John Jay Ray III took control of bankrupt cryptocurrency exchange FTX in the early hours of November 11. Ray was asked at a US House hearing on financial services to compare FTX to Enron, another financial disaster he cleaned up after. “This is just an old embezzlement,” said Ray. “Nothing fancy.” FTX simply took the customer’s money and used it for its own purposes.
FTX and its sister company, cryptocurrency hedge fund Alameda Research, operated in the Bahamas, unsupervised. At least $8 billion in client funds are missing, causing cryptocurrency enthusiasts to rethink the future of finance and politicians to call for tighter reins in the cryptocurrency space.
Is this the end of cryptocurrencies?
“In its current form, yes,” Frances Coppola, an independent financial and economic commentator, told Al Jazeera. She pointed out that in its 14 years of existence, the cryptocurrency world has failed to generate any significant real-world use cases other than crime financing. It has mostly been a speculative investment, which only worked as long as real dollars entered the system.
“Crypto has never known anything but easy money,” she said. “Now, central banks around the world are rapidly raising interest rates and relaxing quantitative easing. There is a brutal liquidity squeeze in global markets and money is being sucked out of risky asset classes.”
Cryptocurrencies have been about as risky as it gets. “The valuations that cryptocurrencies enjoyed just a year ago are gone and I don’t believe they will return for a long time, if ever,” she said. “Actually, I think cryptocurrency prices need to drop further. There is still a lot of leverage in the space and central banks are not done tightening yet,” she said.
Carol Alexander, professor of finance at the University of Sussex, did not think that cryptocurrency would disappear completely. She argued that non-fungible tokens will definitely survive as metaverse development continues. “However, we are experiencing a jolt right now similar to the dot-com bust, with a lot of small companies defaulting.”
Alexander believed that the survivors would be smart contract blockchains like Ethereum, some regulated exchanges like Coinbase and futures exchanges like the Chicago Mercantile Exchange.
Charles Whitehead, a professor at Cornell Law School in New York, agrees. “It may be too early to announce the death of cryptocurrency, but we are clearly lagging behind in efforts to regulate it,” he told Al Jazeera.
‘Get rich quick’
“The theoretical promise of cryptocurrency was a payment system not subject to the control of intermediaries,” Nicholas Weaver, a researcher at the University of California at Berkeley who has been an outspoken critic of cryptocurrencies, told Al Jazeera. But the real promise was that the cryptocurrency would always rise in price, he said.
“FOMO, or fear of missing out, is as old as money itself,” said John Stark Reed, a cryptocurrency skeptic who once led the US Exchange and Security Commission’s Internet enforcement office. The promise in cryptocurrencies has always been “get rich quick with no effort, no experience and no risk,” he said.
Bankman-Fried’s smooth talk also played a part in making people think that FTX was a safe way to keep your money and a safe bet for an investment.
“Some investors seem to have been blinded by SBF’s charisma in the same way that Softbank’s Masayoshi Son was blinded by the fast talk of WeWork’s Adam Neumann,” explained Coppola. “There wasn’t a lot of due diligence going on.”
Masayoshi Son invested his first $4.4 billion after Neumann gave him a 12-minute tour of a WeWork in 2016. Likewise, FTX investors delivered $2 billion, bringing FTX’s valuation to $ 32 billion, without bothering to know more about the company’s operations.
FTX went on a massive buying spree from late 2021 to 2022, spending nearly $5 billion on a myriad of cryptocurrency deals. FTX also spent $256 million on 35 properties in the Bahamas. SBF and Ryan Salame, CEO of FTX Digital Markets in the Bahamas, spent tens of millions on political donations. Salami was buying up restaurants in western Massachusetts. Bankman-Fried also donated money to charities and various media outlets.
Ray’s role in the Chapter 11 lawsuit will be to try to recover as much of that money as possible, a process he’s already started. In the meantime, Bankman-Fried was extradited to the US to face charges and FTX co-founder Gary Wang and former Alameda Research chief executive Caroline Ellison admitted to the charges against them and agreed to cooperate with the authorities. in ongoing investigations,
All cryptocurrency is FTX
“I think many investors thought FTX was safe, although the reality is that no cryptocurrency exchange is regulated enough to be considered safe,” Weaver said.
Most of the influx of real money into cryptocurrencies fell through 2021. The rest stopped in May 2022, when stablecoin TerraUSD collapsed, wiping out $18 billion of intended value and blowing the ledgers of many other cryptocurrency companies. FTX’s fall followed that of cryptocurrency hedge fund Three Arrows Capital and cryptocurrency lending platforms Voyager Digital and Celsius Network.
Now even Binance, the world’s largest cryptocurrency exchange, has started to wobble. Binance’s accounting firm Mazars recently announced that it was halting all work on cryptocurrencies, and the company has deleted all mention of that work on its website. Binance clients withdrew $6 billion worth of cryptocurrency assets in the week Mazars halted its cryptocurrency work.
One theory among critics was that all cryptocurrency exchanges are bankrupt because they are overleveraged and full of unsellable cryptocurrency assets that have no market demand but are still accounted for at full mark-to-market value — not what a seller could actually get to them. If this is true, then the future of cryptocurrencies could involve even more cryptocurrency companies declaring bankruptcy in the near future.
There were many opinions about what the death of cryptocurrencies meant. According to Weaver, it meant, “We don’t care anymore.” He envisioned a world where there were no more Crypto.com logos on the racetrack, no more TV commercials touting cryptocurrencies as a financial investment future. “Those who put their money into cryptocurrency in recent years have already lost most of their money. Extinction is admitting they lost everything.”
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