“When 2 Brothers Fight to Death the Neighbor Grabs the Land.”

Subsequently to the feud-rescue-deal-and-drop between Binance and FTX, two of the largest crypto exchanges in the world, we are currently witnessing the debacle of FTX sinking the crypto industry to new lows further deepening the crypto winter and prolonging the unbearable bear market. This market drop was inevitable but it’s not the feud that truly caused it. The feud just exposed some deep structural issues pertaining to the industry and highlighted the systemic risks that can be caused by devious practices and/or bad actors. We cannot just claim to move away from the old legacy banking and financial system and consistently copy all its flaws while hoping everything will be fine. What are the problems, what is at stake? How do we rise from this?

Back to Basics: let’s put things in perspective: understanding the crypto market size and structure

The crypto industry is dealing with both structural and systemic risk. It shouldn’t be a surprise if Bitcoin bottoms to $8–12k before picking back up on a bull run at a later stage. The crypto industry is today mostly speculative and needs to further introduce the fundamentals of traditional financial system based on sound economics and real performance value creation from real economic assets. In other words it borrowed the bad stuff from traditional financial system and disregarded the good stuff that are supposed to make the industry sustainable and protect investors.

If we had to compare with traditional finance system we could say Bitcoin is the Beta of the crypto market. “Beta is a concept that measures the expected move in a stock relative to movements in the overall market. A beta greater than 1.0 suggests that the stock is more volatile than the broader market, and a beta less than 1.0 indicates a stock with lower volatility. In other words, Bitcoin is a de facto industry barometer, therefore if the price of Bitcoin swings the crypto market up and down. If Bitcoin has lost 25% of its value in 24 hours, you can therefore imagine what will be happening to the other assets. I can bet with my 2 decades experience in high finance and investment track record in the tech industry that this is just the beginning of a domino effect, as many key players (along the biggest in the world) had exposure on FTX. systemic risk in crypto industry is way much higher here than in traditional finance and 10 times more damaging in terms of market drops due to limited liquidity, highly correlated assets and very limited number of big players (2 main assets represent 60% of the total industry market cap) in an industry with a tiny market cap $2–3 trillion compared to the size of global financial market $750 Trillion (out of which the global stock market and fixed incomes market caps represent $125 Trillion each).

In order to put things in perspective, let’s compare the two major events that happened this week respectively on the crypto market and the US Stock market. When Elon Musk announced the sale of $4 billion of Tesla shares, the stock dropped by 5%. While when CZ (Binance CEO) announcement to dump FTT Tokens led to a freefall of FTX token by 80% in one day. While Tesla’s shares may bounce back due to sound fundamentals at some point though unlikely for FTX that will most likely undergo a painful liquidation due to lack of fundamentals and of course poor governance. The drop is acute for the reasons mentioned above referring to the highly correlated crypto assets, limited market liquidity leading to high volatility, further hammered by lack of business fundamentals and real economic backing fueled by digital assets with zero or almost no substantial backing.

The crypto industry is still in the infancy stage: Let’s not throw the baby with the bath water.

This being said, the downfall is temporary and will help separate the wheat from the chaff and leave the crypto assets with real value and business fundamentals to emerge from the industry cleansing. The same happened during the dotcom bubble in the early 2000 and saw the emergence of strong businesses like Google and Amazon thereafter. This is the main benefit of this repeated crisis since the Luna collapse in May. A purge needed to happen and the purge is currently happening.

This industry is still in its infancy and the traditional financial sector has experienced a similar type of issues in the past driven by greed, over-leverage, and lack of checks and balances. Most of it led to the global financial crisis of 2008 triggered by the reckless emission of unchecked credit default swaps and mortgage-backed securities. Let’s not have a short memory and always remember that finance is based on patterns and data analytics. If you don’t have a good memory, then don’t get into finance. So one should not throw the baby with the bath water and point to the crypto as the next scam because at the end of the day the careless practices used currently in our industry were exported from the traditional financial system (including centralized printing or digital paper).

Decentralization or Greed: A fundamental battle of values that will determine the future of the industry.

The problem is that some of the players in our beloved crypto space have learned from the best (or should I say the worse?) and are adopting the very same bad tricks and practices that led to the regular collapse and unfairness of traditional financial markets. In that sense, they are betraying the very essence and motive that led to building a new system like Bitcoin based on decentralization for a better world. I am one of those trained in the highest ranks of traditional finance who jumped the boat to join the crypto movement and contribute to the emergence of this long-awaited decentralized world empowering people and providing financial freedom for all. We should all wake up and smell the coffee!

We just cannot continue this combination of digital fractional banking and hyper-leverage fueled by limitless greed. With the FTX Debacle, the same issue as Luna algorithmic stable coin is pointing its nose here with much worse and more complex features. Such a model temporarily works well with market fluctuations and short-term volatility, but de facto collapses with any slight market shock that can lead to heavy and hyper-fast withdrawals (Luna’s model only worked on a growth trend-based model) which was stupid because once you reach $83 billion market cap in an industry fluctuating between $2–3 Trillion of total market capitalization and you have to massively sell BTC to cover your positions and your algorithmic stable coin parity you are de facto provoking the down price of BTC because of the high volume you have to sell to maintain your positions. Therefore even if the value of your BTC reserves dwindles and you even have to sell more of it to maintain parity and therefore become the unwilling architect of your demise as the more you sell to cover parity the lower your reserves in BTC are in value and volume and if things go fast you go quickly to zero like what happened in May. We are all aware of the pitfalls resulting from the decoupling away from the Gold Standard since Nixon in 1971 leading to frivolous printing of money and the disastrous outcomes leading to recurrent financial crises and recent exceptionally high inflation. This is why at Ubuntu Tribe, we endeavored to launch a digital coin backed by real physical gold redeemable at any time and not backed by thin air to bring real value into the crypto economy and bridge it with the real economy to ensure broader adoption. This has always been my opinion that the introduction of tokenized hard assets like gold, real estate, and art (NFTs) or else will help drive greater adoption while diluting the systemic risk currently endangering the crypto industry.

The crypto industry doesn’t have the size and robustness yet to face the diseases imported from the traditional finance system.

All in all, indeed the problems and greed mindsets of traditional banking that I have seen for 2 decades have been imported into the crypto world and it has been quite scary. I have always pointed to those flaws and explained that it was not sustainable and would lead to a programmed collapse and necessary restructuring for three main reasons:

1. There is not enough liquidity on the market for all the freely printed coins with zero backing that each player wants the consumers to swallow. It can only work (although temporarily in the real world because it’s backed by sovereign states and military power). Everyone wants to be their own central bank and print as they wish. In just 48 hours $10 billion of customers’ assets just got wiped out by the FTX event it’s not sustainable and we shall ensure it is not repeated. In the race for gains and profits the industry has ignored the very fundamental pillar of finance: 1) Asymmetry of Information and 2) Sound Collateral. Or should I say bad actors only picked one of the pillars (asymmetry of information, the convenient one…) through opaque management and ignore the other by fabricating fake collaterals with no real economic or utility backing and that have no use in the real world. Many solid institutional investors fell into the trap and lost a lot of money with the FTX flop. To name a few, Blackrock, Softbank, Sequoia, SoftBank, Circle, Temasek, Tiger Global, Ontario Pension Fund, etc. invested at their own risk and are big enough to digest the risk. We should be worried about the audience of retail investors, often non-savvy players unfamiliar with the intricacies of the finance world. They are unfortunately the first and most likely victims due to naivety, lack of information, and unpreparedness.

2. The systemic risk is way too big due to the various interplays of digitally printed coins plagued by cross inter-lending questionable practices in the background. The two major coins- BTC and ETH represent more than 60% of the industry market cap. So basically, it’s like having two whales swimming in a glass of water. When in trouble, you inevitably have to sell only a few reliable assets and the slightest movement of price creates a tsunami on the market at any occurrence of panic sale.

3. Even when you apply highly traditional finance modeling principles they can’t be copied and pasted for obvious reasons. The $750 Trillion total market cap of the global financial market dwarfs the crypto market barely reaching 3 Trillion. The slightest risk of failure of a big 5 in the crypto market leads back to a possible 2008 scenario “Too Big to fail” and reminds us of the old times similar to a crypto remake of AIG bailed by the Federal Reserve’s printing machine. In the crypto space where due to the lack of Central Banks to bail out the whales, the bigger fish in the pond are compelled to acquire the smaller dying fish and bail them out. In turn, hopefully, the bigger fish inheriting poor assets will get bailed out by bigger fish, and the risk of contagion increases and propagates. But wait! Isn’t the biggest fish in the pond somehow not becoming very similar to the Central Bank model that the whole industry was criticizing and scared of? But isn’t the biggest fish bailing out to ensure its own survival as it could not recover from a fully collapsed industry that could ruin the trust of the early adopters but de facto annihilate any form of hope for future adoption? Does the bigger fish have a choice? Hhhmm on the other hand are we going back to the centralized finance world we have long criticized? What does this all mean?

“When two brothers fight to the death, the neighbors grab the land!”

How do we ensure our industry blossoms and deliver on its extraordinary promises? Also does calling out the bad actors solve the problem? Is that enough? Of course, it doesn’t. So do we educate hundreds of millions of small investors about the dirty old tricks inherent to the traditional finance world imported by the crypto industry? We certainly should and must do so but that will take some time and may not be enough. Should we, therefore follow the old-fashioned regulated model often suggested by the SEC to only allow some types of investments only to accredited investors? For simplification purposes, one could say that The SEC defines an accredited investor as either: an individual with gross income exceeding $200,000 in each of the two most recent years or joint income with a spouse or partner exceeding $300,000 for those years and a reasonable expectation. But what about the 7 billion people who are waiting in line to access this industry to escape the poverty trap and who may be left out of the game should we apply the same principles? Isn’t the beauty of crypto the open access to wealth for all?

The African adage saying that “when two brothers fight to the death, the neighbor grabs the land” is deep wisdom and showcases what may be happening here as a consequence. It was not long ago after the Terra/Luna collapse that Goldman Sachs tried to gather $2 billion to buy/rescue Celsius crypto lender. The risk here for the deeply weakened industry is to become overexposed to become easy prey to regulators, and other traditional finance players with deep pockets. This would of course defeat the very purpose for which it was created. The problem is that when you act like kids you should not be surprised to get over-parented and highly scrutinized. There is a real risk of an over-regulated crypto market under the excuse that the industry failed to provide enough assurances to protect investors. Regulation is necessary when it plays a facilitator role but can be stifling when it becomes an oppressor driven by fear. On the other hand regulation is not the Panacea and won’t resolve the intrinsic issues of the industry. Let’s not forget that the mortgaged backed securities of the 2008 crisis were regulated products, even more so, Bernie Madoff was regulated by the SEC the whole time. If we were mature enough to take the crypto industry to this point, we should first pre-empt any external intervention, show more discipline, and fix the industry among ourselves before it gets too late.

The liberation movement spearheaded by the blockchain and crypto industry is in danger…

I have been championing and advocating for blockchain and crypto adoption among leaders around the word over the past few years chanting the potential of this new technology to create a leveled playing field. Satoshi and his early crypto friends must be up in arms watching their early dreams currently being sabotaged. Where did we go wrong here? What needs to change? How do we truly protect the end-use, retail investors, and the man on the street who entered the game with their savings fired up by the opportunities and filled with so much hope, and who is likely to lose years of savings? This has nothing to do with a war between Binance and FTX what is at stake is the survival of a promising industry still in its infancy and is borrowing similar flaws and bad tricks from the very old finance world it originally aimed at challenging for the better. Even our beloved crypto industry could be engineering its own collapse and become a subject and an easy target for a takeover by old big finance. Can anyone see what’s going on here?

Since adolescence, I have always been fascinated by technology. I remember the very early days of the internet many years before the Internet Bubble of 2000. I was an adolescent and we were later on among the first in Europe to build a website to connect students across universities. I immediately embraced the internet revolution because I wanted to be part of this global empowerment movement. Indeed knowledge is power and suddenly the window opened for humanity to access limitless information at the palm of their hand. Today I see the blockchain industry and cryptocurrency as a Liberation Movement. I view it as this powerful tool that has the potential to rise as one of the most valuable equalizers in human history. An equalizer capable to ignite the most staggering wealth transfer known to mankind if and only if the crypto industry survives its infancy stage. All children (and adults) make mistakes but the only ones who grow are those who learn from them. It is high time that we learn!

From an ethical point of view, there is a fundamental dilemma that requires attention here. The possible antinomy of greed and decentralization. Greed has certainly positively fueled crypto adoption but is certainly becoming the biggest plague for the industry. The problem with greed and bad actors is that they always want more. Greed often leads to the concentration of capital, resources, and power which often defeats the purpose of decentralization. It is imperative for the captains of industries within the crypto and blockchain space to remain loyal to the core values that led to the creation of blockchain and remain the guardians of this liberation movement and coordinate their actions to ensure such values are preserved in the programming, coding, structures and stakeholders interactions within the industry.

A cold wake-up call and a Call to Action!

Each player should take responsibility and come forward. We should salute the recent proactive approach of Binance and Coinbase a couple of days ago to offer to publish a regular transparent report on the state of their reserves. This will help bring more comfort and trust to the industry. Any respectable player in the crypto space should take a similar approach. We took a similar route many months ago to lead by example. Ubuntu Tribe GIFT Coin Gold International Fungible Stable Coin to be released to the market shortly) is one of the first stablecoins on the path to being fully regulated at the sovereign level. We took the initiative to go through a license application with the Bermuda Monetary Authority, one of the best and most advanced regulators in the world for virtual assets. We delayed our go to market because we wanted to ensure to be licensed and give comfort to our customers that we had passed the stringent test imposed by some of the most demanding regulators in the world. We did so in the interest of our customers and investors out of transparency and because we were confident it was the best way to reassure any stakeholders engaging with GIFT Coin and Ubuntu Tribe even if it implied operating at a loss for a year.

Where to from here?

For sure, pre-empting regulation and offering more transparency will certainly help but will not be enough to address the industry’s systemic issues. What else needs to happen for the crypto industry to thrive and gloriously emerge from this infancy stage?

I see 5 key solutions to be implemented and standardized within the industry to ride this repeated crisis wave.

1. Proactive disclosure and Transparent mechanisms while respecting privacy

2. Broader Asset Class Diversification with assets tokenization bridging with real-world economy for more stability and liquidity

3. Return to the economic and financial review of business fundamentals and tone down the purely speculative approach damaging the industry

4. Implementation & Standardization of portfolio risk management/assessment protocols and tools

5. Adoption, Adoption, Adoption to ensure broader market depth and liquidity through customer acquisition beyond the crypto community.

Of course, many key players have already taken those steps and the trend is growing towards maturation and stabilization but it has not reached critical mass yet to tip the balance in the right direction. Greater concentration and consensus towards urgent action are needed to restore trust for the next bull market to be more robust and sustainable and pave the way for a long trend of growth and adoption. As Einstein wisely pointed out, “the definition of insanity is doing the same over and over again, and expecting different results”. The time has come to change and tweak and few things. The time is now! We shall overcome!

By Mamadou Kwidjim Toure — Founder and CEO of Ubuntu Tribe – Mamadou was ranked among the Forbes Magazine’s top 10 most influential men in Africa & top 30 global thought leaders in blockchain by Hackernoon Magazine…

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