{"id":36267,"date":"2022-11-26T05:52:36","date_gmt":"2022-11-26T05:52:36","guid":{"rendered":"http:\/\/egrowonline.com\/?p=36267"},"modified":"2022-11-26T05:52:36","modified_gmt":"2022-11-26T05:52:36","slug":"cryptocurrency-proves-itself-vulnerable-to-liquidity-crises","status":"publish","type":"post","link":"http:\/\/egrowonline.com\/?p=36267","title":{"rendered":"Cryptocurrency proves itself vulnerable to liquidity crises"},"content":{"rendered":"
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The supposedly responsible face of cryptocurrency turns out to have been anything but punctilious in his dealings \u2014 which should be a wake-up call to sleepy regulators and legislators alike.<\/p>\n
Sam Bankman-Fried\u2019s empire died young this month, when his cryptocurrency exchange FTX filed for bankruptcy.<\/p>\n
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The details remain scarce, but the bottom line is this: FTX was supposed to act as a custodian of the funds customers traded via the service. Instead, it took billions of dollars of that money and lent it out, including to the trading firm Alameda Research also owned by Mr. Bankman-Fried. To make matters worse, Alameda\u2019s assets were largely tied up in FTT, FTX\u2019s own digital currency. Alameda used this FTT as collateral for a boatload of loans, possibly including the customer funds it received from FTX.<\/p>\n
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When a CoinDesk report revealed some of this, what ensued was a death spiral: Investors worried about FTX\u2019s solvency scrambled to redeem their assets, sending FTT\u2019s value plummeting. But FTX didn\u2019t have their assets \u2014 it had the digital currency FTT and a massive loan to Alameda that the company couldn\u2019t return, because it, too, mostly had FTT.<\/p>\n
This could classically be called a run on the bank. The trouble is, FTX wasn\u2019t supposed to be operating like a bank at all. The complicated details surrounding the double-dealing and bad bookkeeping aside, the larger scheme has all the appearances of an old-fashioned scam. FTX\u2019s customers likely thought their money was being safely held, but the exchange apparently passed it off to use for speculation.<\/p>\n
Now, Mr. Bankman-Fried (who has blamed the bulk of the problems on accounting errors) has resigned as CEO, and he and his executives are sure to face civil lawsuits and possibly criminal charges, too \u2014 in the Bahamas where the offshore FTX is headquartered or in the United States, or both.<\/p>\n
The Justice Department, the Securities and Exchange Commission and the Commodity Futures Trading Commission are reportedly all now investigating FTX; the SEC claims it had already begun before the scandal erupted. They should pursue these cases vigorously.<\/p>\n
What\u2019s perplexing is that the SEC and CFTC have done so little so far, even as Mr. Bankman-Fried (also a Democratic Party megadonor) wooed them and everyone else in Washington with proposals that would supposedly bring the crypto industry to heel.<\/p>\n
The entire cryptocurrency industry has proved itself vulnerable to liquidity crises, if not full-on solvency collapse like the one FTX appears to have suffered. These catastrophes might have landed Alameda in the hole from which it will never manage to climb out. Yet for all the conversation about the need for new laws to regulate cryptocurrency, there are existing rules that authorities could have \u2014 and didn\u2019t \u2014 use.<\/p>\n
Crypto assets are just traditional assets but on the blockchain, a digital ledger. The key to figuring out which rules to apply is finding the right analogies: What about crypto is the equivalent of a security, what\u2019s a commodity, what\u2019s a collectible? What\u2019s a broker, what\u2019s a bank? Crypto entities sometimes blur these lines, playing prime brokerage and exchange and clearinghouse all at once without registering as any of the above \u2014 claiming that, because they\u2019re like nothing regulators have seen before, they can\u2019t be regulated without congressional action. So far, the dodge has mostly worked: SEC defenders blame the agency\u2019s slowness to act on pressure from lawmakers to hold off enforcement until new laws are written.<\/p>\n