5 Lessons the Crypto Industry must learn from the FTX Disaster

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The FTX implosion has caused billions of dollars in losses for investors and consumers, but it also has major long-term implications: loss of public confidence in the cryptocurrency industry. In response, business owners and others must ask how this happened and what can we do to prevent it from happening again. We must commit to addressing unscrupulous or irresponsible actors while continuing to push the boundaries of Web3. I have been in this industry since 2015 and here are five things that need to happen for blockchain technology to reach its potential.

First, we need a legal framework that can protect users and still promote innovation. The status quo of enforcement regulation must end. Policy makers and industry leaders can work together to come up with something similar to the 1996 Telecommunications Act, which created the conditions for innovation to flourish responsibly. Any new rules must distinguish between technology and the companies that build services on top of it. Follow Internet Directions: We do not regulate network time or hypertext (also known as the web) transfer protocols. Still, we try to regulate platforms like PayPal, Internet Service Providers like Comcast, and other corporate entities like Amazon that use those protocols. In the case of disasters like FTX, policymakers need to understand that the key problem is not decentralization, but too much centralization in crypto-business intermediaries that hide their decision-making and financial health from the public.

Second, let’s keep in mind what makes blockchain technology disruptive and focus our efforts on creating products and solutions that take advantage of its strengths: that allow anyone, anywhere to move, store and manage their wealth and assets among peers . Let’s support entrepreneurs trying to build a better Web and a more inclusive financial system for all. Blockchains are the first digital medium of value, in the same way that the Internet was the first digital medium of information. Our digital economy needs a digital native asset class for payments, savings, and other financial tools. The next wave of entrepreneurs in this space should focus on creating simple and accessible Web3 applications that appeal to a broad swath of the population and solve more real-world problems, rather than arcane business applications and esoteric financial instruments. Create products that ordinary people want, need, and can understand.

ThirdLet’s end the hero worship around cryptocurrency founders running centralized companies. The reality is that middleware like FTX does not have to dominate the industry. After all, what makes Web3 so compelling is that it is permissionless and decentralized, which means anyone, anywhere can own digital assets, manage them peer-to-peer, and have a say in their governance. Bitcoin was the first to make this possible, and Ethereum and DeFi applications have powered it. To its credit, FTX offered a great user interface and experience, but it needed more transparency, better risk management, and stronger governance. Companies like FTX have served and may continue to serve as important on-ramps into this asset class and the broader world of Web3. However, the access ramps to an industry should not define the industry. Right now, Binance accounts for half of all crypto asset volumes. We can sing their praises today for surviving, but a rally like this should worry everyone.

Four, We need to support companies that want to build on Web3 using public blockchains. Many large companies have spent years tinkering with permissioned blockchains and other closed systems and are ready to make the leap to Ethereum and other public infrastructure. Those platforms failed to deliver value, but they made those companies comfortable with the technology. Now, let’s build more gateways to use this public infrastructure for real-world business applications. NFTs are a good start, as they can “pill” a large company on Web3 and open the doors for more innovations. Web3 users and developers will benefit from more corporate innovation in this area, but so will investors; After all, if hundreds of companies are using this technology, they probably also need to own the underlying asset to run a node, pay the gas fees. And so on.

Finally, we must recognize that while self-custody is a feature for some, it is a significant impediment to Web3 adoption for others. That means users still need reliable service providers in this space. Web3’s technology tools are not intuitive for everyone, and many users have justifiable apprehension when it comes to maintaining their own assets. Roneil Rumburg, founder of music platform Web3 Audius, told me recently that the FTX issue should “lead to more time/resources spent improving the usability of fully autonomous, decentralized tools for managing digital assets,” though he acknowledges that while “it’s possible to be a standalone crypto user today, the usability bar for doing so remains so high that it’s out of reach for many mainstream users.” Web3 innovators are creating more accessible tools, but individuals and businesses especially will continue to need trusted agents and partners. Let’s support good players through industry standards like proof-of-reserve requirements, sensible regulations, and social consensus and collaboration; in other words, let’s denounce bad actors when they appear and support those who speak truth to power.

Web3 was supposed to make “too big to fail” brokers irrelevant. With FTX, we got exactly what the creator of Bitcoin, Satoshi Nakamoto, was looking for: a centralized organization that used his influence to take excessive risks in a poorly regulated market. In the end, retail paid the highest price. We need to emerge from this crisis with a renewed commitment to not only build secure, simple, and decentralized tools on open protocols, but also to regulate centrally controlled financial intermediaries, no matter what technology they use.

Alex Tapscott is co-author of the best-selling Blockchain Revolution, co-founder of The Blockchain Research Institute, and managing director of The Ninepoint Digital Asset Group.

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