We are disappointed to find that many folks in the blockchain space have strayed from OG crypto values, as some may call them, cypherpunk. There exists enthusiasm over traditional financial products acting as buyers of last resort. Simultaneously, there is excitement over early developments in tokenizing “real world assets (RWAs)” as a result of a Larry Fink (Black Rock CEO) clip distributed far and wide by the twitter algorithm. In the community, there is general enthusiasm from influencers towards on-boarding tradfi onto “crypto rails”.
In our experience, we have never, except for naively very early on in my personal journey, viewed this as a reality. There are two reasons. First, having worked with folks and known folks in traditional finance including doing a good deal of reading, it is clear that regulatory compliance and information security are two important considerations that follow profitability mandates for traditional financial institutions. Therefore, we find it unlikely that traditional financial firms will be open to interface with public blockchains without adhering to various KYC/AML standards, particularly in the United States (regulation by enforcement) and European Union (MICA-2). This will require some type of concession from users and operators. Even the Private Pools paper by prominent crypto natives eluded to this inevitable outcome. Recently, Multicoin wrote an article that said, “I find it hard to think DeFi can grow another 10x without KYC standards”.
We do not think it is worth the trade-off of building systems that are supposed to be permissionless – censorship resistant bulletin boards that anyone can read from or write to - if the outcome is to reinvent existing financial infrastructure. These public bulletin boards provide a strong layer of coordination, trust, and economic security with which applications can access to be built on top of. This economic security can be mesh or collaborative, it need not come from one coin alone. This means application developers can build applications for autonomous communities who can collectively organize themselves without requiring any type of state level permissions. It is critically important to preserve the values of permissionless innovation, censorship resistant money, and autonomous coordination.
Second, being students of previous financial crises including living through three – dot com/911, CDO/MBS, COVID — its pretty clear to us that many corporations including financial organizations in particular are poorly managed. The traditional financial institutions often have excess exposure to leveraged products purchased by their traders through various swap agreements, the risks are not well understood internally. One could point to any number of unethical behaviors (spending $20,000 per day on flowers for the executive suite) and stupidity/criminality (rating junk bonds as AAA ) uncovered during these periods of turmoil. The track record of these traditional financial institutions is less than stellar its despicable. In fact these institutions collectively lost more money in 2008 than they made in profits in their entire combined histories of operation. Yet we here calls to invite these folks on chain.
Finally, we don’t think when Vitalik wrote his recent article “Make Ethereum cypherpunk again” he was talking about on-boarding “bank chains”. We don’t think Satoshi was applauding bankers when he wrote this message in the genesis Bitcoin block.
>The Times
>03/Jan/2009
>Chancellor
>on brink
>of second bailout
>for banks
Yet, many are pushing for a reality in which traditional financial firms wind up owning the valuable land. Once the bankers have everything they want, they will attempt to reset the rules and eject the natives out. Of course, arguably the most important feature of blockchains is the right to fork. Indeed, its likely that as natives and institutions brush shoulders there could be a very contentious fall out. We think the industry or ecosystem as a whole is dangerously naive about making a Faustian bargain with traditional finance.
Meanwhile, in 7-10 years the user experience for intents, real-time ZK proving / verification, custom application interfaces, and smart personal assistants will make self custody and UX features of crypto, not bugs. In this world, we don’t need the traditional financial players because we on board people through word of mouth and teaching along with some meme-coin trading, prediction markets, and novel applications. We remain optimistic but it is notably frustrating to see folks that claim to have OG values stray so far from them when a whiff of money shows up.
It’s not lost on us that the universe is observer-dependent and there is something called moral relativism. Perhaps we are simply mistaking something, the genesis Bitcoin block, as a Schelling point of values, which it is not. Crypto is a big tent now that means various things to different people. Diversity in beliefs is important for a richer understanding and contextual clarity of our world. That said, we still think this is an important topic to discuss in public because the future of this ecosystem is at stake.