FTX and Crypto Bust Show Capitalism's Limits

Investors have been led astray by misleading signals from the market. It enticed them to go "all in" on centralized exchanges rather than focusing on real-world use cases for tokenized value exchange.

The spectacular failure of FTX and other crypto firms has exposed the limits of capitalism and the urgent need for better information and regulation in the digital-asset industry.

Investors were misled by false market signals that directed them to "go all in" on centralized exchanges like FTX instead of focusing on real-world use cases for tokenized value exchange.

The absence of transparency in the crypto industry, at least until 2022, prevented the formation of reliable price signals that could have guided investors toward sound investment decisions.

We're not just talking about FTX's mind-boggling accounting practices (or lack thereof). I'm referring to what we knew, or didn't, about the conditions driving the soaring token prices that attracted millions of retail customers into multiple crypto exchanges and lending platforms, inflows that spun up billions of dollars in fees and, by extension, attracted great gobs of venture funding to those companies.

We're all astounded that FTX, now essentially worth nothing, was valued at $32 billion a few months ago, and that lending service Celsius Network clocked in at $3.5 billion before it went under. But we should be asking similar questions about the investments and deposits that poured into Binance, Coinbase, Kraken, Crypto.com and other such exchanges. I'm not suggesting that they too are on the verge of bankruptcy or are suspected of fraud, rather that we should reflect on the inflated expectations for long-term growth that drew the influx into the entire industry.

Investors fell for a kind of capitalism head fake. For a time, the spectacular outsized profits generated by these centralized rent-extracting machines suggested to venture capitalists that they were the businesses into which they should be investing. According to the rationale of the market, they were onto something. The market was saying “this is the future.”

Tragically, we now know this was a false signal. There was no there there. A good chunk of the token exchange and lending business was built on a house of cards, an elaborate interconnection of leveraged positions across a crypto ecosystem sustained by a collective belief in “number go up.” It was really just a toxic mix of momentum trading, opportunism and rehypothecation (allowing assets to collateralize several transactions). It was never sustainable.

We should have recognized from the start that the triple-digit yields offered on various decentralized finance (DeFi) platforms during boom periods in 2021 were unjustified, not just because they were insanely high relative to traditional finance but also because there was insufficient real-world utility underpinning them. The same could be said for the trading activity and fees earned by centralized finance (CeFi) platforms.

For there to have been enough base-level utility to sustain the trading prices higher up the chain, there needed to be a lot more investment in underlying real-world use cases for tokenized value exchange, such as in decentralized energy. But the market wasn't signaling that that's where the money should go. It was saying “go all in” on FTX, Celsius and their ilk.

How do we fix this?

Sadly, we can't just exhort people to reject get-rich-quick promises in favor of smaller, more sustainable opportunities in cross-border remittances, non-fungible token (NFT) loyalty projects, distributed digital identity solutions or any number of other real-world applications. Speculators are gonna speculate.

What we need is more reliable information about crypto businesses and industries, not just data on the short-term profitability of exchanges and lenders but in-depth details on the underlying foundation of those returns and their long-term sustainability.

Perhaps with that information, venture investors will ignore short-term opportunities associated with speculation and instead invest in real, longer-term projects.

But there's still a problem here and it lies with Silicon Valley. Given that token models now offer venture capitalists the prospects of a much earlier exit than the five-year liquidity lockups they're traditionally subjected to, they may still be incentivized to ignore indications of long-term challenges and continue to bet on short-term bubble moments, knowing they can always pass their bags to the next greater fool. They can do this because they get early access to exclusive “data rooms” during funding round deals, giving them an informational advantage over later-arriving small investors.

This is the “information asymmetry” problem that securities laws are supposed to guard against. We can think about it in terms of the parties in any later-stage funding round: the investable entity itself, which knows everything; its early investors, who know a lot but not everything; and the prospective targeted investors, who are much more in the dark. These kinds of asymmetries are one of the fundamental causes of price signal distortions. Forced disclosures by securities regulations narrow that information gap.

It should be obvious by now that for CeFi exchanges such as FTX, tougher regulation, including registration with the Securities and Exchange Commission, is unavoidable. The question is how far should such regulation

News source：https://www.kdj.com/cryptocurrencies-news/articles/ftx-crypto-bust-capitalism-limits.html

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