As the bear market takes its course, the crypto landscape is changing under our feet, and while consolidation of the industry is necessary for the short term, we must avoid monopolies. As centralized exchanges (CEXs) become an essential gate to the crypto world, who keeps that gate becomes quite important.
Leaving personalities aside, monopolies are rarely good for service users. As so much of this space is new, price discovery is importantm, and an elastic supply of customers will help set the benchmark prices for services such as fiat on-ramps, trading fees, and transfers.
A monopoly makes the supply of customers inelastic — they have no choice, which is rarely in their best interest. In the 1990s, when Microsoft controlled about 90% of the personal computer market, they distributed Internet Explorer for free, effectively killing off competitor Netscape Navigator.
Microsoft was later charged under antitrust laws for creating a monopoly by making it technically difficult to replace Internet Explorer with an alternative browser. The company also came under fire for charging their captive audience high prices for essential software like Microsoft Office.
In the crypto space, the jurisdiction that controls international CEXs is unclear, and so the civil suits that were previously brought against the original internet companies may not be an option. For our industry to continue to thrive, we need to encourage open competition to drive innovation.
I’m talking about crypto’s long-term future. For now, I understand it’s necessary for the bear market to do its job and wash out some companies and those with poor risk management — as the cliche goes: when the tide goes out, you see who’s swimming naked.
This is part of a process of consolidation. CEXs, protocols and projects that have been sensible with their balance sheets and built for the long term with careful due diligence will be in a strong position going forward. This should lead to a small, strong cohort of survivors who are capable of taking the industry into the next bull market.
But it should be a cohort, not just one behemoth that controls the market because this will not allow nascent projects the chance to thrive on their innovations. In fact, this was the very scenario the principles of decentralization were created to avoid.
I’m all for the free market and, while a monopoly might be the result of an excellent company winning over its competitors, history shows that unchallenged companies suffer from inertia and can stifle the market. Very successful groups can end up existing just to perpetuate themselves and prop up their oligarchal leadership.
But surely a concentration of pro-crypto power is necessary to advocate for the industry against hostile regulations and questionable central bank digital currencies (CBDC). Don’t we need a champion?
I don’t know about you, but I would prefer a “fellowship of the ring” strategy rather than pinning the hopes of our industry on some James Bond character who, let’s be honest, was basically a troubled man with a drinking problem. At this crucial moment in our industry, we need a strong team of advocates and avoid a huge concentration of power.
Indeed, as governments mull the process of crypto regulation, our industry advocates should be working with regulators on how best to apply current laws against monopolies in the crypto market. After all, regulators have the mandate to protect consumers from monopolies as well as pump-and-dump con artists.
It’s unfortunate that decentralized finance is not yet universally accessible, safe and understood as it solves many of these issues by using decentralized “DAO” governance. So, in the meantime, it’s important that the industry, regulators and CEXs governance avoid the dangers of monopolies forming and stifling the innovation that crypto’s main contribution to the financial system.
