The state of crypto: past, present and future?


Crypto has undergone a seismic change. Alexandre Hornstein investigates what 2023 could hold in store for the embattled currency.

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Image by Jernej Furman

By Alexandre Hornstein

In 2022, crypto seemed the future. Funding from investors was piling in, high profile celebrity endorsements and a bullish market made crypto appear in place to revolutionise finance. However, as it currently stands, trust in crypto has imploded and regulators across the globe are placing it under scrutiny. Originally valued at $3 trillion at the start of 2022, the crypto industry fell to just under $1 billion by the year’s end. The trigger for this crisis was the collapse of the Terra blockchain.

Central to the Terra blockchain are two coins, UST and LUNA. UST was a stablecoin tied to the US dollar, with 1 UST being pegged to 1 US dollar. LUNA however was a normal crypto coin, with its value determined by market forces. The idea behind Terra was that UST would keep its peg to the US dollar through the backing of LUNA, and the Terra blockchain would regulate the amount of UST and LUNA coins in circulation to ensure this. If UST coins were burnt, then the algorithm would produce more LUNA, and vice versa. Terra would encourage UST adoption through the Anchor Protocol, a savings scheme that promised users a 20 percent interest rate. These interest rates, combined with the perceived safety of stablecoins saw a surge of UST in circulation, with 15 billion dollars’ worth in the Anchor Protocol and 18 billion dollars’ worth in total circulation. LUNA was seemingly playing its part, with the coin reaching a peak valuation of 119 dollars per coin in April 2022. Yet by the end of May 2022, LUNA would crash to less than a penny.

Many expressed concerns regarding Terra’s structure – particularly how it had the potential to facilitate a death spiral. Despite the founders’ confidence and the acquisition of reserve capital to retain UST’s dollar valuation, it proved insufficient. A swap of 85 million UST on 7th 2022 saw users rushing to ‘burn’ (swap) their UST for LUNA. For every UST coin burnt, more LUNA was produced by the algorithm, resulting in the death spiral of LUNA’s value and the Terra blockchain. Within five days, UST would fall below the dollar valuation twice, LUNA would crash to less than a penny, and the Terra blockchain would halt. The damage would amount to $45 billion, causing widespread anger, dismay and human suffering.

This collapse resulted in a loss of confidence across the crypto space. Bitcoin and Ether, the two most used crypto currencies, fell by 60 and 30 percent in value respectively. Numerous crypto hedge funds and crypto exchanges became insolvent in the following two months. Three Arrows Capital, a crypto hedge fund that managed over 18 billion dollars’ worth of crypto assets, defaulted on loans and declared bankruptcy on 1st July 2022, in part due to what was once a holding of $559.6 million worth of LUNA falling to a value of $670.45. Celcius, a crypto lending company managing over 10 billion in assets , also halted operations during the summer due to the fall in many other coins’ value. Yet pinning the collapse of these crypto projects solely on the plummeting values of Bitcoin and Ether following the Terra blockchain crash obscures a common trend of malpractice and criminal activity within the crypto space.

Do Kwon, one of the co-founders of the Terra blockchain, is on the run from South Korean authorities and Interpol for breaches in common market laws. The founders of Three Arrows Capital are also on the run, with current whereabouts unknown. Alex Mashinsky, the founder of Celcius, a self proclaimed modern day Robin Hood, rug pulled his customers and is currently being charged on fraud by the New York attorney General Letitia Jones. Yet the most damning example occurred later that year with FTX

FTX seemed the real deal. Since 2019,  it had grown to be the second largest crypto exchange and its valuation peaked at $32 billion. Yet it turned out to all be a mirage, for leaks on 2nd November 2022 revealed that Alameda Research, a sister firm specialsing in trading crypto, was covering its lack of liquidity through FTT tokens. A bank run on FTX occurred and the firm filed for bankruptcy nine days later. More information revealed that FTX had used customer funds for high-risk trades through Alameda without customer knowledge. His fellow co-founder of FTX Gary Wang, and Alameda Research CEO Caroline Ellison have both pleaded guilty, whilst Sam Bankman-Fried is to stand trial in October accused of  conducting one the largest cases of fraud in world history.

Supporters of crypto might point to more positive news, such as greater adoption of crypto currencies in many countries, especially cases such as Brazil and El Salvador. Yet, when most crypto coins lost over 60 percent of their value within a year, it feels like faint praise. When crypto’s supposed benefits of transparency and decentralisation turned out to be a lie and a catastrophic weakness respectively, regulators now feel obliged to step in. Currently, the regulation of crypto and stable coins is due to heard in the UK’s parliament, whilst the Commodity Futures Trading Commission and the Treasury Department in the US have also pushed for further regulation, calls reinforced by recent news the arrest of the Russian owner of Bitzlato, a Hong Kong crypto exchange, which served as a hub for money laundering and illicit trades.

2023 is likely a year of further regulation, and a further reduction in its value could be on the way. Even the crypto exchange that survived collapse have either walked back on outrageous promises, such as reversing previously offered benefits from their cards, or have lingering concerns, such as Binance and its links to Bitzlato.  If ever the public is to won over by crypto’s potential following the 2022 collapse in this new year, then crypto projects must embrace all the perceived positives associated with this new means of doing finance, decentralisation and transparency