Crypto has had some serious trials and tribulations this year and 2023 is shaping up to be a battleground. Does this mean crypto is done for? Did TradFi win? Are we stuck with a baseless currency and centralized banking forever.
Not at all. Let me break down what’s happening.
The great Terra/Luna crash ripped apart one of the most contentious practices of the cryptoverse, something I am calling MetaBanking. Metabanking is the process of handing over your digital assets to a centralized entity, who would then use yours and other peoples crypto to create various financial products to sell to other people. In return you got a high return.
But it broke the first rule of crypto “not your keys, not your coins”.
While this worked it was great but late in 2021 the cracks were starting to show and greed was out of control. The hubris of Do Kwon and the UST stablecoin depegging took down all the players who were over leveraged. And that was pretty much everyone.
Celsius, Vauld, Blockfi, 3 Arrows Capital, Voyager, Babel Finance and thousands of individual investors got wrecked to the tune of hundreds of billions of dollars. In South Korea alone investors lost 70 billion. The crash has all but shuttered development on algorithmic stablecoins and drawn the attention of regulators like hyenas to a kill.
On September 15th 2022 the Ethereum blockchain merged it’s mainnet from a computationally intensive Proof-Of-Work consensus to a validator based Proof-Of-Stake consensus.
It was the equivalent of “swapping an engine while a car is driving down the highway” as Charles Hoskinson co-founder of Ethereum and founder of Cardano put it.
The merge changed the internals of Ethereum and it’s tokenomics as well. The burn rate of Ethereum tokens was changed; vastly increasing the token burn rate, and creating deflationary pressure on the overall ecosystem for the ETH coin. But this massive change to crypto’s second biggest asset by market capitalization did exactly nothing to the price of the Ethereum coin.
By most metrics it was a “buy the rumor sell the news” event.
In fact the gas fees (a fee to use the network) hardly changed at all. Besides dropping the power output by 99% and destroying an entire industry of cryptomining,
The Merge has only accomplished one thing: centralize Ethereums network into the hands of Tradfi.
And it only took a month or two before the node operators began ingratiating themselves to the government and started censoring the network.
Tornado Cash is crypto mixing service that is either a critical tool for financial freedom or a backdoor for terrorist money laundering depending on who you ask.
A “mixer” is a service that scrambles the identifiers on various cryptos and then sends it back to the user as kind of a fresh slate so they can’t be traced.
There is a dozen or so reasons why you might want to do this, all of them have to do with privacy and a few of those reasons run up against various banking laws. For instance: If you are a Russian citizen trying to move money around after the international banking system was shut off, or an Iranian protestor/Canadian Trucker trying to accept donations for your cause, or maybe you want to send untraceable money to a missionary in a hostile country or something as simple as sending an anonymous donation, services like crypto mixers are a necessary tool for a functional and free society.
But bad actors like privacy too, so sometimes North Korea will take a break from laundering money through Chinese banks and use Tornado Cash. That makes the whole Tornado Cash thing evil if you are a pencil necked regulator over at the Office of Foreign Assets Control.
On August 8th 2022, OFAC announced sanctions on the Tornado Cash mixing smart contracts. This set off a flurry of criticism from the crypto industry but also some thoughtless capitulations. Notably the entire codebase repository for Tornado Cash was taken off line by it’s hosting company, Github (which is owned by Microsoft). Then one of the Tornado Cash developers was arrested in Amsterdam by the Netherlands Fiscal Information and Investigation Division (FIOD).
The Dutch, of course were just playing ball with the OFAC sanctions and there was no legal precedent to arrest the 29 year old Alexey Pertsev. Only after a huge amount of public pressure and a wave of lawsuits over the threat to free speech did OFAC back down with a lol jk you thought we were serious update to their FAQ that was a form of detente.
But the message was clear: we’re watching, get in line. The Tornado Cash Github repository was restored but the developer Alexey Pertsev is still in jail and now 63% of all Ethereum transactions are OFAC compliant even though they legally don’t have to be. The battle lines for centralization have been drawn.
During this year, crypto has seen one man gain power and influence faster than anyone was expecting. Sam Bankman-Fried; a nebbish tradfi wonk who got his start at the secretive Jane Street quant firm, then founded his own quant operation called Alameda Research and eventually went on to start the crypto exchange FTX in 2019.
To those in the industry he is known as SBF and until this year he was considered a billionaire nerd who wanted to beat Binance as the #1 crypto exchange in the world. But as 2021 ended and the regulators began looking for something to ruin, SBF started to take center stage during several key crypto hearings that happened on Capitol Hill.
It soon became apparent that SBF wasn’t just the CEO of a popular exchange, he was looking to shape the future of crypto.
A long and hefty list of political donations was dug up that showed how deeply entrenched SBF was with the Biden administration.
He was one of their largest donors.
Then as the details of the Terra/Luna fallout began to emerge there was mounting evidence that Alameda Research were acting as hatchet men for Sam; and had a large hand in taking down Celsius, Ronin Token and even ICP. Soon headlines across the cryptoverse popped up when Sam himself came out in support of a bill that was essentially a copy of the Bitlicense from New York state, the draconian bill written by Wall Street that has made doing crypto business in NYC a struggle and would essentially make Defi illegal.
Many in the cryptoverse would say that SBF has shown his true colors and that he’s aligned himself with TradFi. Others say he is doing the work necessary to put forth good regulation in the hopes to stave off something more restrictive.
No matter how you look at it, he’s a billionaire wall street trader that’s using his money to write legislation for an entire industry. He’s not a crypto developer nor has he ever been.
2023 and Beyond
There is a lot more to cover (NFT volume is down 99%, USDC is probably going to be the CBDC for the United States) but those things haven’t been moving the conversational currents on CryptoTwitter™ this year.
The question behind the question on everyone’s mind is this: will crypto keep innovating at the current, breakneck pace?
Because if it does then there is literally nothing TradFi or regulators can do to stop it besides kickback and smoke a bowl of Copium. So enjoy the bear market, and stack your portfolio while it’s on sale. The next three years in the financial world are set up for fireworks and crypto is going to be the main event.