While everyone was busy looking at the election returns, one of the Democratic Party’s biggest donors had an epic financial meltdown. On Tuesday, Sam Bankman-Fried, the young CEO of the crypto exchange FTX (a company name you may remember from the World Series, when the umpires wore an advertisement for it on their uniforms), announced a sale of the exchange to its main rival Binance, after a ” liquidity crisis” (a neutral term for a run on the bank, or in this case the crypto exchange). Even at the announcement, Binance CEO Changpeng “CZ” Zhao noted that Binance reserved the right “to withdraw from the agreement at any time.”
It took about 24 hours; Binance took a look at FTX’s books and pulled out of the acquisition. FTX, at one time valued as a $32 billion company, has had to pause withdrawals, and Bankman-Fried has told investors the company is $8 billion in the hole and may have to file for bankruptcy. FTX’s legal and compliance team quit. You can no longer describe SBF as a crypto billionaire; his net worth has fallen below this mark.
What appears to have triggered this is a news report in Coindesk revealing that most of the holdings of SBF’s private hedge fund, Alameda Research, were composed of FTX’s own digital token, FTT. This shouldn’t necessarily have affected FTX, which is an exchange: People make deposits and trade crypto, and the exchange holds those deposits and executes the trades, making money from fees. But FTX has lent to customers to buy crypto, has not had much reserve capital to cover withdrawals, and worst of all, has not separated the accounts, instead using customer money to make a bunch of bets.
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SBF essentially dealt with this in a long Twitter thread, but he’s very, very sorry about it. The correct answer to that is handcuffs.
Some of these machinery worked through the FTT. So when CZ at Binance asked FTT after the Coindesk report, it worried investors and sent FTT’s price straight down. And that worried several investors, who were fighting to get their money out of FTX – money that FTX didn’t have. “The problem is that FTX took the customers’ money and traded it for a bunch of magic beans, and now the beans are worthless and there’s a big hole in the balance sheet,” as Bloomberg’s Matt Levine put it.
This is a typical vicious cycle for, well, a Ponzi scheme. Or a more reputable institution shot through with fraud, as in the financial crisis. Of course, there’s also the vicious cycle we’ve seen through crypto this year, as the main institution bailing out the lenders is… Sam Bankman-Fried. So if the device that bailed out half of the cryptographer is now itself so toxic that he needs to be bailed out, I think we can safely say that this asset class is vaporware. (Binance, which resisted the role of lender of last resort, may not be in such good shape either.)
All of this begs the question: Why is Congress just moving forward with industry-friendly crypto regulation right now? We could see action on Senate Agriculture Committee legislation to shift some jurisdiction to the Commodity Futures Trading Commission in the lame-duck session. There are piles of bills in Congress to exempt this or that crypto-asset.
This is completely confused. We have a volatile product that basically inflates every few weeks, and members of Congress, fat with crypto money from before the billionaires went bankrupt, are just following the old program, seemingly oblivious to what reality has presented in recent months. Putting together a weak regulatory and tax regime for crypto right now is like putting together a prescription drug benefit for fentanyl.
The regulations should be prophylactic, if anything. “If the digital asset industry has a real future, they must meet the minimum safeguards that exist for traditional financial institutions to prevent or mitigate such failures,” Mark Hays, senior policy analyst at Americans for Financial Reform and Demand Progress. said in a statement. But I doubt it is even viable. My two cents (or 0.000001 bitcoin, and rising) is that the only entities that should be working with crypto in Washington right now are law enforcement.
