The world of crypto trading is known for its extreme volatility. “Not for ordinary people”, Carol Alexander, Professor at University of Sussex, told us, but could that change? With decentralised finance (DeFi) in development, the introduction of CBDCs and incoming regulations, could this space be tamed? We spoke to Carol Alexander to understand the key trends and the potential blockchain holds for the future of finance and beyond. Watch the interview below or read the transcript underneath.
Tell me about yourself and your work in crypto assets.
I've been increasingly specialising in crypto over the last five years. I picked it up as a new topic when I felt like a change. I started writing some papers on crypto from 2018 or so. Then one thing led to another, and now I would say it’s about 45% of my work – doing some real math stuff still, just to keep my brain alive. It's not very quant the work I do in crypto, although the forensic work is. That forensic finance, going into the microstructure, you need such massive data sets. Of course, I don't do any of that now; I work with colleagues that do that. It's getting so interesting because it is so important and so few people understand it.
You do though. Your questions were really, good. I thought, I've nearly got these questions. They're perfect. I don't have to change anything. So normally when I get questions, I edit them.
Thank you so much for saying that. This is a very unique market; it's got its own volatility; it's got its own mind! What are the key trends here?
Trends are being driven by increasing institutional interest. We've got the BlackRock ETF – of course BlackRock is also managing the Circle (that's the second major stable coin), and the access to the overnight repo facility. The US government is now using cryptos – yet another source because cash and banks aren't enough to finance the debt. Institutions are getting increasingly into it and all major banks now have got digital assets. Because they're good at risk management, hopefully, they'll bring some risk management into crypto, which is what we really need. And that is also building consumer confidence.
On the other hand, we've got regulation and Gary Gensler, also the CFTC, and the Department of Justice are bringing up so many well deserved cases. Not necessarily Gary Gensler's vendetta against Ripple, which we've just heard is not a security – which is great because it isn't. And then their crazy judgment that Ether, the currency of the Ethereum blockchain, and everything that goes on it is security!
The two main trends are institutional interest driving growth, more demand, and regulation, which is a bit of a joker in the pack. And of course things like the collapse of FTX goes hand in hand with the regulatory side because it catalyses more regulation. But laid on top of those opposing trends for the Bitcoin price, which drives everything, is the manipulation, mainly on Binance, Bitcoin, Tether, Perpetual, or Bitcoin USD Perpetual as well. They have two perpetuals, these contracts are very close to the spot.
Quite a bit of my earlier research focuses on the impact that finance has on destabilising the entire market. So what happens is you get a bit of good news like Ripple, professional traders, Binance itself, Jump, Jane, Cumberland, big hedge funds, big major banks… obviously they don't do it overtly, but they do it. They put on very large trades, much more than the normal size that would be banned in a regulated market. Of course, nothing is regulated on Binance. And then they'll fire the cannon upwards as soon as there's a bit of good news, and they'll put the price usually up about 4%, and then they sell. Just as ordinary investors think, “oh my god, we must get into it”, it comes down again because the whales are selling.
And then some bad news, for example the news about SEC going after Binance, you would have expected the opposite [to happen] – cannons turn around 180 degrees, fire in the other directions, big short put on, and then they're by the bottom. However, since Binance is one of these players that are doing it maybe they were counterbalancing those trades and we didn't see that. If it's not bad news about Binance, but bad news about something else, they will succeed in shooting the price down 4% approximately. Then they buy back, just when investors are thinking, okay I should short. The market is tumbling and the price recovers. So ordinary investors are screwed either way. This market is not for ordinary people.
I wanted to talk to you about the impact that consumer sentiment, like social media posts, might have. How do you see that?
That's what I was just explaining really. There's a bit of news and then professional traders getting in very quickly and profit from that news. There was so much confusion about is Bitcoin blockchain? And now we've got this same confusion, is crypto DeFi or how is it related? And that's a really good question.
DeFi is much, much bigger than crypto. Absolutely. DeFi is really everything. You need crypto to run blockchains. You need something called the native token to put smart contracts on blockchains. So ether is a native token of Ethereum. Bitcoin is the native token of (the capital B) Blockchain (little B for bitcoin).
The coin or the native token. You can't really do anything on the bitcoin Blockchain itself because it's just a clunky, old, stupid proof of work thing. There are what we call layer two solutions that allow you to put pro smart contracts on bitcoin, the omni layer, and various others. So you can use bitcoin to light the fuel for those smart contracts, but it's not primary use of bitcoin. Bitcoin Blockchain is useless. It's just a toy.
The Ethereum blockchain and what we call layer two and other sort of speeding up solutions with a huge architecture now underpin the entire digital economy. And where there are private blockchains, they're also using Ethereum standards. Now private blockchains don't need a coin to run because the consensus can be done just by people who are employed by (for example) a consortium of banks who will run their cord of blockchain or something like that. So the people's job is the validation of the different transactions. And already we're seeing finance interest rates, swaps, bonds and, so forth.
And now, just a few days ago, treasury put out a call to say we are stopping all trading of paper shares. Everything's going to be digital assets based. So in fact, I'm very well posed at that point because I'm working on a project exactly for that to tokenize stocks, and I'll be going to talk to the treasury about that as soon as I can.
Anyway, so DeFi is like this massive iceberg. On the one hand, you've got the computer science revolution. It's much, much more than just AI. AI is actually straightforward. The technology we're using for AI has been around for decades. But the technology we are developing for blockchains is amazing. And there's the young generation who are – surprisingly – slightly disillusioned by the way that Western capitalism has denied them the sort of things that I had when I was your age: opportunities, money… Inequality is growing all the time. And so you find, because there are no boundaries, people in India and other developing countries pioneering the architecture here. Because they haven't grown up in financial markets, they make their own. So that's why we see all these innovative products, staking services… you don't get that anywhere else. Even some of their financial products, like variable leverage tokens, they don't exist in ordinary markets. The perpetuals, the main thing that's traded, they don't exist in ordinary markets too.
But beyond the financial markets, we've got the whole economy. Supply chains are running on blockchain now. And this is all DeFi in a much broader sense, because of course you need finance for blockchains, and it's the finance, the certificate, the port authorities and things like that are being tracked, or insurance claims! But then, blockchain is also underpinning not just the financial part of the economy, but things like health services and so forth. It's broader than finance. Long answer, sorry.
No, not a problem. I feel like whatever’s happening in the crypto space, it will reflect on the DeFi space because, as you say, people may not be able to tell it apart. So whatever sort of stories that come out of there might still impact the future of the DeFi space.
It will. If finance goes under, then that's going to be quite a huge knock on crypto central. But we can't not have native tokens like ether. There were many other blockchains as well, for example Polygon and Solana, and some of these are taking a hit. We don't need as many as we got. Now we need things called layer zeros that intersect all these motorways together and connects them.
They all carry smart contracts, but then there is this other form of token which is crowdfunded. Nothing to do with blockchain apart from the fact that they use a digital asset to crowdfund. It's similar to an IPO in that you're raising money usually on a smaller scale, but some of them, Tezos raised $450 million. Some of them are very large, like EOS. But this number of them is growing all the time, so there are 19, 000 or more different currencies.
We call them currencies, but are they currencies? Are they commodities? Are they stocks? Those tokens are clearly securities, but ETHO is clearly a commodity. Bitcoin is supposed to be a store of value, but can it be if it's so volatile? I don't know. They have features of currencies, features of commodities, and some of them also are securities, no doubt. The majority of them are securities because of the way that they've been used to raise funds.
I also wanted to talk about the central bank backed digital currencies, CBDCs, as they're coming through. How is that going to change the game here?
It'll help the risk of stable coins. That's the bottom line at the moment. Let me just start at ground zero because most people don't really understand CBDCs and the document that they put out, I thought was very clear, but it has been criticized by the public. And I do know a lot of people who are rather nervous about big brother being able to see every transaction that we do. I would say, first of all, we definitely need to reduce our exposure to private money because as we use our Apple Pay, our Ding, and our credit cards, and so forth, more and more of our money, 85% of all cash or all funds in the UK, is held with private banks.
You may have heard a couple of days ago about the landmark ruling that Barclays are not going to be paying that lady back, even though she was defrauded nearly a million. And that's a landmark case! I have also been scammed – I had a remote access scam, they gained remote control of my phone and my computer at the same time and made all these transactions. I didn't even make them and I'm still waiting like six months to hear anything from the financial ombudsman because it was one of these many electronic money institutions. Your money is not safe with these places. It really isn't and yet we're relying on it because we have no alternative.
But imagine, instead of that (because nobody carries cash around anymore), the only source of public money which is safe. There's no credit risk. And that's what a CBDC will do. That's all. They're still going to give people cash if they want it.
It's a bit like a pay-as-you-go phone or car over time. More and more people are just using pay-as-you-go on your phone, but there used to be lots of people that couldn't do it and they wanted to put money in a meter and we'll carry on like that for a while, but we definitely, need to have a CBDC because the alternative is that you use something else with a stable value, certainly not bitcoin, but something called Tether.
That has a relatively stable dollar value, although it can be attacked, and stable coins have been attacked. The Terra Luna attack was a major attack on a different type of stable coin, not really in supply anymore. What they're supposed to be are custodial stable coins, but it's pretty clear that Tether was just taking people's fiat currency, issuing Tether.
There were intermediaries like exchanges, which act as brokers. These exchanges are not just a platform. They also act as brokers, they act as custodians, they do their own clearing and settlement, they wipe you out on a moment's notice without a margin call, et cetera, et cetera. They also were brokers for Tether. And you would upload your fiat, (you would try and get it off though), swap it for Tether, and then trade against Tether things.
A couple of years ago, that was the only model that was used. And a couple of years ago, an awful lot of money was going onto these exchanges and a huge amount of Tether was being issued – up to 70 billion. That's gone a bit down recently, maybe. It's a huge amount of dollars that have been issued out of nowhere from a company that is completely unregulated and has all sorts of problems with a Bitfinex exchange, which was an intermediary. Problems, cowboys, bad actors, the whole time! Clearly these exchanges made enough money in the end to pay back this commercial IOU, commercial paper that they gave to Tether.
So Tether is now phase two fully transparent! When you look at their website, they seem to have all the reserves, and of course they don't because by the MiCA, the Markets in Crypto-Assets Regulation in Europe, USD stable coins are going to be restricted. Great, because Tether's taken over South America. The dollarisation of South America is fairly complete with Tether. And the U. S. government are quite happy with that and they're in bed with Circle, the other U. S. stablecoin, through BlackRock. So now Tether issuing tons of, GBP and EUR but they can be attacked, they will be attacked, and there's all sorts of regulatory problems going on with them.
And it's not a long term solution to have money supply controlled by an unregulated private company. But if the money supply of a stable thing you can use on blockchains is by a government like a CBDC, then that's the way forward. So it's definitely going to happen. And people shouldn't be so scared.