Bloomberg Column: What Crypto Really Needs is a Killer App, Not an Unbeatable Binance

This is a question that most ordinary people don’t need and don’t have the opportunity to answer:

Would you rather live in the United Arab Emirates with a $23 billion fortune without a U.S. extradition treaty, sacrifice a chunk of your fortune, or spend 18 months in jail to sort out all your issues with the U.S. Department of Justice (DOJ) and the Securities and Exchange Commission ( SEC )?

Binance Holdings CEO Changpeng Zhao appears to have chosen the latter.

We don’t know all the details of the deal – the most closely watched point is how long, if any, CZ will have to spend in prison – but it appears to clear the way for Binance to continue as the world’s largest cryptocurrency exchange, and for Zhao to maintain his place in the top 100 of the Bloomberg Billionaires Index.

I believe the deal itself and the increased regulation it requires will have a negative impact on many of Binance’s customers, especially those outside the United States, and crypto traders who want to adhere to U.S. standards have turned to alternatives such as Coinbase Global Inc.

The bigger issue is the relationship between the traditional financial system and the crypto-financial system.

Almost all crypto-related news reports are inseparable from those trendy and difficult words: people are exchanging fiat currencies for cryptocurrencies, or trading crypto assets to earn fiat currency profits, or raising fiat cash for cryptocurrency projects, or using cryptocurrencies to purchase traditional goods and services.

No doubt this can all be attributed to the excitement, conflict, crime, punishment, and desire for wealth and loss in human nature.

But this is a distorted view because it ignores the larger narrative of the relatively peaceful and stable development of crypto protocols, without requiring any interaction with traditional financial or legal systems.

The current hot areas are Metaverse, Web 3.0, projects in Layer 2 and Layer 3, and we can’t exclude DeFi despite some setbacks in 2022. While all of these things have technical definitions, they are all used as buzzwords by crypto people and are more useful for marketing and hype rather than classifying and tracking actual projects.

The good news is that there is real progress on all of these things, and more. (Disclaimer: I am an active crypto investor and have venture capital and advisory relationships with crypto companies.)

Binance grew up on the technological frontier, navigating vague and inconsistent regulations in multiple jurisdictions, satisfying customers while angering regulators. It now appears to be choosing to side with legality and rebuild itself on known territory. U.S. regulators appear ready to accept it as a "legal immigrant."
Combined with other settlements this year and expected developments like the SEC’s approval of a spot Bitcoin ETF, this suggests a negotiated truce between regulators and those who want to move fiat currency in and out of crypto.

Financial sector regulators appear ready to allow transfers if effective safeguards are put in place to prevent fraud, money laundering, tax evasion and sanctions violations.

Many old-school crypto purists (I lean in that direction myself) are skeptical.

We believe the future of cryptocurrencies will be divorced from traditional finance, that the protocols that revolutionize society will not be funded by fiat cash, and that their value will not be easily converted into fiat currency. Crypto purists want to reduce the coercive power of governments and large financial institutions, not be naturalized by them , and certainly not compromised on their terms.

But there are many others in the crypto space who welcome peaceful coexistence with clear rules.

One reason is that they believe it will reduce fraud, including criminal activity such as ransomware, terrorism, etc. Another reason is that it will reduce the legal capital costs of underwriting cryptocurrency projects and increase the legal currency value that can be extracted from successful projects.

But perhaps the biggest reason is that it will allow law-abiding people to work in the industry without fear of prosecution.

When it comes to regulation, there is a parallel split between those who want to bring cryptocurrencies into the existing legal system and those who want to keep cryptocurrencies as isolated from fiat currencies as possible. CZ’s deal with US regulators appears to be a win for the former. If the deal satisfies both parties, we can expect other crypto-forward projects to come to the fore.

The future of cryptocurrency will be determined by technology, not by billionaires and lawyers negotiating cutting-edge real estate.

If the cryptocurrency space can launch a “killer app” that convinces hundreds of millions of people to learn about real crypto – rather than just holding crypto in a portfolio or speculating on NFTs – it will take off on its own, without having to seek permission from regulators or capital from traditional investors.

Without a killer app, cryptocurrencies will remain a technological tool for fringe projects and niche believers, without enough economic value to interest lawyers or most investors.