When pain really means gain – why today’s crypto juncture is their business break

First things first, the recent market selloff is not exclusive to crypto. The volatility affected the entire market, especially the tech stocks, with both the Nasdaq and Dow Jones US tech sectors shedding more than 26% as of May 24.[i]

However, the recent downfall of the algorithmic stablecoin Terra (UST) – where it lost its dollar peg- shook investor confidence in the broader crypto ecosystem. The de-pegging of Terra and other stablecoins poses a significant reputational risk and amplifies calls by policymakers for regulation.

What happened with Terra was uniquely tied to its business structure. Unlike the leading stablecoins, which are backed by cash and less risky assets, UST relied on an algorithm and a sister cryptocurrency, Luna, to keep its price from fluctuating. Terra’s unique business structure- which is inherently different than asset-backed stablecoins- highlights that the issues with Terra are not a reflection of the broader stablecoin industry and should not diminish the opportunity that stablecoins provide.[ii]

There is, however, a significant silver lining, the market volatility can serve as an inflection point and bring the ultimate legitimization to the crypto sector. It is in moments like this that every player will show its true colors, and those who have a solid value proposition underpinned by strong risk management, security and transparency, will come out big winners and propel their businesses forward.

Other financial services sectors have faced their share of inflection points and emerged stronger. Following the great recession, the best prepared banks came out with stronger capital, liquidity and stress test planning. The crisis brought out a stronger, more robust, more resilient banking system. It also created an opening for the emergence of the fintech and crypto industry that we see today which provide greater access to financial services.[iii]

Has new technology that’s proven to bring efficiency and realize value ever not succeeded amid all types of challenges? No. When a game-changing application of technology clearly brings efficiency to business, it not just survives and thrives, it takes over and becomes the new standard.

About 45 years ago, a group of European banks decided that the most efficient way to conduct cross-border transactions was by standardizing how they talked to each other. Today that idea is a global cross-border interbank payment utility enabling nearly five trillion USD worth of transactions daily.

Blockchain, the underpinning technology of the crypto industry, and all the new financial infrastructure being built with it, is in its own way, a next-gen version of this quest for market efficiency and global, net new value realization.

And stablecoins- when appropriately maintained under a transparent regulatory framework- have vast potential to play a significant role in future payment systems. Still, Terra’s crash serves as a humbling moment for the industry and one they must address head-on.

No matter the reaction to the recent market activity, one thing is still clear: the crypto industry is not going away.

The industry continues to fill a gap in financial services that is not going away and is only going to become more institutionalized. Using the recent volatility to dismiss the digital asset industry is short sighted. This moment is an opportunity for all crypto players to find their place – their voice – in the marketplace. When the dust settles, those who articulated an undeniable value proposition underpinned by sound risk and business management principles, will take over.

Next Steps for the Industry

No crisis should be wasted. Instead, the industry should use this opportunity to engage further.

• Educate and shape the narrative: The industry must seize this opportunity for greater education on their value, security, transparency and compliance standards to gain broader acceptance, awareness and sound policies.
• Embrace regulation, embrace the oversight: The market volatility has only further increased policymaker calls for regulation, particularly around stablecoins.[iv] The industry should continue to welcome regulation and lean into shaping and educating this regulatory structure through targeted and thoughtful public affairs engagements.
• Prepare in advance: Crypto firms should be prepared to respond to a reputational, regulatory, and/or operational crisis. Whether the crisis stems from market swings or organizational disarray, a bespoke crisis communications plan that responds to likely and material risks, is crucial as firms invest in positioning themselves in a highly competitive market. Additionally, given the industry’s increased scrutiny, crypto firms must be prepared to respond to broader market trends that can compromise their ability to conduct business in the long run.
• Safeguarding the facts: With any crisis comes misinformation and a need to correct and contain false narratives that could inflict irreparable damage to the newer players and brands. These corrections and education should be done through a comprehensive, cohesive, and coordinated public policy and communications plan.
• Strong Risk Management: Two of the three main arguments against the industry stem from the perceived lack of proper risk management culture, policies, and procedures expected of any financial services firm managing other people’s assets. As such, it is imperative that crypto firms invest in cybersecurity and compliance to the benefit of its customers, partners, and the industry at large. This will help preserve the trust of their users and of the broader market amid complex times.

[i] Tech rout is just a ‘shake-out’: Top CEOs predict what’s next for, https://www.cnbc.com/2022/05/24/tech-stock-rout-or-temporary-blip-top-ceos-weigh-in-on-whats-next-for-markets.html.

[ii] What Is LUNA and UST? A Guide to the Terra Ecosystem; https://www.coindesk.com/learn/what-is-luna-and-ust-a-guide-to-the-terra-ecosystem/.

[iii] Federal Reserve Bank of Cleveland, “The Great Recession in Retrospect”, December 2017, https://www.clevelandfed.org/newsroom-and-events/multimedia-storytelling/recession-retrospective.aspx#retrospective.

[iv] Senate Banking, Housing, and Urban Affairs Committee (May 10, 2021) The Financial Stability Oversight Council Annual Report to Congress, https://www.banking.senate.gov/hearings/05/03/2022/the-financial-stability-oversight-council-annual-report-to-congress.

FTI’s expertise

FTI Consulting understands the opportunities of the digital asset industry. We excel at challengers. We bring coordinated and expert backgrounds to prepare for water-shed moments such as this. We combine our deep backgrounds in digital assets, financial services, crisis preparedness, public affairs and investor relations teams to bring a coordinated strategic approach to clients.  Importantly, we also know how to prepare these firms to utilize these crises to emerge stronger and highlight their resiliency. For more information, contact us about meeting at Coindesk’s 2022 Consensus or by sending an email to [email protected]