But misusing clients’ money and being caught out when the music stopped, isn’t something new. Many a man has done much worse, and the markets have lived to tell the tale. The 2008 financial crisis, for instance, wiped nearly two trillion dollars from the global economy. Neither the banks, nor their dubious dealings have disappeared despite that.
The crypto universe too in its short 10-year existence has weathered several such shocks. In May this year, digital coin Luna and crypto bank Celsius collapsed leading to a trillion-dollar rout. It didn’t stop investors from buying other coins, including FTT. That’s been the pattern: a crash, leading to some accusations and threats of reappraisal, but not much else. Committed players, men like Bankman-Fried or Cory Klippsten, founder and CEO of Swan Bitcoin, have doubled down on such opportunities.
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So don’t expect it to be any different this time. After all, no one wants to miss out on a chance to make exponential gains — buy some Solana and watch it grow by more than 10,000 percent; or buy meme token Shiba Inu and exult as it shoots up more than 40,000,000 percent.
Ultimately, the current calamity that befell the crypto market only points to the big unanswered question about these currencies – what purpose do they serve? Their role as a store of value hasn’t worked. No one will now trust a crypto currency to be stable. Which brings us to the original purpose it was meant for, as a medium of exchange between two consenting adults. As Satoshi Nakamoto saw it, the idea of bitcoin was that: “A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.”
That’s just not happened even though it has found backers like Starbucks and Tesla who accept payments in crypto currencies, and even countries like El Salvador which adopted bitcoin as its official currency in October last year. But their acceptance hasn’t been widespread, reducing them to just another speculative investment.
Which is why the price of bitcoin or ethereum or the wipeout of FTT hardly matters. That’s what Mr Market is all about. For all the hand-wringing about the decline in the prices of various cryptocurrencies, this year hasn’t been too kind to fiat currencies either. In March, the Sri Lankan rupee lost almost 50 percent of its value almost overnight. The Turkish Lira lost 44 percent of its value in 2021, and it has only worsened this year.
Currencies, like stocks, are susceptible to the whims of markets. But the biggest hit to their stability comes from human greed and avarice. Which is really what the current collapse is all about. With FTX and its affiliate companies filing for bankruptcy, its founder, Sam Bankman-Fried, has been replaced as CEO by John J. Ray III, a lawyer who has worked on the bankruptcies of Enron, Nortel Networks and many other companies. And that’s really what this is, another messy bankruptcy. No more, no less.
To accept that we need to delineate clearly what happened here. FTX, a crypto exchange, lent $10 billion of the $16 billion it held in customer assets to Alameda Research, also owned by Bankman-Fried. The Hong Kong-based trading firm, in turn, lent out billions of these dollars. The security for many of these loans was FTT, a cryptocurrency created by, who else, FTX. At some point in the last few weeks, FTT started dropping sharply. What triggered the fall is mired in controversy. Some say it happened when Binance, the world’s largest crypto exchange and clearly a rival, said it was selling its half a billion dollars’ worth of FTT after reports emerged of FTX’s loans to Alameda. Whatever the reason, as the value of FTT started crashing, FTX was hit by $5 billion in customer withdrawal requests, leaving it with a $8 billion shortfall. What followed was the predictable domino effect.
In the wake of the disaster, the establishment got its voice back. The Securities and Exchange Commission started a probe into Bankman-Fried while there was a clamour for increased regulation. Some of that will happen, though ironically the regulation will confer further legitimacy on what has been considered outside the mainstream financial world.
Will any of it stop the next crypto currency from being hatched? Unlikely. Already, the same investment sharks who lured investors into the FTT mess are pitching variants of it as the next big thing.
Elsewhere in Mint
In Opinion, Manu Joseph tells how hypermorality nearly brought Twitter Inc to ruin. Jayati Ghosh delivers a message to the adults in the room of global macro policy. Rajrishi Singhal says India is likely to push the G20 envelope. Long Story profiles the Indian ‘team’ at the Qatar World Cup.
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