difficult task to regulate cryptocurrencies, all the businesses 0:07:57.280 --> 0:08:01.280 that have been built on top of these uh software, 0:08:02.200 --> 0:08:04.360 they can still be regulated because if you look at 0:08:04.720 --> 0:08:07.680 the business model of any exchange for that matter, like 0:08:07.800 --> 0:08:11.920 fd X, these are traditional age old business models for 0:08:12.000 --> 0:08:16.120 which we do have a decent amount of guidelines and 0:08:16.200 --> 0:08:20.000 regulations available. I think it's just that how do we 0:08:20.120 --> 0:08:24.360 gradually put that onto these businesses which are built on 0:08:24.680 --> 0:08:30.120 crypto asis and hence bring about more transparency, better disclosures, 0:08:30.160 --> 0:08:33.160 and better audits as well. That's going to be the 0:08:33.240 --> 0:08:37.559 key going forward, because I would say that self regulation 0:08:37.760 --> 0:08:41.960 in the space has failed over the last decade, and 0:08:42.640 --> 0:08:47.040 it's time that regulators did step in and brought about 0:08:47.840 --> 0:08:53.720 um more clear guidelines and regulations, especially around disclosures and 0:08:53.800 --> 0:08:57.960 how these exchanges, who are essentially custodians, how they handle 0:08:58.080 --> 0:09:02.680 the funds of their users. Now, this is very much 0:09:02.720 --> 0:09:10.359 the line obviously that regulators have. They're like, hey, we're regulators, 0:09:10.600 --> 0:09:15.320 we'd love to regulate. It is increasingly in you know, 0:09:15.520 --> 0:09:19.079 countries like India, a line that is not necessarily being 0:09:19.120 --> 0:09:23.080 achieved through regulation, for example, but through things like taxation. 0:09:24.320 --> 0:09:27.400 It is, but it's not necessarily the line that all 0:09:27.440 --> 0:09:31.400 of crypto is wholeheartedly embracing, because for every CEO who's 0:09:31.440 --> 0:09:35.960 going out there saying we get it, regulate us, there 0:09:36.040 --> 0:09:41.040 are entire telegram chats of people who are like, get 0:09:41.040 --> 0:09:43.200 your hands off my crypto. How dare you try to 0:09:43.240 --> 0:09:47.040 impose your Wall Street discipline on us where it's totally 0:09:47.080 --> 0:09:49.600 different asset class? Why are you trying to use things 0:09:49.679 --> 0:09:51.840 like you know, the how we test, which is what 0:09:51.880 --> 0:09:55.360 the U s SEC uses in part to assess whether 0:09:55.440 --> 0:09:59.760 something is the security on things like crypto. Based on 0:09:59.800 --> 0:10:02.280 your reporting so far and the folks that you're talking to, 0:10:03.240 --> 0:10:06.320 do you see these factions coming to any kind of 0:10:06.400 --> 0:10:09.960 middle ground. The crypto community tends to be very polarized 0:10:10.559 --> 0:10:14.360 and also that's an inderstation. And actually, but since the 0:10:14.400 --> 0:10:19.079 collapse of Luna earlier this year, USD and it's sister 0:10:19.200 --> 0:10:22.200 token Luna lost their peg to the dollar. In the 0:10:22.280 --> 0:10:26.000 last few weeks, they had a spectacular meltdown, sending prices 0:10:26.000 --> 0:10:28.480 to near zero and their market value doing followed by 0:10:28.840 --> 0:10:32.800 the collapse of many other centralized lenders in the space, 0:10:33.559 --> 0:10:37.600 we have seen that users themselves have started demanding for 0:10:37.720 --> 0:10:43.280 more and more transparency and disclosures from all these players. Right, um, 0:10:43.360 --> 0:10:47.720 so that is an organic movement that I would say 0:10:47.760 --> 0:10:51.760 that is coming from within the community, right, But users 0:10:51.800 --> 0:10:55.880 can only force a centralized business to do so much. 0:10:56.280 --> 0:10:58.920 At the end of the day, the regulators have to 0:10:59.640 --> 0:11:04.400 come and finally decide on, Okay, this is what we 0:11:04.720 --> 0:11:08.679 require from you in order to make sure that you're 0:11:08.720 --> 0:11:11.760 working in a compliant manner. Right. So that's where I 0:11:11.800 --> 0:11:15.040 think the difference has to be because in the last 0:11:15.080 --> 0:11:18.240 couple of months, we had have seen some regulatory action 0:11:18.800 --> 0:11:22.200 in this space, but the big ones have been around 0:11:22.320 --> 0:11:26.320 let's say, the sanctioning of tornado Cash, the virtual currency mixer. 0:11:26.440 --> 0:11:29.720 Tornado Cash was sanctioned by the U. S. Treasury Department 0:11:29.720 --> 0:11:32.000 after it was used to launder more than seven billion 0:11:32.040 --> 0:11:36.960 dollars worth of digital currency since its creation. The crypto 0:11:36.960 --> 0:11:41.880 community is disgrunted that regulators are acting more and more 0:11:42.480 --> 0:11:49.559 on just defining the underlying tokens or censoring the underlying products, 0:11:50.400 --> 0:11:56.400 rather than looking at these businesses which we're selling um 0:11:56.520 --> 0:12:01.359 investment products without you know, proper license, without proper disclosures, 0:12:01.880 --> 0:12:05.640 do you know people across the world. So I think 0:12:06.160 --> 0:12:11.400 that's where the divide is up next. More from Bloomberg 0:12:11.360 --> 0:12:16.160 REPORTA said Chukla on the sometimes factionalism of the crypto industry. 0:12:28.400 --> 0:12:31.840 Crypto was designed to not have to rely on trusted 0:12:31.960 --> 0:12:35.480 third parties, and for anybody, I'm just gonna shamelessly plug 0:12:35.600 --> 0:12:40.200 my colleague Matt Levine and the single story issue of 0:12:40.480 --> 0:12:44.280 Bloomberg Business Week that he wrote called The Crypto Story, 0:12:44.360 --> 0:12:46.960 which is also available online and you can listen to 0:12:46.960 --> 0:12:50.480 it on this very podcast. We air special audio episodes 0:12:51.040 --> 0:12:53.440 on weekend, so please do check that out. The point 0:12:53.440 --> 0:12:57.440 that I made so brilliantly is that people fundamentally want 0:12:57.600 --> 0:13:01.560 to trust each other, even if the system that they're 0:13:01.600 --> 0:13:06.959 designing is assumed to not require it. Like just we 0:13:06.960 --> 0:13:09.800 we have this tendency to move towards situations in which 0:13:10.240 --> 0:13:14.960 you can trust other people, and transparency doesn't necessarily solve 0:13:15.320 --> 0:13:19.400 for bad faith. And I think a lot of the 0:13:19.480 --> 0:13:22.880 response to Sam bankmun freed, and a lot of the 0:13:22.920 --> 0:13:26.600 response to the FTX bankruptcy filing has been people feeling 0:13:26.640 --> 0:13:31.440 betrayed by this guy who would get up on stage, 0:13:31.440 --> 0:13:34.920 including at conferences put on by Bloomberg and say things like, 0:13:35.640 --> 0:13:37.800 you know, we were trying to set a high standard 0:13:37.800 --> 0:13:40.960 for the kinds of companies that we were would say 0:13:41.040 --> 0:13:45.199 yes to to helping bail out or essentially making statements 0:13:45.240 --> 0:13:48.760 that presented them as the smartest guys in the room. 0:13:48.800 --> 0:13:52.800 A lot of the time. I'm not sure regulators are 0:13:52.840 --> 0:13:58.600 necessarily equipped to solve bad faith of the time. But 0:13:58.960 --> 0:14:01.040 I want you to just just tribe what's in that 0:14:01.160 --> 0:14:05.320 ideal world of crypto self policing and self regulating that 0:14:05.440 --> 0:14:07.960 so many people in the space think is possible. How 0:14:08.000 --> 0:14:10.719 do you deal with actors who are accused of operating 0:14:10.720 --> 0:14:14.440 in bad faith? What do you actually do? Two ways 0:14:14.480 --> 0:14:19.000 one can handle this. One is the traditional way of 0:14:19.160 --> 0:14:24.880 having regulations and making sure that they're enforced right. The 0:14:24.960 --> 0:14:29.160 other way, which some of the decentralized protocols already has 0:14:29.200 --> 0:14:35.800 in them, is have mechanisms built in which would penalize 0:14:36.160 --> 0:14:41.040 bad actors. Right. But the thing is the second way 0:14:41.080 --> 0:14:44.960 of doing is it's kind of complex, it is convoluted. 0:14:45.560 --> 0:14:48.720 It's difficult for people to understand, Okay, how is a 0:14:48.760 --> 0:14:52.240 bad actor going to get punished by somebody who's not 0:14:52.320 --> 0:14:57.080 there to punish them? Right? So I think there's a 0:14:57.160 --> 0:15:02.280 long road ahead for the sector to recover from here. 0:15:02.520 --> 0:15:06.760 The crisis of confidence is big this time around, and 0:15:08.280 --> 0:15:10.720 in order to gain back that confidence in order to 0:15:11.400 --> 0:15:16.680 establish some legitimacy. The first thing that all the major 0:15:17.400 --> 0:15:20.120 players in the space, the thought leaders, the businesses, that 0:15:20.160 --> 0:15:24.040 they have to do is to make sure that they 0:15:24.680 --> 0:15:28.920 act in a compliant manner without even having regulations. If 0:15:28.960 --> 0:15:33.440 they can act in a compliant manner, disclosed more than 0:15:33.520 --> 0:15:37.280 they should be disclosing. That is one way to bring 0:15:37.320 --> 0:15:40.280 about some confidence because still now the practice has been 0:15:40.320 --> 0:15:43.240 that we will do the bare minimum. The other thing 0:15:43.400 --> 0:15:46.840 which a lot of the purists should do is that 0:15:47.920 --> 0:15:51.960 they should communicate what their project is, what their product is, 0:15:53.080 --> 0:15:57.000 to the layman in a simpler manner, because let's be 0:15:57.080 --> 0:16:00.600 very honest, the UI, the user interface and the user 0:16:00.680 --> 0:16:05.920 experience for anybody who wants to interact in this space 0:16:06.280 --> 0:16:11.360 without a centralized party like ft X, if it's very cumbersome, 0:16:11.440 --> 0:16:14.240 you need to be really smart in order to like 0:16:14.280 --> 0:16:17.600 even make or just or just really tech savvy, because 0:16:17.600 --> 0:16:19.600 there are a lot of people were not tech savvy 0:16:19.640 --> 0:16:25.560 and vice versa. So exactly so those roadblocks need to 0:16:25.600 --> 0:16:29.400 be removed. I think people should work on improving the 0:16:29.480 --> 0:16:33.000 user experience and the user interface move as you know, 0:16:33.120 --> 0:16:36.760 things progress, because um, it doesn't matter how decent lize 0:16:37.000 --> 0:16:41.760 or secure. The underlying blockchain is all the product that's 0:16:41.800 --> 0:16:44.640 built on top of it. If people are not able 0:16:44.800 --> 0:16:47.920 to use it or understand it, they're going to fall 0:16:48.080 --> 0:16:54.400 back to platforms which they feel comfortable using, right and 0:16:54.920 --> 0:17:01.479 that information asymmetry always leaves a window for bad actors 0:17:01.960 --> 0:17:05.840 to exploit people who may be a bit cullible or 0:17:05.840 --> 0:17:09.359 maybe just be a bit ignorant about how the space works. 0:17:09.880 --> 0:17:13.240 So I think that's how the place in the space 0:17:13.240 --> 0:17:16.960 should move forward. Thank you said. You can find more 0:17:17.040 --> 0:17:20.080 of Sid's recording on the Bloomberg terminal and on Bloomberg 0:17:20.080 --> 0:17:29.399 dot com. This is Bloomberg Crypto, a daily podcast from 0:17:29.440 --> 0:17:32.480 Bloomberg and I Heart Radio. For more shows from I 0:17:32.560 --> 0:17:35.840 Heart Radio, visit the I Heart Radio app, Apple Podcasts, 0:17:36.000 --> 0:17:39.919 or wherever you get your podcasts. Send us your comments, questions, 0:17:39.960 --> 0:17:43.080 or suggestions for the show to Crypto at Bloomberg dot net. 0:17:46.280 --> 0:17:49.399 The supervising producer of Bloomberg Crypto is Vicky very Galina. 0:17:49.840 --> 0:17:53.520 Our senior producer is Janet Babin. Our producers are Mohammed 0:17:53.520 --> 0:17:57.160 Faruke and Sharon Barriro. Our associate producers are Ty Butler 0:17:57.200 --> 0:18:00.800 and Moses on The Desta wonder At is our engineer. 0:18:01.160 --> 0:18:06.360 Original music by Leo Sidron. I'm Stacy Maria Shmaal. We'll 0:18:06.359 --> 0:18:07.080 be back tomorrow.