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So what happened to crypto? – Harvard Gazette

Recent high-profile financial collapses at bitcoin labs, celsius and terraform, which together wiped out hundreds of billions in market value, helped trigger a market run from cryptocurrencies, driving its value from $2.9 trillion last fall to less than $900 billion today. This “crypto crash” has reinforced the perception by critics that digital currency markets, which are primarily used as an investment vehicle as it is not widely accepted as payment for goods and services, are little more than global casinos. operating with virtually no rules or accountability. .

scott duke kominers ’09, a. m. ’10, Ph.D. ’11, is a professor of business administration at harvard business school and a faculty member of the harvard department of economics and the harvard center for mathematical sciences and applications. kominers spoke to the gazette about why the cryptocurrency market has crashed in recent months and how a tidal wave of upcoming international regulation could affect the market. The interview has been edited for clarity and length.

Reading: What happen to bitcoin

questions and answers

scott duke kominers

bulletin: what triggered the cryptocurrency crash?

kominers: For the past six months, we have been leaning towards a state of general financial uncertainty. crypto assets are highly volatile, in part because there is a lot of uncertainty about which crypto technologies are likely to be the most useful in the long run; for example, which ones can coordinate the market for the media of exchange and many of the applications. they are technological in nature and novel (or at least untested). therefore there is a lot of uncertainty and much of the return value is downstream, just like with technology companies.

Note that there has been a broader pullback for tech companies. many tech companies make big investments in growth up front, and then the payoff is long term in the future. in our current macroeconomic climate, it’s harder for them to find money for those kinds of investments, and that kind of business can become more difficult to operate.

crypto can have the same dynamic. on top of that, it is more uncertain which technologies are going to be successful in the long run. and then on top of that there is the speculation associated with new asset classes and the like. And so, there’s a lot of uncertainty around cryptocurrencies; And in times of general financial market uncertainty, people turn away from riskier assets.

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At the same time, much of the investment in basic technology and entrepreneurship in crypto is still underway. we also saw this with previous crypto cycles. At the end of 2017-2018, there was a significant recession and many of today’s top crypto companies emerged from that. So I think from a business perspective, there’s still a lot of teams forming, and here’s an opportunity when things are a little less crazy, when there’s less attention and especially energy around speculation and trading – this gives an entrepreneur more time to focus and really carefully develop their product without having to constantly face the market.

Scott Kominers

“ … it’s still really difficult to figure out how to pay taxes on your crypto assets even if you understand precisely what they are,” said Scott Duke Kominers. File photo by Rose Lincoln/Harvard Staff Photographer

GAZETTE: In November, the global crypto market capitalization was $2.9 trillion. Today, it’s $870 billion, according to CoinMarketCap. Bitcoin, the oldest, most established cryptocurrency, has fallen over 70 percent in value during that period. What changed?

kominers: there was still uncertainty. we were in much more of a financial boom and a crypto boom, specifically. even in that period, the market prices of various cryptocurrencies went up and down, massive swings, swings of 30 percent in a week, sometimes. I advise a group of entrepreneurs and the feeling of many at the time was that it was very difficult to build in that environment because things were changing very quickly and there was a lot of attention and pressure from the boom cycle. when all that slows down, a lot of the projects that weren’t sustainable in one way or another are eliminated. that means that there has been a loss of value, there have been losses for the entrepreneurs; there are losses for investors. and that trickles down to retail investors as well.

But at the same time, entrepreneurs who are still on the move are accomplishing a lot and creating a lot of value. And remember: not all crypto products are purely financial. for example, many are more consumer-oriented products, such as systems for coordinating group decisions or managing event tickets. the long view is that there is real fundamental technological value here, and so what really matters for the market is whether we can realize that value through entrepreneurship and supportive regulation. and I think the current environment is one where we have a lot of potential to do that.

We still don’t know what successful infrastructure solutions and business models will look like in the long term. we don’t know if it’s the things we have now, in some variation, or if there will be entirely new crypto platforms and products. In the early days of the internet, many of the platforms and business models did not survive. what I’m really interested in seeing is which crypto projects come out much stronger from this “bearish” market phase.

gazette: The flurry of bad news involving high-profile companies like bitcoin, terra and celsius has renewed calls for regulators to protect consumers from forex traders, fraudsters and theft. How vulnerable are cryptocurrency investors, particularly retail hobbyists?

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kominers: I definitely think more consumer protection is needed in this space across the board. there needs to be more transparency and not just transparency at an abstract level, but the technology needs to be transparent to consumers in a way that they can understand it. this is a problem in all cryptocurrencies, and it is one that companies are starting to try to solve. it is very difficult for a consumer to manage his own position in the core crypto market with current tools. As a result, if you’re a retail consumer, you often end up on one of these intermediate platforms where the lack of transparency means you may not understand what’s going on. As we’ve seen, people can choose to enter these platforms during a boom, and it’s very exciting. but if you don’t understand the risk you’re taking, that can be really damaging as soon as the state of the market changes.

There needs to be much more transparency, better messaging and clearer definitions of the different asset classes. everything from taxes (it’s still very hard to figure out how to pay taxes on your crypto assets, even if you understand exactly what they are), to information that would help people assess which markets they want to be in and how much risk they’re taking. you’re assuming you highlight it in the same way we provide information on other asset classes and products. there are no unified disclosure standards for crypto platforms; there are no standardized disclosure rules or formats. and it’s two layers of lack of transparency – neither of them necessarily have a clear idea of ​​what the platforms may be doing, and on top of that a consumer may not understand the added volatility in the crypto market and so can’t make an overall risk assessment.

bulletin: This week, a panel of banking regulators and treasury officials from g20 countries said it will introduce “robust” new regulations in October in response to “intrinsic volatility and structural vulnerabilities in cryptocurrencies.” earlier this month, the us the treasury department presented president biden with what he called a “framework” for overseeing digital financial assets across government and internationally, while the european union and european parliament have agreed on new crypto rules that include a license requirement that is expected to take effect next year. How is this wave of regulation going to affect the market?

kominers: some regulation is probably good for the industry because for crypto to reach widespread adoption and use, it needs to be in a market and technology context where the consumer can access it and do it in a way that is valuable and a much lower risk than today. Frameworks, when well developed and responding directly to the kinds of issues the market is seeing, can make a market more efficient and more valuable for everyone to participate in. therefore, some degree of improved structure and frame construction is a good thing. The challenge, of course, is that these crypto currencies and other crypto assets are often simultaneously financial assets and technology platforms, which means you have to think about two different categories of regulation working together.

on the one hand, the granting of licenses and the background check of an asset in order to be able to market it in some centralized system; that sounds like a really good thing from a stability and monitoring perspective. but at the same time, that could greatly limit competition. if it is difficult to introduce new types of tokens, then it can block innovation and reduce the chance of new platforms emerging, meaning you won’t necessarily get the most efficient technology. these are difficult trade-offs. One of the big challenges we have faced in regulating cryptocurrencies up to this point, and will face in the future, is balancing the need to achieve platform stability with the need to maintain competition and interoperability of cryptocurrencies. the platform.

editor’s note: kominers is a research partner at a16z crypto and advises various market companies and crypto projects. owns some crypto assets, especially a variety of non-fungible tokens.

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