Crypto

Crypto’s Enron-sized Scandal Threatens to Undermine Its Main Reason for Existing

Sam Bankman-Fried, Founder and Managing Director of FTX Cryptocurrency Derivatives Exchange, during an interview on an episode of Bloomberg Wealth with David Rubenstein in New York, U.S., on Wednesday, Aug. 17, 2022. (Jeenah Moon/Bloomberg via Getty Pictures )

Crypto has an Enron-sized scandal that threatens to completely undermine the trust proposition for its existence, regardless of Sam Bankman Fried’s mea culpa tour.

why is it important: The house of cards built by Bankman-Fried has drawn several parallels, including Enron, Theranos, Bear Stearns, Lehman Brothers and Madoff Investment Securities.

  • In that vein, there’s nothing really new under the sun – even with the sky-high volatility that characterizes the nascent digital currency market.
  • We’ve kind of seen this movie before, and we think we know how it will end.

The big picture: FTX”day one statementin bankruptcy court confirms the picture that has emerged over the past month.

Like Theranos/Madoff/Lehman, the main spark of FTX’s downfall was the staggering incompetence and dishonesty of its founder, and the failure of anyone around him to notice (or at least care). .

  • “The fallout from [FTX’s] mixed client assets, poor disclosure, and missing internal controls should remind us that while the cast of characters and products may change, the scenario of financial market mess remains painfully familiar,” wrote Robin Vince, President and Chief of the management of banking giant BNY Mellon. in a Financial Times Editorial Friday.

Yes, but: What is crypto-specific is an untested, interconnected and interdependent ecosystem that is ripe for contagion and dramatic spillover effects. And since that wick was lit, the fire spreads faster and wider.

  • It matters a lot when it comes to the long-term outlook for crypto – and why it might take a very long time for investors (especially small ones) to trust the industry again.

What they say : The fall of FTX “will dramatically transform the crypto ecosystem, further shaking confidence and raising doubts about its current outlook,” Moody’s analysts wrote last week.

  • The company’s failure “has left a market share void that will prove difficult to fill without renewed customer interest in crypto assets, a scenario to which we currently assign a very low probability.”

  • Crypto firms are doing damage control. Voluntary audits are suddenly fashionable again, with crypto exchanges scrambling, trying to stem a slew of outflows. But even these have limits in what they can prove.

Rollback: Crypto was born in the aftermath of the 2009 crisis; its main selling point was its decentralized nature.

  • The idea was that individuals could not trust traditional finance and allow smaller players more power to make their own decisions without the influence of larger players.

The bottom line: The crypto industry was already facing a trust deficit. And that set him back a long way.

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