One of the first events that sold me on the idea of Bitcoin was the Mt. Gox disaster. While most of my finance colleagues viewed the hacking as a reason to dismiss crypto, I couldn’t get over the fact that a virtual good was stolen and the theft hurt. This wasn’t possible before blockchain, because all virtual goods were easily replaceable — a feature that also made them worthless. In the ensuing years, I came to view other price dips caused by major hackings as an opportunity to buy. Though the resulting news coverage in the mainstream media seemed bearish, the subtext was to educate the public on the fact that blockchain technology enabled something fundamentally different, and better.
The Quadrica fiasco, with an exchanges CEO dying and client funds being supposedly there but apparently inaccessible, has the same feel to it. What looks on the surface to be a black eye for the industry actually shows why the crypto financial system is better than the legacy one.
It starts with the fact that anyone could have still used this now-defunct company right up to the collapse and not lost anything, so long as they followed the best practice of withdrawing purchased coins to their own blockchain addresses. This is almost never an option in traditional finance. You can’t just take possession of your assets from a Wall Street broker, as anyone who had an account at a Lehman Brothers in 2008 knows all too well.
Then there is all the public sleuthing of the ledger that has led some to question the official narrative. The transparency of public blockchains empowers us to always “not trust, but verify” what we are told. Getting to the bottom of any controversy is therefore crowdsourced, with everyone given the opportunity to do their own research. The people harmed by Madoff couldn’t do that. This doesn’t mean that victims of shady behaviorwill always find the answer, but at least they know to ask the right questions.
Regulation is a hot topic in the blockchain industry these days, thanks to the bear market and the double standard imposed by authorities like the SEC. The Quadriga collapse has predictably led to calls for more regulation. But what it actually highlights to anyone with an open mind is why with blockchain infrastructure, you can get away with a lot less.
Most of the greatest frauds and collapses in history, be they Enron, Worldcom, Tyco, Qwest, Madoff, Fannie Mae or MF Global happened at companies that were heavily regulated. Fannie was a pseudo-government agency, MF Global was a Primary Dealer whose CEO was a former senator and governor, and Bernie Madoff was the chairman of the NASDAQ. Wall Street is one of the most regulated industries on earth, and yet all of the shenanigans of the financial crisis, including some of the greatest scams in history, happened. The solution isn’t more regulation (MF Global happened post Dodd-Frank) but rather greater systematic transparency and individual sovereignty.
In the legacy financial system, we have no choice but to take a CEOs word of his company’s solvency. But that doesn’t help in a crisis, as every entity that failed in 2008 told us it was fine — as did its auditors and regulators — right to the bitter end.
In the crypto system, we don’t have to take anyone’s word for anything. We can just visit a website. A traditional bank can tell you all it wants about how solvent it is, but only Maker can show you. You can even watch every single loan being issued and paid off in real time. I doubt even the CEOs of most legacy banks can get that level of transparency into their own books.
More importantly, in the digital asset economy all of these actions could be taken proactively. All of the research and analysis being done on Quadriga’s cold storage wallets and reserves today could have been done a long time ago, before there was any sign of foul play. And it should have. Going forward, this level of scrutiny will probably start to be applied to all major exchanges by the community on an ongoing basis. The good exchanges will facilitate the public oversight, as some already do.
The net result will be a safer and more stable financial system, and an acceleration of “the tokenization of everything.” Just as the Mt. Gox hacking added to the long term bullish thesis of Bitcoin by bringing more attention to its unique properties, the Quadriga failure shines a light on how blockchain is just better infrastructure.