Mistrust is back at the center of the cryptoverse

There's something a bit oxymoronic about the idea of a cryptocurrency company. In the wake of the implosion of FTX, crypto is increasingly going back to its trustless roots — a world where companies have a much smaller role to play.

Why it matters: FTX's spectacular collapse, and the looming prosecution of its disgraced founder, Sam Bankman-Fried, has undermined confidence in the institutional crypto ecosystem.

• The result has been a bifurcation: Normal people want reassurance they can trust the companies they deal with. Crypto people, on the other hand, prefer to simply not trust anyone at all.
• This, naturally, carries its own risks.

The big picture: Crypto companies have raised more than $85 billion from venture capitalists in recent years, per Galaxy Digital, of which some $1.8 billion went to FTX. The irony is that those investments were all based in a system of contracts and civil-society institutions that have never been trusted by crypto's true believers.

• Now, crypto is flowing out of institutions, including Binance, the largest crypto exchange.
• That means it's flowing directly to individuals, who are increasingly choosing to look after their own crypto wealth, rather than trust any company to look after it for them.

Flashback: Bitcoin was created in 2010 as an alternative to government-issued money, in the wake of a global financial crisis that cratered trust in institutions.

• Bitcoin is based on a "trustless protocol" — the blockchain — where no one needs to know the identity of their counterparty in any transaction, and there is no credit risk or counterparty risk.

What happened: As the global economy recovered from the 2008–09 financial crisis and crypto became increasingly mainstream, a large number of companies were created to help individuals navigate the crypto world.

• By necessity, anybody dealing with those companies was on some level trusting them.
• Part of the reason the companies were trusted was that they were able to raise billions of dollars in venture capital, and customers reckoned that the VCs had done their homework.
• That assumption now looks misguided.

Where it stands: Crypto companies are trying very hard to prove themselves trustworthy — which isn't easy when no major auditor will work with them.

• For many crypto investors, however, there's no need to trust auditors or work through elaborate Merkle Tree proofs, so long as they can revert to a world of investing and trading where they don't need to trust anybody at all, except for maybe themselves.
• That's the promise of DeFi — decentralized finance — and of "cold storage" solutions where coins are kept on physical devices that are not connected to the internet. Such products are seeing a surge in sales in the wake of FTX's collapse.

The bottom line: Governments control currency, so if you want to convert your U.S. dollars to crypto, or vice versa, you're going to have to go via some kind of trusted and regulated institution.

• Outside those "on-ramps and off-ramps," however, it's entirely possible to navigate the cryptoverse without trusting anyone. That's bad news for companies in the space.