Judy: The fallout keeps growing
for the crypto-currency industry
after an unexpected bankruptcy.
It involved one of the largest
and most well known exchanges
for buying and selling
cryptocurrencies such as
Bitcoin.
As amna nawaz explains, there
are now major questions about
how this happened and what it
may signal about the larger
world of crypto finance.
Amna: Judy, that crypto exchange
, ftx, was founded by Sam
bankman-fried in 2019.
And it had more than a million
users.
The bankruptcy came just days
after a published report raised
questions about whether ftx had
adequate capital.
Investors pulled out in what
amounted to a bank run on ftx.
Now, ftx's downfall has renewed
concerns about the safety and
credibility of many
cryptocurrencies.
Their values have plunged as
well.
Roben farzad follows this as the
host of the podcast, full
disclosure and joins ne mow.
,Welcome back and thank you for
joining us.
This is complicated stuff.
You have this crypto exchange,
ftx, and it goes from being a
cryptocurrency empire one week
to bankruptcy the next.
How does that happen?
Roben: It should have been
simple stuff.
If you have an exchange, it is
capturing a spread between the
bid and ask, kind of a market
maker and depository for people
to put crypto assets in.
It is a total keeper in effect.
The market got wind that other
things were in play, namely that
it was funneling money to a
related hedge fund, Alameda
capital, and its underlying
currency, its own token was
being sold left and right, that
left the doors open for
investors to demand money back
from ftx.
As you called it, a run on the
bank.
It is difficult to ask plain
this in normal terms because by
its nature, it is decentralized,
there isn't a central bank,
there isn't a federal reserve
stress test.
They are based in the Bahamas.
We are untangling this in real
time and it seems like every day
, another new revelation drops
about what was going on behind
the scenes.
Amna: We should mention the
hedge fund, Alameda, was run by
Sam bankman-fried, that is the
connection.
The damage is not just limited
to ftx.
What does the collapse mean for
the broader cryptocurrency
market right now?
Roben: It is a bad look for all
of crypto.
People face margin calls, people
had tokens and had to sell them,
they thought it was a
diversification scheme.
We were told crypto was supposed
to prevent something like this,
it was a distributed letter,
that block chain does not
require regulators out there
with microscopes and magnifying
glasses looking at this because
it is self restricted and it is
impossible to live.
In truth, behind the scenes, it
is still open to have messy
financial controls for people to
funnel money to a closely
related bank.
Imagine if bank of America was
behind-the-scenes funneling
money to Merrill lynch, customer
deposits was I think the most
egregious thing.
When customers caught wind of
that, they demanded money back,
and it was a run on the bank.
They did not have the
collateral, no capital
requirements, no regulation.
It has been a catastrophe and it
has rippled to all manner of
crypto assets.
Amna: Outside of crypto assets,
is there institutional exposure?
If you have never bought or sold
or held cryptocurrency, could
you be impacted by this massive
collapse?
Roben: I think that is keeping
certain regulators up at night.
When this jumps the pond from
the crypto west world into
regulated banks, the too big to
fail banks, J.P. Morgan, Citi.
A smaller bank in Paris went off
the reservation.
These banks have been subject to
stress tests since the financial
crisis and which off the
reservation, if you will.
Regulators at least in the
United States demand they keep
cash on their balance sheets and
they are there in case a run
like this happens.
It is not as fungible as saying
I have a ton of these tokens, it
is cash like.
Regulators have looked at that,
they've said you have to have a
firm balance sheet, and crypto
is something you can dabble in,
it could not be a bedrock asset
on your balance sheet.
It remains to be seen if there
are some thing we don't know
about.
Amna: You have mentioned that
crypto is decentralized and
unregulated by design.
What does this mean for future
regulation?
Roben: Does the fed want to
intervene?
Did you guys want this?
You wanted to be decentralized
and exotic and have outsized
gains.
Bitcoin went from a couple
pennies to $60,000, fell back to
$15,000, and that excited
people.
You saw the breathless super
bowl ads.
Do you want to call it a
security?
And if it is, are you open to
the transparency into closure
demands, being accountable to
the sec, federal reserve stress
tests?
I think it harsh is the mellow
of crypto for a lot of players
who would be less inclined to
dabble in the asset class.
Judy: We know the sec and just
apartment -- justice department
are looking into this.
What questions do we still have
about what went wrong here?
Roben: How can you take customer
assets and use them to fund
risky bets in a related hedge
fund?
How could there not be internal
controls at the cfo and board
level, that you just have -- I
think on a rising tide, you
don't worry about these things,
but something as basic as a
skeptical report on arrival
outlet caused a run on this
bank.
It shows you how flimsy the
foundation is, and you have to
look at other changes and
currencies, the other
institutions that say we are
good for the money, when the
money is actually a token built
on faith and credit and what?
Where is the cash?
You have to be backstopped by
heart capital.
That's the biggest question for
me and there are trillions
involved.
Amna: Thank you so much.
Roben: My pleasure, thank you.