Polyamory, Denial, and Recriminations: Rebuilding Trust in Crypto After FTX
The bankruptcy of FTX on Nov. 11 shocked the crypto market by wiping out FTX’s $34 billion valuation overnight, with investors like Sequoia and Softbank reducing their investments in FTX to zero. Market contagion spreads with BlockFi, the latest victim’s bankruptcy filing earlier this week and Coinbase debt trading at near distress levels.
FTX was reported to be $8 billion short of meeting customer demands for money just two days before bankruptcy and estimates vary as to how much customer money is stuck in bankruptcy. There is an estimated $10 billion funding shortfall, with FTX owing $3 billion to creditors. Customers, who are unsecured creditors, are at the back of the queue and are unlikely to see their money.
John Ray, the specialist who led the liquidation of Enron was appointed to handle the bankruptcy of FTX, said he had never seen “such a complete failure of corporate controls and such a total absence of information reliable financials”. This, in the unregulated crypto market where there is no investor protection or insurance scheme.
Everyone blames someone else – policy makers point the finger at the crypto industry, and crypto industry executives point the finger at regulators, and regulators point the finger at FTX saying “ we’ve been telling you for years that this is going to happen, which is why we’ve never brought crypto to land.
The unfolding story becomes more tragic and strange day by day and now brings to light members of the establishmentmany idolized SBF for his political and philanthropic giving backed by his excessive virtue.
The disgraced Wonderkid took to the airwaves this week with Andrew Ross Sorkin at New York Times DealBook Summit pretend he didn’t try to commit fraud by blaming huge management failures and sloppy bookkeeping – that he was more of a Blunderkid than a Wonderkid.
Jim Cramer, who will not utter SBF’s name (putting SBF in the same category as Lord Voldemort), afterwards ranted about the Times interview and called it an outright fraud. Cramer didn’t buy Blunderkid’s story and accused SBF of being a fraud – more Ponzikid – like Bernie Madoff, Kenneth Lay, Elizabeth Holmes or Wirecard CEO Marcus Braun, who goes on trial next week for fraud.
Bankman-Fried blamed Caroline Ellison, CEO of Alameda – FTX’s sister company, for the failure of FTX. Ellison is now sadly attributed to him Tumblr Comments on his “foray into poly” decrying the need to step away from the pecking order for personal ranking for such romantic encounters. Live by the rank die by the rank – his CEO market ranking couldn’t be lower.
FTX’s bankruptcy appears to have broken the social promise of crypto and is now at its lowest level of trust in its 13-year history. Its promise to deliver a better, safer and more inclusive financial system, of the people, by the people, for the people, seems broken.
The Senate GA hearing on Thursday brought things back to some semblance of normality. This is the same committee that SBF appeared in January of this year, announcing the crossroads better industrial and regulatory collaboration. No one should be surprised that calls to legislate crypto now have a wider audience in both chambers with CFTC Chairman Benham lead the call.
The Dodd–Frank Act was adopted in 2010 in response to the 2008 global financial crisis, and established regulatory measures to protect consumers and the economy against risky behavior by insurance companies and banks. We can see a similar act for crypto, the question is what, when and how far it will be.
The 2008 crisis was the worst since the Great Crash of 1929 which opened the doors to the Great Depression. In the Great Crash of 1929it was excessive leverage to buy stocks that led to the Glass–Steagall Act which forced banks to separate deposit and lending activities from riskier investment banking activities. Glass-Steagall was largely repealed in 1999, which arguably paved the way for the 2008 crisis.
During the 2008 crisis, excessive leverage in mortgage-backed securities and complex derivatives caused the highly regulated banking system to go into cardiac arrest. Neither regulations nor regulators would have stopped the collapse which was arguably largely due to human error and poor leadership and governance across the global financial network.
In any case, we did not stop using the US dollar or the banks following the crises of 1929 or 2008, and it is unlikely that we will stop using the blockchain or buying bitcoin after this crypto crisis .
Banks and the financial system were untrustworthy in society after the 2008 crisis. In 2011, Occupy Wall Street occupied Wall Street to protest a financial system that did not effectively serve 99% of the American population – the fintech revolution and the crypto promise were two of the powerful antidotes to which the star was rising.
Crypto exchanges have lost trust and confidence in the market. The market rumor is the “flight to quality” after FTX went bankrupt, with customers abandoning crypto exchanges and seeking to be in the safe hands of banks for their crypto. The hunter is now the hunted, and the great promise of crypto is to have a near-death experience.
In the days, weeks and years after the 2008 crisis, most people in most banks were responsible, did their job and did the right thing, and had to suffer the ignominy of an industry that no longer had the public’s trust and above all trust. Banks were bad, and it was bad to work in a bank. A small number of rotten apples spoiled the barrel.
Whether through embezzlement, mischief Where non-feasanceFTX’s bankruptcy seems to precipitate a systematic crypto market failure, more than it looks like a bit of bad luck or timing in a tough market with over-leveraged counterparties.
The failure seems to have little to do with crypto, bitcoin, or blockchain, nor with policymakers, regulators, or regulation. It is a human failure. And it is human failure that extends to the worship of idolatry and reliance on false icons. This human failure further extends to poor leadership and governance and the way FTX was run and managed.
In 2017, nearly a decade after the 2008 global financial crisis, insolvencies, scandals and regulatory fines, many believed that banks still have a long way to go to restore confidence.
The crypto industry would be well advised to quickly learn from market failures and embark on the long road to recovery. Pay particular attention to the time it takes to rebuild trust and win back the customers, counterparties, and ecosystem partners needed to successfully scale as a going concern.
All of us who work in the crypto, digital assets and digital financial services ecosystem are also well advised to support the mostly honest and highly professional individuals and companies working in the crypto and digital assets ecosystem . Most people and businesses are working towards a better financial system for everyone, and like all crises, one or two have brought the system to its knees through a single point of failure.
Staff, counterparties and partners not realizing their complicity in the network to a company’s single point of failure is a real learning that we need to take into account following the failure of FTX. This is the root cause of most crises, and we really need to address it for a more resilient financial system. We need to stop thinking and believing that everything is fine until it is not, and waiting to fail.
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