FTX crash shows cryptocurrencies are giving casino capitalism a bad name – they should be regulated like cigarettes

   2022-11-23 23:11

The typical retail buyer of cryptocurrencies is male, under 35-years old-and has likely lost three quarters of the money he invested.

his isn’t a bug in the system, it’s a design feature in a predatory business model that needs to entice new consumers so as to allow crypto ‘whales’ to cash out. The higher the price, the more people joined in and it is estimated by June last year that 220 million people had owned crypto.

Those research findings were published by the Bank for International Settlements (BIS) – the central banker’s central bank – just before Sam Bankman-Fried’s FTX crypto exchange crashed and burned in another blow to an industry that’s now worth less than a third of the €3trn market capitalisation it boasted a year ago.

SBF, as the 30-year old MIT graduate was known, fits part of that BIS profile at least. For a sophisticated investor who was once hailed as the future of finance he was little better than your average crypto Joe, who in the words of long-time industry observer Amy Castor “trusted the newspaper headlines. They just about get ‘number go up’”.

The difference, of course, is that SBF leveraged and lost other peoples’ money, billions of dollars of it. But it wasn’t just the ‘incel investor’ class that believed in and backed SBF.

Slowly but surely crypto was becoming more mainstream and as recently as January a who’s who of blue chip finance was scrambling for a piece of FTX in a funding round that valued the firm at $32bn.

They were betting that crypto would keep on growing and that it would be regulated, creating a barrier to entry at a time when FTX would be an incumbent, generating outsize returns.

A who’s who of blue chip finance was scrambling for a piece of FTX in a funding round that valued the firm at $32bn

The rollcall of investors included BlackRock, Sequoia and Singapore’s state fund Temasek. Many have now written down their hundreds of millions of dollars of investments to zero. They might also be cringing at the canned press release quotes they gave at the close of FTX funding rounds.

Alfred Lin of Sequoia praised SBF as “a special founder” who was “leveraging the world’s crypto rails to build the future of finance”, while Tom Loverro of IVP is surely blushing at the “visionary founder” of a firm that takes ”regulatory compliance and engagement seriously”.

Either these sophisticated firms have no idea what they were talking about – just like your crypto Joe, they were riding a wave – or they chose not to undertake due diligence, or worse still chose to ignore the risks in the pursuit of those returns.

It’s not as if there weren’t warning signs about crypto being a ponzi and its use in criminal activities.

The BIS study highlights the exploitative nature of the product these mainstream fund managers were buying into.

“In periods of price increases, small bitcoin holdings tend to increase, while especially the largest bitcoin holders – the humpbacks – tend to sell. This, again, is consistent with a market sustained by new entrants, allowing early investors and insiders to cash out at their expense.”

FTX was nothing if not ambitious. The firm’s roadmap for the next five-to-10 years stated its ambition to become the largest global financial exchange offering cryptocurrency trading, betting markets, stock trading, banking, and peer-to-peer and business payments through a super app that would see it generate $30bn annually in sales.

That is the really big danger – the mainstreaming of crypto finance backed by a regulatory framework. Let’s be clear, you shouldn’t be bringing this industry into the fold.

Sadly, that appears to be what US treasury secretary and former Federal Reserve chief Janet Yellen was suggesting just a day after FTX collapsed.

“In other regulated exchanges, you would have segregation of customer assets. The notion you could use the deposits of customers of an exchange and lend them to a separate enterprise that you control to do leveraged, risky investments – that wouldn’t be something that’s allowed.”

Bank of England’s deputy governor Jon Cunliffe was correct on Monday when he said we “should not wait until [the crypto world] is large and connected to develop the regulatory frameworks necessary to prevent a crypto shock that could have a much greater destabilising impact”. 

He is wrong, however, to believe that regulation can tame the worst aspects of cryptoland.

It needs to be regulated in the same way smoking is – a product segregated and out of sight, available only to those who seek it out and not one that is a feature of your phone’s app store or front page of your online bank.

No one has managed to find a use for crypto. Bitcoin, which still accounts for 40pc of coin trading, has crashed 77pc from its November 2021 peak. Bank of America says its collapse is in the same league as the South Sea Bubble of 1720.

Bitcoin has no intrinsic value or use, what it costs you to make is of no interest to me as a buyer

Crypto firms aren’t going under because they face a liquidity crisis of the kind that would get a central bank riding to the rescue of a high street bank. They’re going bust because the underlying collateral is worthless and is lent, relent and re-collateralised down a chain.

JPMorgan suggests the bleeding on bitcoin could stop once the currency falls to its cost production, which the investment bank estimates at $15,000. But why? Bitcoin has no intrinsic value or use, what it costs you to make is of no interest to me as a buyer.

It is, as Bank of England economist John Lewis wrote recently, a purely speculative instrument where “in upswings no-one wants to get out, loans get repaid, there are no margin calls, liquidity is abundant and collateral prices are rising”.

Unlike other financial instruments such as the shares or bonds of a firm like Apple, there’s no underlying cashflow or value in cryptoland – whether that’s bitcoin at a price of $70,000 or $7,000.

The collapse of bitcoin since last November has shown it is not a good hedge against rising inflation and the falling value of government-backed ‘fiat money’. It doesn’t diversify your portfolio either and its use isn’t correlated with a broken or impaired financial system as the BIS study showed that adoption was greater in well-banked countries which have dense branch networks.

John J Ray, the new chief executive of FTX who cleaned up the Enron fraud 20 years ago, said in the crypto firm’s bankruptcy filing: “Never in my career have I seen such a complete failure of corporate controls.”

Despite the losses incurred by FTX and the funds who punted their client money, there’s been no contagion into financial markets. We need to keep it that way.

Cryptocurrencies need to be kept outside the gate and not regulated inside the walled garden of finance that is designed to protect consumers.

Regulators owe a duty of care and that duty is not one of promoting the interests of this industry.

Original Source

CryptoCurrencyUSDChange 1hChange 24hChange 7d
Bitcoin17,206 0.30 % 4.59 % 6.39 %
Ethereum1,301.4 0.17 % 6.87 % 14.65 %
Tether1.001 0.26 % 0.13 % 0.23 %
BNB301.54 0.04 % 1.77 % 13.21 %
USD Coin1.001 0.22 % 0.08 % 0.19 %
Binance USD1.007 0.13 % 0.63 % 0.66 %
XRP0.4122 0.01 % 3.10 % 9.46 %
Dogecoin0.1080 0.81 % 5.35 % 37.24 %
Cardano0.3153 0.35 % 1.01 % 1.00 %
Polygon0.9299 0.06 % 10.59 % 9.36 %
Polkadot5.460 0.49 % 5.62 % 3.54 %
Lido Staked Ether1,284.8 0.12 % 6.79 % 15.05 %
Litecoin75.98 1.28 % 2.41 % 23.74 %
Shiba Inu0.00000939 0.27 % 3.06 % 6.66 %
OKB21.53 0.28 % 5.17 % 6.53 %
Dai1.001 0.36 % 0.04 % 0.13 %
Solana14.21 2.52 % 6.07 % 14.29 %
TRON0.05485 0.10 % 2.64 % 8.43 %
Uniswap5.740 0.03 % 4.84 % 8.63 %
Avalanche13.16 0.22 % 5.32 % 6.95 %