The Crypto Economy’s Big Hope Is Already in Crisis

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“What is it for?" is the essential question facing the cryptocurrency industry, including from regulators. Videogames have emerged as an answer—if only they could get rid of the speculators. The continuing trial of Sam Bankman-Fried, founder of collapsed exchange FTX, is a reminder that crypto has turned into a big bet on itself rather than the alternative to traditional finance it once promised.

To change that, many crypto developers are focusing on what Ethereum co-founder Gavin Wood dubbed Web3: a third evolution of the internet, succeeding static websites and social media. Unlike now, big tech firms wouldn’t run the show. Instead, this new world would feature decentralized organizations linked by blockchain technology, cryptocurrencies and nonfungible tokens.

The Web3 strategy makes sense. Enabling digital payments isn’t enough to justify crypto’s existence because today’s bank transactions already do this. The industry needs a native economy that is digital yet “real," where crypto is created and spent in a closed loop.

This ecosystem would almost certainly remain dependent on stablecoins—currencies pegged to the U.S. dollar—and thus linked to the traditional monetary system. Still, decentralized applications and “smart contracts" that automatically execute agreements whenever conditions are met could offer advantages.

Some internet services such as web hosting and private networks have long had clients who pay in crypto, but their impact is minute. In a 2021 poll by the British tax authority, only 4% of responding cryptocurrency holders said they had received the coins as payment for goods and services. For executives at big crypto firms such as Coinbase, which are currently besieged by U.S.