Lessons learned



CCO ActivTrades Corp

The collapse of the FTX crypto exchange, and the controversy swirling around its founder, Sam Bankman-Fried (SBF), have plunged the crypto market into an existential crisis.

The new FTX chief executive is John J. Ray lll, who charges $1,300 per hour and has been through several bankruptcies in his 40-year legal career including Enron, one of the largest corporate failures in US history. But his latest case has left this lawyer stunned. Mr Ray wrote to the Delaware bankruptcy court last week that he had never seen such a complete failure of control mechanisms, and that the situation was “unprecedented”. FTX does not even have a central inventory of its own cash reserves or know the number of its employees.

Mr Bankman-Fried was the face of the crypto industry: A shorts-wearing nerd who dabbled in computer games while seemingly effortlessly running a $32bn company. The self-proclaimed “most regulated crypto exchange in the world” was shown to be a madhouse within the space of a few days.

Mr Bankman-Fried and his confidants left behind a barely transparent network of more than 100 companies. Professional funds such as Blackrock or Softbank were taken in by FTX, as well as small investors, who will hardly see anything of their savings again. FTX owes more than $3bn to its 50 largest creditors alone, and more than one million are likely to be affected.

A question that pops up now is whether FTX is a fatal isolated case, or is the crypto world build on sand? When Bitcoin reached new record highs last year, hundreds of thousands wanted to get involved in the market. Adding to the appeal was the almost philosophical promise of blockchain projects, such as Bitcoin and Ethereum, to create a better financial system controlled by incorruptible algorithms rather than “old”, power-hungry regulators and central banks. At the height of the hype, all crypto currencies combined were worth more than $3trn.

In Washington’s political circles, Mr Bankman-Fried became everyone’s darling, thanks in part to generous political donations of around $40m. The fact that crypto currencies were able to become a mass mania, despite the regular crashes and scandals, is also thanks to the growing number of prominent advocates. Social media influencers, athletes, actresses and musicians who were harnessed by the coin lobby earned millions.

But sympathy for the Washington mega donor has evaporated as quickly as his crypto millions. US treasury secretary, Janet Yellen, urged regulators to exhaust existing controls until Congress closes loopholes. A Florida lawyer is pursuing a class action lawsuit against all the stars who gave their good name to FTX. And SBF does not help his case. The VOX reporter wanted to know if his promotion of mild regulation of the crypto scene was his honest opinion. SBF replied unequivocally: “F… the regulators. They make everything worse.”

Important promises made by the crypto community have not been fulfilled. The digital currencies have not turned out to be an effective protection against inflation, and nor are they independent of what is happening on the stock exchange. Since central banks have been raising interest rates, not only technology stocks but also digital currencies have been caught in a whirlpool.

There have been dozens of other exchange hacks and crashes since the Mount Gox disaster in 2014, with investors losing billions around the world. With FTX, history is now repeating itself on an even greater scale. There is a growing realisation in the crypto world that the lost trust can only be regained with stricter supervision.

All of this brings back memories of the dot-com bubble at the turn of the millennium. But its collapse was not the end of the new digital business models. Many of the most successful ones only came about afterwards. Blockchain technology is justified, and the technical aspect of Bitcoin has worked just fine since 2008.

For investors it is more important than ever to do their due diligence on the broker and the platform they are using. Do your homework.

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