FTX's Harrison says stablecoin demand will survive Terra collapse

FTX's Harrison says stablecoin demand will survive Terra collapse

The head of one of the largest crypto exchanges in the U.S. said that fiat-backed stablecoins are still reliable and not risky.

There is no doubt that 2022 has stress-tested the crypto industry. Bitcoin has hit a low not seen since 2020, the industry's market cap has dropped from $3 trillion five months ago to $1.2 trillion, and one of the most popular crypto assets, Terra's LUNA token, is now virtually worthless.

Many novice investors may be wondering what it all means. Is crypto really worth nothing, as European Central Bank President Christine Lagarde said, or is this now a buying opportunity?

According to Brett Harrison, head of FTX.US, it's a mix.

"There's been so much capital flowing into crypto in the private equity space," he told CoinDesk last week on the sidelines of the World Economic Forum's annual summit in Davos, Switzerland. "There are a lot of teams building and creating new infrastructure, developing new projects, and we'll probably see a lot of that investment come back over time."

In a wide-ranging interview with CoinDesk, Harrison discussed the Terra and LUNA crashes, whether crypto exchanges should act as gatekeepers for assets that don't look promising, and what competition to expect from traditional exchanges like the New York Stock Exchange that may offer more than just Bitcoin and Ethereum in the future.

This interview has been edited for length and clarity.

CoinDesk: Do you think crypto traders will rely less on stablecoins? What would be the alternative for the crypto industry?

Harrison: No, I don't think we will see less demand for stablecoins and cryptocurrencies. The term "stablecoin" is used in many different contexts and means different things. Terra Stablecoin is not a stablecoin at all. It is an auto-adjust structured product backed by a volatile asset, and it is basically a subsidized peg. The run on that asset is too big if the asset is too volatile, so it would never really last forever. That's very different from USDC. Most of the fundamentals of DeFi (decentralized finance) and even centralized finance come from these fiat-backed stablecoins, which I don't think are risky at all compared to something like Terra.

You said that UST would basically never be able to be what it was supposed to be. As an exchange, what is your role as a kind of gatekeeper for projects like Terra and coins like LUNA that are unproven and therefore carry a lot of risk?

On traditional stock exchanges, on futures exchanges, on commodity exchanges and on crypto exchanges, there are assets with different levels of volatility. It is important to disclose the risks involved. UST was a completely open cryptocurrency. The code for what was going on there was completely open source, everyone knew exactly how it worked. It was a subsidized peg. There was no lack of transparency, and everybody knew that the asset itself was a risk. I mean, if you're able to offer a 20% return on a token, that kind of very high return is not without risk. The interesting question for us as an exchange is whether it's our job to protect investors from any risk or any volatility. We are constantly sorting out assets that we don't think are reputable, have transparency, or represent long-term value in that regard. It's a fine line that we decide to walk or not walk, but the most important thing is disclosure, and that's why we think it's so important to have regulation for stablecoins, to make sure that if somebody wants to call themselves a stablecoin, it's actually a stablecoin and not this kind of risky asset.

Do you think there will be a regulatory framework for what can and cannot be listed?

There are draft bills from members of Congress that specify, for example, what types of assets a stablecoin can have in order to call itself a stablecoin. In terms of listing, many countries already have standards for listing stablecoins. In New York State, for example, the DFS (Department of Financial Services) has a green list of assets that are allowed to be listed. We would like to see market regulators in the United States provide more clarity on exactly what assets can be listed on an exchange.

Let's talk a little bit more about the markets. Do you think there will be competition between traditional exchanges and crypto exchanges in the near future?

That's an interesting question. We have seen a number of traditional exchanges talking about getting into crypto-related projects or exchange offerings. I think it's very possible that traditional exchanges will want to get into cryptocurrency in this way. However, I also think the reverse is entirely possible. We've launched an equity offering on our platform, and we're not an exchange - we're a broker that offers equity trading to exchanges. But you know, we could very well become a competitor for traditional exchanges in the future. In the derivatives space, we definitely are.

Are you afraid of this competition in the future?

We're not afraid of competition; we welcome it, but there is certainly competition, and we're already seeing a lot of headwinds from the incumbents in this space on our application to the CFTC (Commodity Futures Trading Commission) to allow margin or clearinghouse. So our competitors are very concerned that we're going to enter the market and disrupt it, and that's what we're trying to do.

I want to talk a little bit about the correlation between the crypto market and the stock market. Do you think that correlation will break at some point in the future, and if so, what do you think could break it?

Right now, we are in a global environment where assets are falling. That's true for stocks, bonds, broad-based futures of various types, and cryptocurrencies, and there are many macroeconomic factors contributing to these downward movements. There are also factors specific to cryptocurrencies, for example, everything that has happened to the Terra ecosystem. We're seeing that as cryptocurrencies become more prevalent, more and more institutions are adding cryptocurrencies to their portfolios, which means that when cryptocurrencies are looking for selling opportunities, they're as much in the line of fire as anything else in a downturn. When in doubt, in some sort of violent downturn, all correlations go to one, everything goes down. Right now, as prices fall across the board, of course there's going to be a high correlation between these assets. As the market starts to recover, I think we'll see more growth, idiosyncratic moves between cryptocurrencies and traditional equity markets.

Do you see more institutional investors exiting or entering the market during the current sell-off?

That's a good question. I think it's really going to be a mix. There are going to be some institutions that feel this might be the perfect time to get back in at bargain prices. We're going to see some that feel that even though the contagion from the Terra meltdown has been contained to some extent, they might see that as a reason to be more skeptical of crypto as an entire asset class and hold back on investing, whether it's public or private. So we will see a mix over time, but in general, so much capital has gone into the private equity side of cryptocurrency. There are a lot of teams building new infrastructure and developing new projects, so we'll probably see a lot of those investments come back over time.