The collapse of FTX—what did it teach?

Nov 9
In exposing the dysfunctionality of the bitcoin market, the FTX founder might have been serving the public interest.

Sam Bankman-Fried may go down in history as the person who did the most to erode trust in the cryptocurrency market. If this is the case, he will also hurt investors and the financial system as a whole. Bankman-Fried was found guilty of a major fraud that caused his FTX exchange to fail. worthwhile service.

Bankman-fried presented himself as the antithesis of a bad boy and the hero of the cryptocurrency industry, landing multimillion-dollar endorsement deals with the likes of Major League Baseball and Tom Brady, counseling Congress on regulatory matters, and supporting smaller rivals.

Executives close to him claim that he perpetrated a vast fraud in the meantime, hiding billions of dollars in embezzled cash by fabricating financial statements and exempting his hedge fund from FTX's regulations on collateralization at the expense of clients. The strongest argument he had was that he was too stupid to face charges.

The deception was advanced by his accomplices, some of whom signed cooperation agreements with the case's prosecutors. When determining what penalties to impose, judges must take into account the seriousness of this crime and make sure that Bankman-Fried's accomplices are held fully accountable.

The court also brought attention to how blindly millions of Bitcoin enthusiasts trusted businesses like FTX with their money.

The same troublesome financial intermediaries that blockchain technology was meant to replace are here, only worse because of their relative opaqueness, ability to combine features that lead to major conflicts of interest, and lack of adherence to the security, dependability, and investor protection standards of more established intermediaries like banks and stock exchanges. Every day, billions of dollars worth of deals are still processed by Binance, Coinbase, and Kraken.

If the cryptocurrency space proves to be successful, it won't significantly impact the existing state of the market. Most tokens are essentially worthless unless you wish to launder money, manipulate markets, or engage in zero-sum speculation, as no genuine cash flows are building up in stocks or bonds.

Organizations such as central banks may indeed leverage the underlying technology to facilitate the usage of Bitcoin and facilitate cross-border money transfers, but in such a scenario, Bitcoin holders would not be the main winners.

The demise of Bankman-Fried might have some benefits, at least in this sense. Had he been less of a gambler, if he had consented to only take fees instead of placing extremely lopsided wagers, FTX would have been able to weather much longer market conditions and see far greater growth.

Systemically important financial institutions might have found cryptocurrency-backed lending irresistible as the numbers increased; if this had happened, the implications of the eventual bubble burst would have been even more severe.

This deception was committed by several people; therefore, Bankman-Fried wasn't the only bad guy. As this cautionary story draws to a close, it is hoped that legislators and regulators will put in place the measures required to defend investors, stop criminal activity, and reduce any systemic risks associated with cryptocurrencies.

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