The crypto industry is discovering that there is nothing without trust

The $1 million proceeds can be used as collateral for leverage, held on deposit, spent on a Lamborghini or reinvested.

However, the token will not increase in value unless a third party steps in to create a market by offering to buy and sell from its 1 million holders at floating prices.

This is the role of the crypto exchange in creating markets for bitcoin, ethereum, solana, dogecoin and thousands of other altcoins. Without the market makers and their huge advertising budgets, the tokens would be worth close to their intrinsic value of zero.

Even the world’s largest cryptocurrency – bitcoin – relies on exchanges to create a market. No one stands ready to redeem it like Australia’s Reserve Bank or the US Federal Reserve as a centralized authority or issuer.

A traditional, regulated stock or commodity exchange does not make a market for securities or assets. It simply guarantees trade settlement if one of the counterparties defaults.

The regulation of exchanges by multiple authorities means that investors trust that their securities can be converted into cash on demand for profit or loss.

The exchanges exist as virtual monopolies due to the strict regulatory environment under which they are licensed to operate. Companies cannot list on exchanges such as the ASX unless they meet strict legal and disclosure requirements.

So it’s obvious that what the media and industry call crypto exchanges are actually loosely regulated market makers.

During the pandemic, these market makers made fortunes by charging fees on trades and profiting from the spread between the market rate and the price offered to retail traders.

In a typical flywheel effect, the profits were reinvested in advertising to attract more retail investors and earn more fees.

‘In God we trust’

This week, FTX was reportedly liquidated after a leaked report showed that the trading arm – a firm called Alameda Research – held the majority of its liabilities (roughly $8 billion) in FTT as a trading token issued by FTX.

In other words, Alameda relied on investors’ confidence in FTT’s market value, otherwise it could become insolent itself.

Tweeted decision by rival exchange Binance to sell $500 million in FTT threw off the house of cards as no one trusted FTT’s value if Binance wanted to sell.

In turn, Alameda’s trading losses meant that its assets could not cover its liabilities when FTT’s value plummeted.

Despite claims that code is law and blockchains are immutable, crypto still relies heavily on trust as a concept, and its unregulated nature makes it vulnerable to collapse.

By contrast, free market economies operate in which trust is derived from regulation: money depends on trust in the issuer; stock investors rely on stock exchanges to settle trades. The US dollar proclaims In God We Trust and activities such as driving or eating out depend on some trust in government regulation.

After crypto’s stream of explosions in 2022, including FTX, Celsius, Luna, Voyager, 3 Arrows and BlockFi, it will be difficult for the industry to regain public trust.

Regulation may help, but it has always been anathema to its decentralized, libertarian ideals, grand in theory but useless in reality.

While those hoping for crypto to disappear entirely are unlikely to get their wish, its rise into the public consciousness may have peaked with FTX’s collapse.