Cédric O: What's next for FTX?

The true extent of the consequences for the crypto ecosystem of the earthquake caused by the FTX bankruptcy is still far from known: its more or less distant aftershocks could still lead to other chain difficulties. However, the scale of the disaster and its relatively systemic nature should lead us to draw some initial lessons.

The first, obvious one, is the urgent need for genuine international regulation and an end to the denial shown by part of the crypto ecosystem. Admittedly, the FTX wreck is not that of cryptocurrencies as such but that of an intermediary. But all too often, behind this argument, there is a desire not to question the libertarian underpinnings and "institutional allergy" deeply rooted in the DNA of the ecosystem. And for good reason, FTX's collapse is not just that of SBF and its affiliates, it is also the systemic consequence of the sector's lack of regulation.

>>> FTX: the figures of a historic fall

It is striking, in this respect, to what extent many of the rhetoric of many of the promoters of Web3 echoes the mantras of Web 2.0, in a form of collective amnesia. In the concepts of network state or decentralised and self-organised communities we find the same libertarian underpinnings as those who had promoted through the emergence of the web the participation of all, the wisdom of crowds or the end of hierarchies. We know what happened: in a dialectic characteristic of Silicon Valley, this crypto-hippie self-regulatory illusion allowed the emergence of economic and democratic power concentrated as never before in the hands of private companies, the explosion of online hatred or fake news... and in fine reminded us of the indispensable nature of regulation and its institutional corollary. In the same way, Web3 has experienced this development at an accelerated pace (and in a more confidential way, both sectorally - finance - and in terms of dissemination, as this has not extended to the general public). 

Until the present situation. This one has the merit of reminding us that finance is based on trust, and that trust is based on underlyings (and their protocols, whether they be the dollar or bitcoin), but also on players, of which the regulatory framework is not the least important attribute. Whether they are states, central banks, banks or other financial intermediaries, these actors are credible because they are regulated according to imperfect standards that are accepted if not known to all. 

‍Last but not least, these actors and these rules have democratic legitimacy. During my years in government, one of the leaders of the Diem project (formerly Libra) explained the advantages of this to me by saying that it was not normal not to be able to transfer money from one country to another without friction. This assertion is questionable, to say the least. It's probable that the way the financial system currently works creates rents for certain intermediaries in international transfers (thanks to fintechs); but for the solution to be to create a transnational para-currency governed by a private company is the negation of democratic sovereignty. This is what I had caricaturistically summarised during my years as a minister by the formula "a currency goes with a parliament and an army". Let's not forget that Parliament's primary role is to vote on the budget, and that monetary issues are an attribute of a country's economic - and therefore strategic - sovereignty.

However, it seems essential not to throw the baby out with the bathwater. In a time that leaves little room for nuance, it would be surprising if the chain of tribulations of several major players did not fuel the cryptophobia of part of the political and media sphere. That would be a mistake. Firstly, because the FTX affair has little to do with crypto-assets themselves, their interest or the questions they may raise. On the contrary, it is a terribly classic case, a form of "Enron" scandal squared or cubed, where what is being questioned is not the underlying asset but the practices of one (of several, even) intermediary(s).

Secondly, because blockchain and crypto technologies represent considerable potential for innovation. By guaranteeing the authenticity of exchange registers and disintermediating some of the latter, they compensate for some of the trust flaws inherent in the operation of the Web as we know it and could significantly improve the lean character of many processes that have historically been very inefficient (in finance or legal, for example) - and therefore costly.

Will we, however, get as far as the famous Web3, i.e. a revolution in a large part of the Web, thanks to the widespread use of this trust overlay? Allow me to suggest that this is still highly uncertain. To do so, they will have to meet a number of significant challenges, foremost among them their energy consumption, their ability to handle millions of transactions in real time and their interactions with the good old Web 2.0 players, who have a strong tendency towards centralisation and do not offer the same intrinsic security.

But these technical shortcomings of current technologies and other uncertainties should not lead us to jump to hasty conclusions: it would be counterproductive to deny ourselves their potential in terms of trust, efficiency and, of course, job creation. Worse still, Europe would be shooting itself in the foot once again by missing out on a new technological wagon, even though it has the assets to be a leader in it!

>>> Sorare: "We need to be agile on regulation"

Bref, what we are witnessing is ultimately a very classic dialectic of innovation. To emerge, innovation needs to break the rules and get off the beaten - and standard - track. To develop and break out of insider circles, it needs trust, which means rules (over the widest possible area) and frameworks. It is up to the legislator to find the right balance in order to create the conditions for this trust without preventing innovation from emerging and spreading. 

This dialectic, while essential, is far from self-evident. This is all the more true when it comes to cryptos, which present regulators with a particular difficulty: that of mixing a financial underlying in addition to the blockchain technologies used (first and foremost Ethereum) with applications that have nothing to do with finance (whether smart contracts or digital art), creating cross-interactions between historically separate regulatory fields.

The various regulators, from the French government (PACTE law) to the European institutions (MICA) via the ACPR, AMF or even recently the ANJ on the Sorare case, have taken many steps in this direction. But this progress is still largely insufficient. We will necessarily have to go much further in adapting our regulatory frameworks and their implementation - probably by introducing asymmetric regulation between emerging and established players, and certainly by ensuring that it is implemented effectively and uniformly across Europe. In that case, the crypto world will gain nothing by opposing it head-on, or relocating to Dubai to try and escape it. To grow, it needs this regulation.