The future of crypto? On-chain and independently verified
Despite being hailed as transparent and secure, the cryptocurrency industry has been beset by fraud, scams and general crisis in recent months.
The FTX scandal has sent shockwaves through the web3 community and dampened the dizzying promise of this sector’s halcyon days. The regulator has duly stepped in and, with questions of a potential clampdown gathering steam, the future of the asset class itself has never hung as finely in the balance as it does today.
So, what’s the solution? Here at TaxBit, we believe that the key to a marked improvement in adoption and a more robust model of exchange differentiation lies in the transition from ‘on-chain’ to ‘on-chain and independently verified’. This process is already underway, and the future of crypto depends on its continued success.
Here’s why.
The weakness of trusting blindly in on-chain
While the recording of transactions and data directly onto a publicly viewable blockchain sounds safe enough, the extent of on-chain’s transparency has recently been put to the test, with some weaknesses being exposed. There’s still a lot of maturing for this young asset class to do - hence, bad actors have exploited this misunderstanding for their own nefarious means and harmed the reputation of the industry as a whole.
The FTX debacle will likely go down in history as crypto's Great Financial Crisis, and you don’t have to squint too hard to notice the parallels with Bear Stearns. Shortly before the investment bank’s collapse, it was valued at $20bn - which was eclipsed by FTX and Alameda Research before their own house of cards came crashing down. Add a culture of excessive risk-taking into the mix, and you start to see history repeating itself. But don’t panic - there’s a lot that can be done to stop a similar death knell from sounding again in the future.
Where does the confusion come from?
Blockchains are very secure, but they’re not as watertight as many believe. Smaller altcoins, for instance, may be susceptible to what’s known as a ‘51% attack’. Elsewhere, breaches can result from human error or limited cybersecurity budgets. This permeability has given rise to the sort of issues outlined above, and, as a consequence, trust is at an all-time low. The bottom line is that without trust, the asset class will never be truly democratised. So the solution is on-chain and independently verified.
Blockchains are very secure, but they’re not as watertight as many believe.
What does an on-chain and independently verified future look like?
The future of the asset class lies in greater stringency - of accounting, of auditing, of transparency. The actions of SBF have necessitated a sea change in the creation and enforcement of rules. A few months ago, the Financial Accounting Standards Board unanimously voted in favour of new accounting rules for digital assets. It’s a promising start, but we’re only beginning to scratch the surface in terms of what is possible in the prevention of future crises. Consider:
Proof of Reserves
Chart of Accounts
Demonstration of liabilities and intent behind them
Clarity of ownership
Transparency of value and taxable implications
These tools - which traditional financial institutions are beholden to, but crypto or public exchanges are not - could be leveraged to rehabilitate trust within the crypto community.
Take public exchange giant Coinbase, which already uses audited financial statements to prove its reserves. Said venture capitalist Nic Carter via Coindesk: “Requiring exchanges to show they have assets to match their liabilities would improve transparency and help to win back public trust in crypto… Post-FTX, a new enthusiasm for proofs of reserve has emerged.” Indeed, Binance has recently demonstrated a willingness to engage in the conversation. However, the question of corresponding audited liabilities remains.
Of course, these changes won’t be easy, nor will they happen overnight. Success is contingent upon recalibrating how regulation is viewed within the space. We have a collective responsibility to convince people that it isn’t a choke point and, rather, represents the future of the industry itself.
Where does TaxBit fit into all this?
TaxBit is the leader in digital asset tax and accounting. Our products enable digital asset stakeholders to achieve compliance and accuracy at scale. With modernised information reporting, data collection, and accounting – our technology is trusted by top financial institutions, regulators, and investors. We help reduce regulatory uncertainty and promote transparency so that crypto can evolve as an asset class.
We’re here to do our bit for the next evolution of the asset class, and we’d love to work with you to bring about a brighter future for all. If that sounds interesting, don’t hesitate to get in touch.