How long will the crypto winter last – and what comes next?

The crypto industry has endured months of tumbling valuations, scores of liquidations and thousands of job losses after the collapse of stablecoin terraUSD and its paired cryptocurrency luna triggered a domino effect across the sector. It has been dubbed the new crypto winter and has even been compared to the 2008 financial crisis.

At a Barron’s Live event examining where crypto goes from here, Financial News caught up with Gwendolyn Regina, investment director at Binance’s blockchain arm BNB Chain, and Ari Redbord, head of legal and governmental affairs at blockchain intelligence firm TRM Labs.

The discussion came shortly after crypto hedge fund Three Arrows Capital went bust, and about a week before the lender Celsius Network filed for bankruptcy. Despite this, Regina and Redbord struck a positive tone for the sector – and suggested what investors can expect next from the topsy turvy industry.

What was the most worrying moment in the recent crypto crash?

Gwendolyn Regina
We’ve had several black swan events. The most worrying part over the last quarter was the luna crash. It showed how an experiment that was so promising in nature just didn’t work out. Then there were more black swan events, like Three Arrows Capital being liquidated. So the most surprising things are the black swan events.

Ari Redbord
The reason Luna stands out for me is the consumer protection aspect. Real people were dramatically affected. Of the real events that have had an impact over the last few months, those that affected average investors, folks who had invested in terra and other sorts of stablecoin projects [were the most worrying]. That’s really where regulators are focused now as well.

Institutional investors’ trust has been shaken by the crypto crash. How does the industry regain that trust?

GR
We shouldn’t be surprised that this winter is here. Markets go up and down. Crypto goes in four-year cycles so this is long overdue. When we talk about institutional confidence, look at how the industry has grown over the last 12 or 13 years since Bitcoin was invented. You now have more and more institutions involved, and more and more retail investors in the market. The general industry is more knowledgeable not just in crypto, but also in the underlying technology that is blockchain. There are solid projects being built and there is solid innovation. On a daily basis, I talk to many builders and entrepreneurs, and especially in a bear market it is great because valuations are down and people are much more realistic.

AR
There’s an adage about the winter being the best time to build and I think there’s something very real about that. We may be seeing a winnowing out of less sophisticated projects. But out of the ashes, we’ll see a very different cryptoverse than before.

What are the implications of the crypto crash from a regulatory point of view?

AR This is a really interesting moment. We are seeing this crash, but at the same time, that is not what has started the regulatory push. There’s a bit of happening around this. MiCA out of the EU has been in the works for two-and-a-half years. And finally, we got to the finish line mostly because of a political dynamic, where the French presidency of the EU Parliament wanted to finish it. That had nothing to do with the downturn and everything to do with something that had been moving over the course of a couple of years.

I spent about 11 years at the US Treasury, the US Department of Justice and about two at the Treasury Department, and you can’t win as a regulator. If you take time, everyone says regulators are falling behind the technology. And if you move quickly, it’s, ‘You have not been thoughtful enough around this’.

How much of a problem for the industry are the recent headline-grabbing threats of crypto from crypto exchanges? And what’s being done to address this?

GR In any kind of adoption of new technology, there will be risks across several domains, you have a technology security risk from the product itself, then you have bad actors trying to exploit all these nascent technologies. Those are terrible. I, myself have been a victim. We’ve all felt the burn. But it’s part and parcel of a product getting adoption by the natives, the core users, the early adopters, and then the market. So to a wider audience, it can seem scary. But I’m bolstered by what individuals, as well as organizations, are doing, trying to work together to build new products that fix current problems and also prevent future ones. It’s always about trying to get two steps ahead of the hackers.

AR That’s what we do at TRM. We work with exchanges like Binance and others as their anti-money laundering solution to stop bad guys from taking advantage of their platforms. We work with government, we work with regulators, we work with law enforcement. But we’ve also formed community groups to really try to stop bad actors from taking advantage of the growing crypto economy. For example, we at TRM, we’ve partnered with Binance, with Circle, with a number of different crypto businesses on something called Chain Abuse, which is basically a resource for individuals to crowdsource hacks and scams and rug polls in crypto. So there are now ways to investigate and mitigate these risks like never before, that are only in crypto. You don’t have an open ledger to track funds in the traditional financial system. Obviously, there are dangers, but there are also new tools to mitigate those risks.

The Bank for International Settlements recently declared crypto unfit as a monetary system, even after regulation. Do you agree?

AR Most of my time as a federal prosecutor was spent on money laundering and other types of crime. That usually involved bulk cash smuggling and networks of shell companies, high-value art and real estate. There’s no blockchain analytics, there’s no TRM for these things. They do not happen on an open ledger where you can trace and track the flow of funds. Crypto allows for some unique ways to regulate. Typically, regulators have always been relying on intermediaries like banks filing suspicious activity reports. What crypto allows for is regulators to actually regulate their entire ecosystem in real time, based on the qualities of open blockchain. So I reject that statement.

Recent job cuts at Coinbase and others have been accompanied by admissions that they hired too quickly. How should crypto bumps approach periods of growth in future to avoid this?

GR At Binance we have talked about how we have we have about 6000 people right now and we are hiring 2000 more positions. So we aim to be about 8000-plus by the end of the year. For us, it’s about understanding the cycles. In the previous bull market, as an organization you always have to think about the fundamentals. Is the market hype, just driving it up? We always try to look at that rather than just narratives. We understand that narratives drive the crypto market, but you always need to look at tokenomics and examine whether it makes sense.

AR I would add that this is not a crypto issue. This is a market downturn issue. Companies tend to grow too fast in bull markets, and then overcorrect in a downturn. But staying lean and mean is probably something that a lot of these companies will look to as we hit a new bull market. But at the same time, this is a cycle you always see with businesses.

To contact the author of this story with feedback or news, email Alex Daniel

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