CONNIE BLOEM: Missing fundamentals threaten to drag cryptocurrency market into the doldrums

We have a new Wolf of Wall Street, epitomising the unfettered bravado and unhindered greed that has stalked the mainstream financial markets for decades.

With the seemingly unconditional support of institutional investment houses, FTX centralised exchange founder Sam Bankman-Fried has fallen from grace.  His demise highlights the urgency of a responsible revolution to provide a real alternative to traditional financial markets, which have fallen victim to manipulation and fraud, perpetrated in centralised companies behind opaque layers of technology by some particularly bad actors.

In an eerie echo of the months and days leading up to the 2008 credit crunch, the financial world is at a precipice once again, except this time it is the global cryptocurrency market in the crosshairs, with billions in investments going up in smoke in the wake of fraud and capital mismanagement. The fallout will be felt for a long time to come.

The spectacular collapse of FTX has sent shock waves up and down every alley of the financial world. FTX was involved in multiple sectors of the market — not just cryptocurrencies but traditional assets such as stocks were traded on FTX’s centralised exchange, and hedge funds and venture capitalists invested their clients’ money in and on the exchange. Alameda Research, a trading company founded by Bankman-Fried, was trading billions of dollars from FTX accounts, leveraging the exchange’s native token as collateral.

This crisis is not the fault of the blockchain technology that underpins cryptocurrency, it is the fault of humans repeating the same patterns of institutional greed, opacity and fraud that led to the invention of crypto in the first place. Bad business is bad business, no matter the vehicle. Nothing beats a good quality, sound and transparent business model. The phrase “disruptive innovation” does not mean discarding the fundamentals of running a good business.

The limitations prevalent in traditional financial markets have reared their ugly heads again: centralisation, uncollateralised leverage, and the absence of transparency. Make no mistake, this is not a story about a lone crypto-crook or the collapse of an instant billionaire. If the FTX saga is not ringing alarm bells it should; it is the same pattern we have seen again and again within the traditional financial system. It is the same story that inspired the Satoshi Nakamoto collective to create an alternative to the traditional financial markets in 2009. It was the reason my team and I, as responsible “market revolutionaries”, have been working the past three years to create alternative, decentralised financial markets that do not benefit the few but service the many. This is a story about the philosophy of developing a decentralised, transparent, trustless alternative to what has become the norm.

The risks involved in how FTX managed its reserves and liquidity were compounded by the company being a centralised exchange. This provided a heady cocktail of concentration risk, a risk that arises through exposure to a single counterparty, an absence of transparency and market volatility. It forces us all to stop and look at the problem more closely.

Until recently the solution appeared to lie in more regulation of this sector, but a true decentralised finance (DeFi) lens presents a different view. The current market cycle has delivered many lessons, the most important being that both the crypto and the traditional financial markets are fundamentally broken and in desperate need of a revolution — a responsible one. There must be a revolution moving us towards markets that are easy to access, transparent and efficient.

However, this is only possible if three key ingredients are present:

• Self-custody — If your assets are not always accessible with your keys, you don’t really own the assets. Beware of centralised exchanges (most of them) that don’t give you direct access to or full ownership of your assets. Take a lesson from the FTX fallout.
• Industry standards — Crypto assets and DeFi markets need to find a set of standards that everyone can subscribe to — and fast. The work of the Intergovernmental Fintech Working Group in SA is invaluable and noble. Principle-based regulations are a powerful tool to guide, and not stifle, the DeFi industry.
• Auditable reserves — Customer funds are sacrosanct and must at all times be audited and never be used by centralised parties that present themselves as exchanges. You cannot mark your own homework.

These three principles should guide the responsible revolution in an alternative, decentralised financial system where both retail customers and institutional investors own their assets directly and are the captains of their own economic destiny.

Blockchain as a technology is tried and tested and without reproach, offering much-needed innovation in our industry. However, in the end it comes down to striking the right balance between this revolutionary technology and a fit-for-purpose regulatory framework, to make both traditional and decentralised financial markets more accessible and safer for all.

We will keep pushing towards our objective of building the democratic and transparent financial markets of the future. But there’s no denying the irony inherent in the fact that this time it’s the crypto markets that are in need of a revolution.

• Bloem is cofounder and MD of Mesh.Trade.