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FTX crash threatens the existence of cryptocurrencies

FTX crash threatens the existence of cryptocurrencies
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Sam Bankman Fried, CEO of FTX Cryptocurrency Derivatives Exchange, speaks at a Bloomberg event in July 2022.

Sam Bankman-Fried, founder and CEO of FTX Cryptocurrency Derivatives Exchange, during an interview on an episode of Bloomberg Wealth with David Rubenstein in New York, U.S., on Wednesday, Aug. 17, 2022. (Jeenah Moon/Bloomberg via Getty Images)

Crypto has an Enron-sized scandal that threatens to completely undermine the trust proposition for its existence, regardless of Sam Bankman Fried’s mea culpa tour.

why does it matter: The house of cards built by Bankman-Fried has drawn several parallels, including Enron, Theranos, Bear Stearns, Lehman Brothers and Madoff Investment Securities.

  • In that sense, there is nothing really new under the sun, even with the dizzying volatility that has come to characterize the fledgling market for digital currencies.
  • We’ve seen this movie before and we suspect we know how it will end.

The panorama: FTX’s”first day statement“The bankruptcy court confirms the picture that has emerged over the past month.

Like Theranos/Madoff/Lehman, the main spark to FTX’s downfall was the staggering ineptitude and dishonesty of its founder, and the fact that no one around him noticed (or at least didn’t care).

  • “The consequences of [FTX’s] mixed customer assets, poor disclosure and lack of internal controls should remind us that while the cast of characters and products may change, the script for financial market turmoil remains painfully familiar,” wrote Robin Vince, president and director executive at banking giant BNY Mellon. in a Financial Times opinion piece on Friday.

Yes, but: What it is What is unique to cryptocurrency is an untested, interconnected, and interdependent ecosystem that is ripe for contagion and dramatic side effects. And since this fuse was lit, the fire is spreading faster and wider.

  • this matters much when it comes to the long-term prospects of cryptocurrencies, and why investors (especially small ones) might take a long time to trust the industry again.

What they are saying: FTX’s crash “will radically transform the crypto ecosystem, further shaking confidence and casting doubt on its ongoing prospects,” Moody’s analysts wrote last week.

  • The company’s failure “has left a market share gap that will prove difficult to fill without renewed customer interest in crypto assets, a scenario we currently assign a very low probability to.”

  • Crypto companies are in damage control. Voluntary audits are suddenly in fashion again, with crypto exchanges struggling, trying to stop a series of exits. But even these have limitations in what they can test.

Retrospective scene: Crypto was born in the grim aftermath of the 2009 crash; Its main selling point was its decentralized nature.

  • The idea was that people couldn’t trust traditional finance and give smaller players more power to make their own decisions without influence from bigger players.

The bottom line: The cryptocurrency industry was already facing a confidence deficit. And this has slowed him down a lot.

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