Fed rate hikes to expose more crypto skeletons after FTX deal: Economist

• Rising interest rates will cause further damage in the crypto space, according to the Peterson Institute’s Martin Chorzempa.
• FTX announced on Tuesday that it agreed to be acquired by rival exchange Binance, shocking investors.
• “We can expect many more problems to come,” Chorzempa told CNBC.

The Federal Reserve’s aggressive rate hikes are likely to flush further “skeletons” out of the crypto markets, an economist has warned.

Martin Chorzempa of the Pearson Institute for International Economics said central bank tightening is likely to cause further problems for major crypto companies after FTX announced it would be acquired by rival exchange Binance on Tuesday.

“We can expect many more problems to come,” Chorzempa told CNBC on Wednesday. “When rates come up, a lot of skeletons that have been waiting in the closet in highly speculative, highly leveraged markets tend to come out.”

The Fed has raised interest rates by an outsized 75 basis points in four consecutive meetings as it tries to bring rising inflation under control, and riskier asset classes have suffered as borrowing costs become more expensive and cash flow dries up.

Digital asset valuations have fallen as the space remains mired in a so-called “crypto winter,” with bitcoin plunging 62% so far this year.

That selloff has led to some spectacular implosions, with Terra Labs’ stablecoin and luna token both collapsing in May and Bankman-Fried’s FTX suffering a liquidity crisis before finally agreeing to be acquired by Changpeng Zhao’s Binance exchange on Tuesday.

The takeover is likely to lead to further scrutiny of major crypto exchanges by watchdogs, according to Chorzempa.

“What has been surprising is actually how resilient the crypto and DeFi space has been after the explosion of the Terra and Luna staking coins, but it wasn’t necessarily meant to last,” he said.

“It’s a very dangerous, speculative space with a lot of risk, and the latest news is going to make regulators think a lot about whether they want crypto companies to also be able to own important financial institutions.”

The Fed hinted at its last meeting that it may move to more gradual rate hikes from December onwards, but that is unlikely to provide relief for some of the tokens that have fallen this year, Chorzempa said.

“It’s hard to say. It could always go down,” he told CNBC. “One of the challenges is that there really isn’t a good way to value anything in this area.”

He added: “There is no discounted cash flow analysis you can do on tokens. That means everything is based on sentiment and social consensus, which can be very fragile as we see.”

Read more: Binance buys FTX amid ‘significant’ liquidity problems. Here’s how billionaire Sam Bankman-Fried’s stock market got here.