This is Bloomberg Crypto, a daily Bloomberg I Heart podcast, and I'm Stacy Marie Ishmael, Managing editor of Crypto for Bloomberg News. It's Monday, November twenty one. In a crisis, there are always losers, and in the aftermath of a crisis, some people will emerge in a stronger position than they were before. Who were some of the players who might emerge stronger from this crypto crisis and how much of that is even linked to the increasingly tense conversation around centralized dentities versus decentralized protocols. For more, I'm joined by Bloomberg reporter Saddartha Shukla. It's difficult for people to understand, Okay, how is a bad actor going to get punished by somebody who's not there to punish them? Said, it's been a minute. Welcome back to the podcast. Hey, thanks for having me. So. The funny thing is we're both recording this episode while we're in Singapore together. We are in the Singapore office because well why not, but also because you know you, me and the team have spent the past couple of weeks trying to figure out what is the long term of crypto in the aftermath of the bankruptcy filings of the ft X Empire, owned and co founded by Sam bankmun Freed. When we were talking about this in an interesting point about the debate between centralization and decentralization, I'd love for you to share with our audience a little bit of insight into the parts of the market that might actually benefit from some of the chaos that's happening right now. Before we get into the aftermath of fd X and who stands to gain and lose, I would like to give some context with regards to you know, what crypto currencies were all about and how the entire industry has evolved in the last decade. So it started with bitcoin being this decentralized um currency which anybody can use right um and the idea was to have no trusted third parties in this payment network. But the industry evolved in a way where if you wanted to get your hands on some cryptocurrencies, you either had to be take savvy enough to set up your own mining rig and then mind some bitcoins, or what you could have done you could have gone to a exchange and you could have just exchanged some of your freate currencies for some bitcoins, right, And that's how the exchange model evolved in the space, and the reliance on again trusted third parties, you know, gained prominence over the last one decade. So for a space that wanted nothing to do with trusted third parties, um, it started relying more and more on them because on ramping onto the crypto economy was not an easy fate, right, And that's how exchanges like f t X, finance for zerx in India, all of them grew into prominence, right. But one of the fundamental drawbacks of the entire business model was that these were centralized traditional businesses built on top of a new asset class, which is crypto, but they were heavily unregulated and continued to operate in a very opaid manner. And that's what we saw happening with f t X as well. I want to ask you a question about that before we go in. You know too much into the details, which is when you say they're operating, you know, these entities are operating in a way that's more opaque, that sounds like the traditional finance system, right, which I think is the point that you were making at the beginning. The idea is that inability to know the positions or the reliability of what somebody is saying about their positions was one of the things that made the financial crisis such a crisis. But I could say that the block chain is very transparent, and even so it can be hard to understand, right, Like that was the whole thing that people were saying about SBS Financials. They were like, we looked at the numbers that he was showing us, and we we were at all of the presentations and everything looks really good, and you know, the transactions mapped to the wallets that said they were the wallets that they had. So it seems to me like transparency alone isn't the solution to whatever this problem is. I think we need to like differentiate between centralized businesses like f t X and just plane solutions which are built on block chains like bitcoin eitherium. So if I had to, like, you know, explain in a sentence, I would say that businesses like f t X they came along with all the risks that were already there with traditional finance, and they also carried along all the risks that were there with decentralized applications. And cryptocurrencies, right, so you know, we they kind of carried the worst of both the worlds as well, right because they, uh you know, worked in such an opaque man of people had no idea with regards to how solvent and exchanges. Like, for example, if I transact on a decentralized lending protocol right now, over there, everything is on the blockchain with regards to the health of that decentralized application and of that lending platform. That was not the case with f t X. So what has happened since the collapse of f t X is that we've seen this renewed um interest among users to first of all, on their own tokens. So there has been this a year old cry um in the crypto space about not your keys, not your tokens, which basically means that if you don't hold your crypto assets in a private key which is owned by you, then eventually it doesn't belong to you. So what we have seen since the last week is that people have started moving their funds out of these trusted third parties exchanges to solutions where they hold access to their own keys. So gradually we are seeing that people are moving away from centralized parties like f t X two more decentralized platforms where at least the balance sheet, if you have to use the term, is visible for people to scrutinize. We can say things like just move to a hardware wallets, but the reality is, for like I don't know ninety or more percent of people, that is the equivalence of saying build your own iPhone, or host your email on your own servers, or self host your website. It is. It is a non trivial technical undertaking. Two engage in like the really actually decentralized business of crypto, which is one of the reasons that centralized densities like at X were so popular. Like, how are folks trying to overcome that? I agree with you on that I'm not going to completely centralized exchanges in this scenario because they've played a very important rule with regards to making it very easy for users to on TRAM and come onto the crypto economy. So I believe that going forward, centralized exchanges still have a very important role to play for this industry to grow. What we need right now is clear regulation because while it's a difficult task to regulate cryptocurrencies, all the businesses that have been built on top of these uh software, they can still be regulated because if you look at the business model of any exchange for that matter, like fd X, these are traditional age old business models for which we do have a decent amount of guidelines and regulations available. I think it's just that how do we gradually put that onto these businesses which are built on crypto asis and hence bring about more transparency, better disclosures, and better audits as well. That's going to be the key going forward, because I would say that self regulation in the space has failed over the last decade, and it's time that regulators did step in and brought about um more clear guidelines and regulations, especially around disclosures and how these exchanges, who are essentially custodians, how they handle the funds of their users. Now, this is very much the line obviously that regulators have. They're like, hey, we're regulators, we'd love to regulate. It is increasingly in you know, countries like India, a line that is not necessarily being achieved through regulation, for example, but through things like taxation. It is, but it's not necessarily the line that all of crypto is wholeheartedly embracing, because for every CEO who's going out there saying we get it, regulate us, there are entire telegram chats of people who are like, get your hands off my crypto. How dare you try to impose your Wall Street discipline on us where it's totally different asset class? Why are you trying to use things like you know, the how we test, which is what the U s SEC uses in part to assess whether something is the security on things like crypto. Based on your reporting so far and the folks that you're talking to, do you see these factions coming to any kind of middle ground. The crypto community tends to be very polarized and also that's an inderstation. And actually, but since the collapse of Luna earlier this year, USD and it's sister token Luna lost their peg to the dollar. In the last few weeks, they had a spectacular meltdown, sending prices to near zero and their market value doing followed by the collapse of many other centralized lenders in the space, we have seen that users themselves have started demanding for more and more transparency and disclosures from all these players. Right, um, so that is an organic movement that I would say that is coming from within the community, right, But users can only force a centralized business to do so much. At the end of the day, the regulators have to come and finally decide on, Okay, this is what we require from you in order to make sure that you're working in a compliant manner. Right. So that's where I think the difference has to be because in the last couple of months, we had have seen some regulatory action in this space, but the big ones have been around let's say, the sanctioning of tornado Cash, the virtual currency mixer. Tornado Cash was sanctioned by the U. S. Treasury Department after it was used to launder more than seven billion dollars worth of digital currency since its creation. The crypto community is disgrunted that regulators are acting more and more on just defining the underlying tokens or censoring the underlying products, rather than looking at these businesses which we're selling um investment products without you know, proper license, without proper disclosures, do you know people across the world. So I think that's where the divide is up next. More from Bloomberg REPORTA said Chukla on the sometimes factionalism of the crypto industry. Crypto was designed to not have to rely on trusted third parties, and for anybody, I'm just gonna shamelessly plug my colleague Matt Levine and the single story issue of Bloomberg Business Week that he wrote called The Crypto Story, which is also available online and you can listen to it on this very podcast. We air special audio episodes on weekend, so please do check that out. The point that I made so brilliantly is that people fundamentally want to trust each other, even if the system that they're designing is assumed to not require it. Like just we we have this tendency to move towards situations in which you can trust other people, and transparency doesn't necessarily solve for bad faith. And I think a lot of the response to Sam bankmun freed, and a lot of the response to the FTX bankruptcy filing has been people feeling betrayed by this guy who would get up on stage, including at conferences put on by Bloomberg and say things like, you know, we were trying to set a high standard for the kinds of companies that we were would say yes to to helping bail out or essentially making statements that presented them as the smartest guys in the room. A lot of the time. I'm not sure regulators are necessarily equipped to solve bad faith of the time. But I want you to just just tribe what's in that ideal world of crypto self policing and self regulating that so many people in the space think is possible. How do you deal with actors who are accused of operating in bad faith? What do you actually do? Two ways one can handle this. One is the traditional way of having regulations and making sure that they're enforced right. The other way, which some of the decentralized protocols already has in them, is have mechanisms built in which would penalize bad actors. Right. But the thing is the second way of doing is it's kind of complex, it is convoluted. It's difficult for people to understand, Okay, how is a bad actor going to get punished by somebody who's not there to punish them? Right? So I think there's a long road ahead for the sector to recover from here. The crisis of confidence is big this time around, and in order to gain back that confidence in order to establish some legitimacy. The first thing that all the major players in the space, the thought leaders, the businesses, that they have to do is to make sure that they act in a compliant manner without even having regulations. If they can act in a compliant manner, disclosed more than they should be disclosing. That is one way to bring about some confidence because still now the practice has been that we will do the bare minimum. The other thing which a lot of the purists should do is that they should communicate what their project is, what their product is, to the layman in a simpler manner, because let's be very honest, the UI, the user interface and the user experience for anybody who wants to interact in this space without a centralized party like ft X, if it's very cumbersome, you need to be really smart in order to like even make or just or just really tech savvy, because there are a lot of people were not tech savvy and vice versa. So exactly so those roadblocks need to be removed. I think people should work on improving the user experience and the user interface move as you know, things progress, because um, it doesn't matter how decent lize or secure. The underlying blockchain is all the product that's built on top of it. If people are not able to use it or understand it, they're going to fall back to platforms which they feel comfortable using, right and that information asymmetry always leaves a window for bad actors to exploit people who may be a bit cullible or maybe just be a bit ignorant about how the space works. So I think that's how the place in the space should move forward. Thank you said. You can find more of Sid's recording on the Bloomberg terminal and on Bloomberg dot com. This is Bloomberg Crypto, a daily podcast from Bloomberg and I Heart Radio. For more shows from I Heart Radio, visit the I Heart Radio app, Apple Podcasts, or wherever you get your podcasts. Send us your comments, questions, or suggestions for the show to Crypto at Bloomberg dot net. The supervising producer of Bloomberg Crypto is Vicky very Galina. Our senior producer is Janet Babin. Our producers are Mohammed Faruke and Sharon Barriro. Our associate producers are Ty Butler and Moses on The Desta wonder At is our engineer. Original music by Leo Sidron. I'm Stacy Maria Shmaal. We'll be back tomorrow.

This is Bloomberg Crypto, a daily Bloomberg I Heart podcast, and I'm Stacy Marie Ishmael, Managing editor of Crypto for Bloomberg News. It's Monday, November twenty one. In a crisis, there are always losers, and in the aftermath of a crisis, some people will emerge in a stronger position than they were before. Who were some of the players who might emerge stronger from this crypto crisis and how much of that is even linked to the increasingly tense conversation around centralized dentities versus decentralized protocols. For more, I'm joined by Bloomberg reporter Saddartha Shukla. It's difficult for people to understand, Okay, how is a bad actor going to get punished by somebody who's not there to punish them? Said, it's been a minute. Welcome back to the podcast. Hey, thanks for having me. So. The funny thing is we're both recording this episode while we're in Singapore together. We are in the Singapore office because well why not, but also because you know you, me and the team have spent the past couple of weeks trying to figure out what is the long term of crypto in the aftermath of the bankruptcy filings of the ft X Empire, owned and co founded by Sam bankmun Freed. When we were talking about this in an interesting point about the debate between centralization and decentralization, I'd love for you to share with our audience a little bit of insight into the parts of the market that might actually benefit from some of the chaos that's happening right now. Before we get into the aftermath of fd X and who stands to gain and lose, I would like to give some context with regards to you know, what crypto currencies were all about and how the entire industry has evolved in the last decade. So it started with bitcoin being this decentralized um currency which anybody can use right um and the idea was to have no trusted third parties in this payment network. But the industry evolved in a way where if you wanted to get your hands on some cryptocurrencies, you either had to be take savvy enough to set up your own mining rig and then mind some bitcoins, or what you could have done you could have gone to a exchange and you could have just exchanged some of your freate currencies for some bitcoins, right, And that's how the exchange model evolved in the space, and the reliance on again trusted third parties, you know, gained prominence over the last one decade. So for a space that wanted nothing to do with trusted third parties, um, it started relying more and more on them because on ramping onto the crypto economy was not an easy fate, right, And that's how exchanges like f t X, finance for zerx in India, all of them grew into prominence, right. But one of the fundamental drawbacks of the entire business model was that these were centralized traditional businesses built on top of a new asset class, which is crypto, but they were heavily unregulated and continued to operate in a very opaid manner. And that's what we saw happening with f t X as well. I want to ask you a question about that before we go in. You know too much into the details, which is when you say they're operating, you know, these entities are operating in a way that's more opaque, that sounds like the traditional finance system, right, which I think is the point that you were making at the beginning. The idea is that inability to know the positions or the reliability of what somebody is saying about their positions was one of the things that made the financial crisis such a crisis. But I could say that the block chain is very transparent, and even so it can be hard to understand, right, Like that was the whole thing that people were saying about SBS Financials. They were like, we looked at the numbers that he was showing us, and we we were at all of the presentations and everything looks really good, and you know, the transactions mapped to the wallets that said they were the wallets that they had. So it seems to me like transparency alone isn't the solution to whatever this problem is. I think we need to like differentiate between centralized businesses like f t X and just plane solutions which are built on block chains like bitcoin eitherium. So if I had to, like, you know, explain in a sentence, I would say that businesses like f t X they came along with all the risks that were already there with traditional finance, and they also carried along all the risks that were there with decentralized applications. And cryptocurrencies, right, so you know, we they kind of carried the worst of both the worlds as well, right because they, uh you know, worked in such an opaque man of people had no idea with regards to how solvent and exchanges. Like, for example, if I transact on a decentralized lending protocol right now, over there, everything is on the blockchain with regards to the health of that decentralized application and of that lending platform. That was not the case with f t X. So what has happened since the collapse of f t X is that we've seen this renewed um interest among users to first of all, on their own tokens. So there has been this a year old cry um in the crypto space about not your keys, not your tokens, which basically means that if you don't hold your crypto assets in a private key which is owned by you, then eventually it doesn't belong to you. So what we have seen since the last week is that people have started moving their funds out of these trusted third parties exchanges to solutions where they hold access to their own keys. So gradually we are seeing that people are moving away from centralized parties like f t X two more decentralized platforms where at least the balance sheet, if you have to use the term, is visible for people to scrutinize. We can say things like just move to a hardware wallets, but the reality is, for like I don't know ninety or more percent of people, that is the equivalence of saying build your own iPhone, or host your email on your own servers, or self host your website. It is. It is a non trivial technical undertaking. Two engage in like the really actually decentralized business of crypto, which is one of the reasons that centralized densities like at X were so popular. Like, how are folks trying to overcome that? I agree with you on that I'm not going to completely centralized exchanges in this scenario because they've played a very important rule with regards to making it very easy for users to on TRAM and come onto the crypto economy. So I believe that going forward, centralized exchanges still have a very important role to play for this industry to grow. What we need right now is clear regulation because while it's a difficult task to regulate cryptocurrencies, all the businesses that have been built on top of these uh software, they can still be regulated because if you look at the business model of any exchange for that matter, like fd X, these are traditional age old business models for which we do have a decent amount of guidelines and regulations available. I think it's just that how do we gradually put that onto these businesses which are built on crypto asis and hence bring about more transparency, better disclosures, and better audits as well. That's going to be the key going forward, because I would say that self regulation in the space has failed over the last decade, and it's time that regulators did step in and brought about um more clear guidelines and regulations, especially around disclosures and how these exchanges, who are essentially custodians, how they handle the funds of their users. Now, this is very much the line obviously that regulators have. They're like, hey, we're regulators, we'd love to regulate. It is increasingly in you know, countries like India, a line that is not necessarily being achieved through regulation, for example, but through things like taxation. It is, but it's not necessarily the line that all of crypto is wholeheartedly embracing, because for every CEO who's going out there saying we get it, regulate us, there are entire telegram chats of people who are like, get your hands off my crypto. How dare you try to impose your Wall Street discipline on us where it's totally different asset class? Why are you trying to use things like you know, the how we test, which is what the U s SEC uses in part to assess whether something is the security on things like crypto. Based on your reporting so far and the folks that you're talking to, do you see these factions coming to any kind of middle ground. The crypto community tends to be very polarized and also that's an inderstation. And actually, but since the collapse of Luna earlier this year, USD and it's sister token Luna lost their peg to the dollar. In the last few weeks, they had a spectacular meltdown, sending prices to near zero and their market value doing followed by the collapse of many other centralized lenders in the space, we have seen that users themselves have started demanding for more and more transparency and disclosures from all these players. Right, um, so that is an organic movement that I would say that is coming from within the community, right, But users can only force a centralized business to do so much. At the end of the day, the regulators have to come and finally decide on, Okay, this is what we require from you in order to make sure that you're working in a compliant manner. Right. So that's where I think the difference has to be because in the last couple of months, we had have seen some regulatory action in this space, but the big ones have been around let's say, the sanctioning of tornado Cash, the virtual currency mixer. Tornado Cash was sanctioned by the U. S. Treasury Department after it was used to launder more than seven billion dollars worth of digital currency since its creation. The crypto community is disgrunted that regulators are acting more and more on just defining the underlying tokens or censoring the underlying products, rather than looking at these businesses which we're selling um investment products without you know, proper license, without proper disclosures, do you know people across the world. So I think that's where the divide is up next. More from Bloomberg REPORTA said Chukla on the sometimes factionalism of the crypto industry. Crypto was designed to not have to rely on trusted third parties, and for anybody, I'm just gonna shamelessly plug my colleague Matt Levine and the single story issue of Bloomberg Business Week that he wrote called The Crypto Story, which is also available online and you can listen to it on this very podcast. We air special audio episodes on weekend, so please do check that out. The point that I made so brilliantly is that people fundamentally want to trust each other, even if the system that they're designing is assumed to not require it. Like just we we have this tendency to move towards situations in which you can trust other people, and transparency doesn't necessarily solve for bad faith. And I think a lot of the response to Sam bankmun freed, and a lot of the response to the FTX bankruptcy filing has been people feeling betrayed by this guy who would get up on stage, including at conferences put on by Bloomberg and say things like, you know, we were trying to set a high standard for the kinds of companies that we were would say yes to to helping bail out or essentially making statements that presented them as the smartest guys in the room. A lot of the time. I'm not sure regulators are necessarily equipped to solve bad faith of the time. But I want you to just just tribe what's in that ideal world of crypto self policing and self regulating that so many people in the space think is possible. How do you deal with actors who are accused of operating in bad faith? What do you actually do? Two ways one can handle this. One is the traditional way of having regulations and making sure that they're enforced right. The other way, which some of the decentralized protocols already has in them, is have mechanisms built in which would penalize bad actors. Right. But the thing is the second way of doing is it's kind of complex, it is convoluted. It's difficult for people to understand, Okay, how is a bad actor going to get punished by somebody who's not there to punish them? Right? So I think there's a long road ahead for the sector to recover from here. The crisis of confidence is big this time around, and in order to gain back that confidence in order to establish some legitimacy. The first thing that all the major players in the space, the thought leaders, the businesses, that they have to do is to make sure that they act in a compliant manner without even having regulations. If they can act in a compliant manner, disclosed more than they should be disclosing. That is one way to bring about some confidence because still now the practice has been that we will do the bare minimum. The other thing which a lot of the purists should do is that they should communicate what their project is, what their product is, to the layman in a simpler manner, because let's be very honest, the UI, the user interface and the user experience for anybody who wants to interact in this space without a centralized party like ft X, if it's very cumbersome, you need to be really smart in order to like even make or just or just really tech savvy, because there are a lot of people were not tech savvy and vice versa. So exactly so those roadblocks need to be removed. I think people should work on improving the user experience and the user interface move as you know, things progress, because um, it doesn't matter how decent lize or secure. The underlying blockchain is all the product that's built on top of it. If people are not able to use it or understand it, they're going to fall back to platforms which they feel comfortable using, right and that information asymmetry always leaves a window for bad actors to exploit people who may be a bit cullible or maybe just be a bit ignorant about how the space works. So I think that's how the place in the space should move forward. Thank you said. You can find more of Sid's recording on the Bloomberg terminal and on Bloomberg dot com. This is Bloomberg Crypto, a daily podcast from Bloomberg and I Heart Radio. For more shows from I Heart Radio, visit the I Heart Radio app, Apple Podcasts, or wherever you get your podcasts. Send us your comments, questions, or suggestions for the show to Crypto at Bloomberg dot net. The supervising producer of Bloomberg Crypto is Vicky very Galina. Our senior producer is Janet Babin. Our producers are Mohammed Faruke and Sharon Barriro. Our associate producers are Ty Butler and Moses on The Desta wonder At is our engineer. Original music by Leo Sidron. I'm Stacy Maria Shmaal. We'll be back tomorrow.