Without a doubt, 2022 has put the crypto industry through a stress test. Bitcoin hit a low price not seen since 2020, the industry’s market cap dropped to $1.2 trillion from $3 trillion five months ago, and what was one of the most popular crypto assets, Terra's LUNA token, is now effectively worthless.
Many newbie investors might ask what all of that means. Is crypto really worth nothing, as European Central Bank President Christine Lagarde said, or is now a buying opportunity?
According to Brett Harrison, head of FTX.US, it's a mix.
“So much capital has moved into the private equity space in crypto,” he told CoinDesk last week on the sidelines of the World Economic Forum’s annual summit in Davos, Switzerland. “There are a lot of teams that are building and creating new infrastructure, building out new projects, that we're probably going to see a lot of that investment come back over time.”
In a wide-ranging interview with CoinDesk, Harrison talked about the Terra and LUNA crash, if crypto exchanges should act as a gatekeeper for assets that don’t look promising and what competition can be expected from traditional exchanges such as the New York Stock Exchange that may offer more than just bitcoin and ethereum in the future.
This interview has been edited for length and clarity.
CoinDesk: Do you think crypto traders are going to rely less on stablecoins? What would be the alternative for the crypto industry?
Harrison: No, I don't think we're going to see less demand for the use of stablecoins and crypto. This word stablecoin is used in a lot of different contexts to mean different things. The Terra stablecoin is not a stablecoin at all. It's like an auto rebalancing structured product backed by a volatile asset, and it's basically a subsidized peg. There's too much of a run on that asset if the asset is too volatile, so that was never really going to last forever. It's very different from USDC. Most of the underpinnings of DeFi (decentralized finance) and even for centralized finance come from these fiat-backed stablecoins, which I don't think are a risk at all compared to something like Terra.
You were saying that UST basically was never going to be able to be what it was intended to be. What is your role as an exchange as sort of a gatekeeper for projects like Terra and coins like LUNA where they're sort of unproven and thus carry lots of risks?
On traditional equity exchanges, on futures exchanges, on commodity exchanges and on crypto exchanges, you have assets of various degrees of volatility. What's important is the disclosure of risks that come with it. UST was a completely open crypto. The code for what was actually going on there was completely open source, everyone knew exactly how it worked. It was a subsidized peg. There was no lack of transparency there, and everyone understood there was risk in the asset itself. I mean, to be able to offer a 20% yield on a token, that sort of very high yield doesn't come without risks. It brings up an interesting question as an exchange, whether it is our job to protect investors from having any sort of risk or volatility. We screen out assets all the time that we think aren't legitimate or don't actually have transparency or are a long-term value in that way. It's a fine line for us to decide whether we want to cross or not, but the most important thing is disclosure, and it's why we think it's so important for there to be regulation around stablecoins to make sure that if someone wants to call themselves a stablecoin, it actually is a stablecoin and not this sort of risky asset.
Do you think that there's going to be a regulatory framework on what can be listed and what cannot be listed?
There are bills that have been proposed by Congress members that actually talk about, for example, what kinds of assets a stablecoin could hold to call itself a stablecoin. On the listing side, there are many jurisdictions that already have standards for what you can list. For example, even in New York state, the DFS (Department of Financial Services) has a green list of what assets you're allowed to list. We would love to see more clarity from the market regulators in the United States on being able to understand exactly what assets can be listed by an exchange.
Let's talk about markets a little bit. Do you think there is going to be competition between traditional exchanges and crypto exchanges in the near future?
It’s an interesting question. We've seen a number of traditional exchanges talk about getting into crypto-related projects or exchange offerings. I think it's very possible that traditional exchanges might want to get into crypto in that way. I also think the other way could be true as well. We launched a stocks offering on our platform, and we're not an exchange – we're a broker that's introducing stock trading to exchanges. But you know, we may very well in the future become a competitor to traditional exchanges, as well. We certainly are in the derivatives space.
Are you afraid of that competition in the future?
We're not afraid of the competition; we welcome the competition, but there certainly is competition, and we already see a lot of pushback from the incumbents in the space on our application to the CFTC (Commodity Futures Trading Commission) to enable margin or clearinghouse. So there's definitely a lot of concern from our competitors that we're going to come in and disrupt the space, and that's exactly what we hope to do.
I want to talk a little bit about the correlation between the crypto market and the equities market. Do you see that correlation breaking anytime in the future and if so, what do you think could break it?
Right now, we're in a global environment where assets are going down. That's true across equities, bonds, broad-based futures of various kinds, crypto, and there's a lot of macroeconomic factors going into these down moves. There's also specific things to crypto, for example, in everything that happened with the Terra ecosystem. What we're finding now is, as crypto gains more mainstream adoption, that means that more institutions are allocating percentage of their portfolios of crypto, which means in a down move when they're looking for things to sell, crypto is going to be in the line of fire just like everything else. And so in a doubt, in a sort of violent downturn, all correlations go to one, everything is going down. And so right now, as prices are decreasing across the board, of course, there's going to be high correlation between these assets. As the market starts to turn around, I think we're going to see more growth, idiosyncratic moves between crypto and the traditional equity markets.
Do you see more institutional investors exiting or entering this phase right now during the current market sell off?
That's a good question. I think it's really going to be a mix. We're going to see some institutions that think this could be a perfect time to reenter the market at favorable prices. We're going to see some that feel that even though the sort of contagion of the Terra meltdown was sort of contained, they might see that as a reason to be more skeptical of crypto as a whole asset class and might cool off on investment, whether that's public or private investments. So we are going to see a mix for that over time, but in general, so much capital has moved into the private equity space in crypto. There's a lot of teams that are building and creating new infrastructure, building out new projects that we're probably going to see a lot of that investment come back over time.
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