Negative space
The FTX failure does not test crypto’s big ideas
It’s been hard to look away from the spectacular collapse of FTX: illiquidity delivers swift justice. I hope the film version is as good as Margin Call. Still, it should come as no surprise: SBF laid it all out back in April, on Odd Lots. (Starting at 21:17: transcript, video.) He was describing the business behind yield farming (with refreshingly frank cynicism), but we now know he might as well have been describing FTX itself.
I suspect that the deep dives into FTX’s laughably casual business practices, the on-chain forensics that suggest it may have been the collapse of Terra/Luna that did FTX in, and the grandstanding from politicians and regulators will make fine theater, and perhaps yield some interesting tidbits, while providing little enlightenment. It’s a sideshow, and those who want to understand the continuing evolution of the monetary system would do well not to get distracted. The consequential shifts are happening in the negative space beyond the FTX drama.
For one thing, it is now more likely that any future tokenized financial infrastructure will be built inside a regulatory fence. The current fuss about jurisdiction is probably mostly noise, but there is a deep question at issue: are crypto assets are bank deposits or securities? For now, banking regulators are deflecting, and securities regulators are saying they don’t have enforcement authority.
Not a failure of ideas
Interestingly, though, the FTX collapse increases the likelihood that this future tokenized system will in fact get built, because it leaves crypto’s technical advances unscathed. I have argued that there are three big ideas that have emerged out of crypto—programmable contracts, tokenization and distributed ledgers. Each of these is a genuinely new financial practice; each came to broad attention through crypto; and each is the subject of active R&D by well-resourced players. None of these ideas was responsible for FTX’s downfall.
Take programmable contracts, for example. The explosion of decentralized finance, viewed sympathetically, is attributable to the possibility of creating complex, non-discretionary conditionality and composability in financial instruments—programmability, in a word. FTX itself had proposed to remake commodities markets with such instruments, in a proposal it had put to the CFTC and which was withdrawn last week.
FTX was working on programmable contracts, in other words, but they do not seem to have had anything to do with its bankruptcy. I still expect to one day live through a Smart Contract Crisis, but this was not it. Similar arguments could be made about distributed ledgers and tokenization—in short, the FTX collapse did not test these ideas.
Interest in these technical advances endures, including from incumbent institutions, public and private, who have little at risk in the crypto markets that FTX has rattled. If the current drama plays out without undermining the arguments for those technologies, it seems reasonable to think that they will go on being built. The longer that goes on, the more likely they are to become permanent features of the system.
Spare a moment, then, to look away from FTX, and watch what is happening in the shadows around it.