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Is a “Crypto Crackdown” Good, Bad, or Both?

Commentaries & Views

Around the world, crypto-haters are cackling euphorically. Over the past few weeks, a number of dodgy crypto schemes have unraveled, potentially giving them the ammunition needed to conduct a much-anticipated “crypto crackdown”.

This is not necessarily a bad thing. As we will show today, things had gotten fairly out of control in the “CeFi” (centralized finance) world. Many crypto investors were deceived by schemes such as “high-yield stablecoin lending”. These platforms sounded relatively safe, but it turns out that nearly all of their claims were too good to be true.

Exhibit A is Terra-Luna, the ~$50 billion trainwreck we covered a few weeks ago. Both retail investors and professionals were caught unaware by its sudden collapse.

Many of the problems with Terra-Luna were focused on Anchor Protocol. On Anchor, you could stake/lend your crypto assets and earn up to 20% yields. Here’s how Terra-Luna described Anchor Protocol on its “Ecosystem” page, where the platform was featured prominently (via Archive.org).

On the official Anchor website, we see that it was advertised as offering a “better yield”, which is “stable and attractive” (via Archive.org):

Anchor claimed to have a 15% “yield floor”, and a 20% “yield ceiling”. All powered by “staking returns from multiple PoS blockchains.”

That Isn’t “Staking”

The three major CeFi companies to implode, Luna/Terra, Celsius, and Three Arrows Capital (3AC), were all engaged in various schemes around borrowing and lending crypto.

The common theme was unsustainably high yields. In today’s world of high inflation and low interest yields in traditional assets, the thought of collecting a 20% APY, plus potential capital gains, was simply too good for many investors to pass up.

The problem, of course, was that the economics were broken from the beginning, and the “staking yields” were destined to collapse, along with the price of the ecosystem’s native tokens (UST and LUNA).

It wasn’t really “staking” at all. As explained by crypto OG Cobie back in April, it was more of a shell game.

Staking used to mean something… For Peercoin and the POS networks that followed, staking had a purpose. Owners would offer their coins as collateral for the chance to validate blocks, and they would be rewarded for doing so. Staking, therefore, rewarded users risking collateral and doing work: participating in functions necessary to the continued operation of the network or protocol.

Somehow, over time, the word ‘staking’ has been repurposed and redefined. Instead of receiving rewards for contributing to chain security with collateral at stake, modern “staking” just seems to mean idk we give you more coins as a reward if you don’t sell your current coins lol.

These modern staking mechanisms do not have any function in the ecosystem to which they belong. They don’t do anything in any practical or technical sense. They don’t make an ecosystem more robust. They are a shell game, using the name of a different thing to obfuscate their actual purpose, which is to encourage less selling.

…Simply paying users for not selling, payment received in the same asset that they are not selling, seems like pretty late-stage in the games of ponzi creation.

Well said. Whether through regulation, or community action, these types of projects should be prevented from taking advantage of investors in the future.

Working Toward Reasonable Regulation

With the amount of money lost by retail investors this year, heightened scrutiny of the crypto industry seems inevitable.

HIVE is hopeful that regulators will take a reasonable approach. In America alone, roughly 145 million people own or have owned crypto in the past, according to a May 2022 survey by Ascent. That alone should provide lawmakers with motivation to enact rational laws that won’t affect legitimate projects.

I reached out to HIVE President Aydin Kilic for his thoughts on the matter. Aydin replied, “We’re optimistic that regulators will take a thoughtful approach to these issues. Yes, there are some bad actors, and they should be dealt with. But let’s take a step back and remember that cryptocurrencies are the first real breakthrough in monetary technology in centuries.”

Mr. Kilic continued, “When Satoshi designed Bitcoin, it was a genuine scientific milestone. He solved the Byzantine Generals Problem, an ancient riddle about how to have multiple monetary systems agree on a single truth. Bitcoin nailed it. The genie has exited the bottle, and attempting to put it back in would be challenging, to say the least.”

I asked HIVE CEO and Executive Chairman Frank Holmes for his thoughts. He replied, “HIVE refused to engage in lending or borrowing schemes, which was a controversial decision with some investors at the time. It was the right call.”

Frank continued, “We will continue to operate in a sustainable growth-oriented manner. We’re optimizing operations, and keeping an eye out for opportunistic investments caused by market disruptions. Apolitical cryptocurrencies like Bitcoin are more important than ever in today’s world. So, we’ll keep building.”

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.