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The implosion of FTX has led to billions of dollars of losses for investors and consumers but it also has an important long term implications: Loss of public trust in the crypto industry. In response, entrepreneurs and others must ask how this happened and what we can do to prevent it from happening again. We must commit ourselves to address unscrupulous or irresponsible actors while continuing to push the boundaries of Web3. I have been in this industry since 2015 and here are five things that must happen if blockchain technology is to reach its potential.
First, we need a legal framework that can protect users and still promote innovation. The status quo of regulation by enforcement must end. Policymakers and industry leaders can work together to come up with something akin to the 1996 Telecommunication Act, which created the conditions for innovation to thrive responsibly. Any new rules must distinguish between the technology and the companies that build services on top of it. Take cues from the Internet—we don’t regulate network time or hypertext transfer protocols (aka the web). Still, we do try to regulate platforms like PayPal, Internet service providers like Comcast and other corporate entities like Amazon that use those protocols. In the case of disasters like FTX, policy makers must understand the key issue is not decentralization but too much centralization in crypto corporate intermediaries that conceal their decision-making and financial health from the public.
Second, let’s keep in mind what makes blockchain technology disruptive and focus our efforts on building products and solutions that play to its strengths: that it enables anyone, anywhere to move, store and manage their wealth and assets peer to peer. Let’s support the entrepreneurs trying to build a better Web and a more inclusive financial system for everyone. Blockchains are the first digital medium for value, in the same way that the Internet was the first digital medium for information. Our digital economy needs a digital native asset class for payments, savings, and other financial tools. The next wave of entrepreneurs in this space should focus on building simple, accessible Web3 applications that appeal to a broad swath of the population and solve more real-world problems, instead of arcane trading apps and esoteric financial instruments. Build products that regular people want and need and can understand.
Third, let’s end the hero worship around crypto founders who run centralized companies. The reality is that middleware like FTX need not dominate the industry. After all, what makes Web3 so compelling is that it is permissionless and decentralized, meaning anyone, anywhere can own digital assets, manage them peer to peer, and have a say in their governance. Bitcoin was the first to make this possible, and Ethereum and DeFi applications have turbocharged it. To its credit, FTX offered a great user interface and experience, but it needed greater transparency, better risk management and stronger governance. Companies like FTX served and may continue to serve as important on-ramps to this asset class and the wider world of Web3. However, the on-ramps to an industry must not define the industry. Right now, Binance accounts for half of all cryptoasset volumes. We may sing its praises today for surviving, but concentration like this should worry everyone.
Fourth, we need to support enterprises who want to build in Web3 using public blockchains. Many big companies have spent years tinkering with permissioned blockchains and other closed systems and are ready to make the leap to Ethereum and other public infrastructure. Those platforms failed to deliver value, but they got those companies comfortable with the technology. Now, let’s build more onramps for them to use this public infrastructure for real-world commercial applications. NFTs are a good start as they can “red-pill” a big firm on Web3 and open the doors to further innovations. Web3 users and builders will benefit from more corporate innovation in this area, but so will investors – after all, if hundreds of companies are using this technology they’ll likely need to own the underlying asset too to run a node, pay for gas fees and so forth.
Finally, we must acknowledge that, while self-custody is a feature for some, it is a significant impediment to Web3 adoption for others. That means users still need trusted service providers in this space. The technology tools of Web3 are not intuitive to everyone, and many users have a justified apprehension when it comes to holding their own assets. Roneil Rumburg, Founder of Web3 music platform Audius recently told me the FTX issue should “lead to more time/resources spent towards improving the usability of fully self-sovereign, decentralized tooling for managing digital assets,” though he acknowledges that while “it’s possible to be a self-sovereign crypto user today, the usability bar for doing so is still so high that it’s out of reach for many mainstream users.” Web3 innovators are making more accessible tools, but individuals and businesses especially will still need trusted agents and partners. Let’s support good actors through industry standards like proof-of-reserve requirements, sensible regulations, and social consensus and collaboration—in other words, call out bad actors when they appear and support those who speak truth to power.
Web3 was supposed to make “too-big to fail” intermediaries irrelevant. With FTX, we got exactly what Bitcoin’s creator Satoshi Nakamoto sought to route around: a centralized organization that used its clout to take excessive risks in a loosely regulated market. In the end, retail paid the heaviest toll. We need to emerge from this crisis with a renewed commitment not only to building safe, simple, decentralized tools on open protocols but also to regulating centrally controlled financial intermediaries, no matter what technology they use.
Alex Tapscott is a the co-author of the bestselling Blockchain Revolution, co-founder of The Blockchain Research Institute and managing director of The Ninepoint Digital Asset Group.
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