Some 8,500 people attended Consensus 2018, the annual cryptocurrency and blockchain summit, in May.
Keynote speakers Fred Smith, chairman and CEO of FedEx, said he sees blockchain as a revolutionary change agent in the transportation and logistics, while Jack Dorsey, CEO of Twitter and Square, said that the internet needs its own native currency.
The crowd's enthusiasm was fantastic, but a major roadblock remains: The digital currency market structure has not yet been built. Worse, you can't just use the traditional market structure for non-digital assets as a model, because that old structure is fundamentally broken.
Look at any other asset class and you'll see the same model: an exchange in the middle surrounded by brokers, settlement and clearing houses, and banks. As a result, there are several participants in every transaction. This model provides some checks and balances, but with so many middlemen, it adds complexity and cost, reduces transparency, and increases risk for abuse and fraud. In many ways, the financial system is as broken as it ever was, but at least the market structure is familiar.
In the cryptocurrency world, many are drawn to the efficiency and simplicity that a structure-less market promises. In theory, you could eliminate some of the middlemen of the old analog market structure, because a digital exchange could also serve as the broker, the exchange and the custodian. But this approach would introduce catastrophic risks by eliminating transparency, removing the checks and balances, and inviting fraud and misconduct at shocking scale and speed.
If we continue to use a system without checks and balances, there will be other incidents on the scale like those this year of Coinrail and Coincheck, which resulted in virtual-currency losses of $40 million and $530 million, respectively, after being hacked.
In Coincheck's case, the Tokyo-based company lost half a billion dollars in NEM tokens because the entire amount was stored in a single-signature, hot wallet. If it had had a qualified custodian, the custodian would have moved the majority of those tokens to cold storage.
The lesson is simple: infrastructure matters. Security, storage and compliance are critical to any digital currency investment solution but the market structure is incomplete with a truly qualified custodian in place. And as we've learned — to the great personal cost of many— there are no shortcuts.
The irony is that the cryptocurrency industry is built around the tenets of decentralization and yet centralized exchanges have built the most centralized markets on the planet.