There is a bitter irony in the turmoil currently gripping the crypto universe. Crypto was born in the depths of the great financial crisis of 2008 as a backlash against the failings of the conventional financial system, with its overleveraged shadow banks and daisy chain of leverage and maturity mismatch. The original Bitcoin white paper published that same year sold a vision in which money was refashioned as a self-sustaining system of peer-to-peer transfer without the need for intermediaries. However, today’s upheaval bears all the hallmarks of precisely the failings that the industry’s early proponents railed against. As firms collapse and coin prices crash, the unravelling of this new daisy chain of over-leveraged shadow crypto banks is now in full flow.
While we survey the wreckage and plot a course for the policy response to rein in the sector, we need to keep in mind some key facts. Crypto operates under the banner of decentralisation, but it is highly centralised in two crucial respects.
First, many supposedly decentralised protocols turn out to be highly concentrated in terms of who actually governs and controls things. Often, it is the founder and a small number of venture capital backers that are in charge — as evidenced by the implosion of the Terra stablecoin in May. In most instances, crypto is decentralised in name only.