Sometimes when you have been involved in something for a long time, you tend to notice when something major has changed or happened in that sector. As someone who has been in crypto for quite a while now, perhaps not in the very beginning in 2008, but long enough this year is perhaps the year that ended crypto’s Genesis era.
Why do I say this? There are of course the well-reported implosions of well-known crypto names and companies like Sam Bankman Fried of FTX and Alameda Research, Alex Mashinsky of Celsius, Terra Luna and Do Kwon, and a handful of lesser-known but influential movers in the space. Most of the key failures happened more than a year ago, but the guilty decision on Bankman-Fried and sentencing was done in late 2023.
Perhaps the most important (or second most important depending on how you view it) reason why I believe this 2023 ends the Genesis era of crypto is the $4.3bn guilty plea deal and step down of Binance CEO Changpeng Zhao. Zhao, or CZ to most people, is one of the most influential names in crypto. His decision not to bail out FTX and state the reason publicly is the reason for the great crypto crash of late 2022.
More importantly, however, is that CZ and Binance contributed greatly to the growth of crypto globally. Although Coinbase is bigger in the US, globally Binance is still the biggest exchange in the world, with an estimated $65bn crypto assets under management. Although a reported $1bn left the exchange after Zhao’s guilty plea was announced, the trading firm remains healthy and experts do not see the outflow as a reason for it to cease operations.
In fairness to Zhao, he was not charged with criminal actions in the same way that Bankman-Fried was charged with misuse of customer funds leading to their loss. Instead, the charges against Zhao are more of failing to implement proper Anti Money Laundering / Know Your Customer (AML/KYC) requirements. In recent years, however, most exchanges like Binance and Coinbase have begun to implement AML/KYC. When Zhao began, however, with capital from the proceeds of his house sale, the ethos of anti-centralized government independence that permeates crypto was how they did business, like many of his contemporaries.
Zhao needed to take three years off from Binance management but was allowed to keep his majority ownership of the Company. He will likely work on something new in the United Arab Emirates (UAE) where he will now be based, assuming the court does not sentence him to jail time.
More importantly, on the thesis of the end of the crypto Genesis era, is the fact that we are on the eve of the SEC approval of possibly twelve spot Bitcoin Exchange Traded Funds (ETF) to be issued by several Wall Street and finance behemoths like Grayscale, 21Shares/ArkInvest, BlackRock, Bitwise, VanEck, Wisdomtree, Invesco & Galaxy, Fidelity, Valkyrie, Global X, Hashdex and Franklin. Experts believe that these ETFs will be approved as there is real demand, but the SEC is trying to ensure that there will be no market manipulation and fraud by scrutinizing all applications. For example, while the twelve firms above will deal with the public investors, they will not have custody of the Bitcoin and they will not do their oversight. Instead, companies like Coinbase will do the custody, while entities like the NASDAQ and the Chicago Mercantile Exchange (CME) will handle the oversight.
This is coupled also with the approval by the US Financial Auditing Standards Board (FASB), the professional organization that oversees the approved accounting rules and standards in the US, to allow for the mark-to-market accounting of digital assets. This means that corporate entities holding these digital assets can mark the market value of these assets in their balance sheets. If the value goes up or down, the asset value is reflected in the balance sheets like stocks and bonds.
While we are not privy to the internal debates and wranglings, many speculate that the approval of a Bitcoin spot ETF was premised on the takedown of the current players in the space, initially FTX, and an unregulated Binance. While Binance will continue to operate, it will do so in a strictly regulated manner, to ensure that the new players are selling Bitcoin to the public as a properly traded and monitored commodity.
It is hard for someone who loves crypto like Zhao to be sacrificed for the sake of the industry’s growth. However, perhaps a needed step for crypto to move on to its next phase, is that the prime movers of its Genesis stage be retired so that the big institutional players can take over its next phase of growth.