Durham's Official Student Newspaper
By Sarah Kuszynski
After the dramatic collapse of FTX and a history of volatility, can trust in cryptocurrencies be restored, if indeed they should ever have been trusted at all?
Cryptocurrencies or ‘Crypto’ are forms of currency which exist virtually and employ cryptographic techniques to secure transactions, namely, they use blockchains which record transactions in distributed ledgers. The virtual currency is often traded on online platforms termed crypto exchanges.
Cryptocurrencies have grown from digital novelties to trillion-dollar technologies that have served as disruptors to the global financial system. Bitcoin, Ethereum, and hundreds of other cryptocurrencies are increasingly held as investments, used for transactions and even in the case of El-Salvador as legal tender. Crypto initially seemed revolutionary and versatile – and FTX was one of the most established and versatile currency exchanges within the ‘crypto sphere’.
The collapse of FTX concomitantly highlights the volatility, illiquidity and security issues which have dogged crypto since its inception
FTX was launched by Sam Bankman-Fried in 2019, when he was only 28. It became one of the largest crypto exchanges and built itself into a mainstream trading platform for retail investors. Yet, on the 11th of November, the cryptocurrency exchange filed for bankruptcy. Moreover, in the following hours FTX experienced a possible hack in which millions worth of tokens were stolen. The company’s value plunged from $32 billion to bankruptcy in a matter of days, dragging Bankman-Fried’s $16 billion net worth essentially to zero.
The collapse of FTX concomitantly highlights the volatility, illiquidity and security issues which have dogged crypto since its inception. FTX’s dramatic fall from grace seems to have shaken the crypto world to its core, especially as Bankman-Fried had become known as the acceptable face of crypto, communicating with lawmakers whilst seeking to influence crypto’s regulation. So, whilst for many Bankman-Fried will remain the seeming epitome of Gordan Gecko-esque financial greed and excess, for others he will be missed – crypto will need a new darling.
Nonetheless, FTX suffered an “unprecedented and complete failure of corporate controls”. According to FTX’s new management, a “substantial portion” of assets held by FTX are missing and/or stolen. Shockingly, the company did not even keep accurate records of who worked there. Perhaps, this is indicative of the absurdity of our technological age or simply a prime example of bad governance.
More significantly, the collapse of FTX has set off a chain reaction that threatens to topple more of crypto’s ‘respected’ institutions – such as Genesis. Prices of other digital currencies continue to fall. Bitcoin has plummeted and Ether has fallen by 20% since FTX collapsed. This downward spiral across multiple currencies highlights that crypto has ‘never before… looked so criminal, wasteful and useless.’ It should also make clear that a cryptocurrency has no intrinsic value, therefore trading such an ‘asset’ is essentially a zero-sum game – when a coin is crashing to zero, the only individuals/business who were able to sell high are the winners.
Crypto and the underlying blockchain technology should survive the ordeal
Relatedly, the FTX debacle could worsen numerous ongoing economic and political crises, namely the cost-of-living crisis. Crypto is an unstable investment increasing volatility in an already unstable world.
That said, crypto and the underlying blockchain technology should survive the ordeal. However, it should be apparent that crypto is not the silver bullet which will transform the financial services sector and the days of its minimal oversight and unchecked expansion are at an end.
Oversight of cryptocurrencies and exchanges will require independent regulation to encourage a greater degree of transparency. This will be most significant for more centralised cryptocurrencies which acquire some of the features of traditional banking. For example, the chairman of the Commodity Futures Trading Commission expressed his view that there needs to be regulations in place to prevent cryptocurrency exchanges from having affiliated hedge funds that trade on the platform, such as FTX’s Alameda Research. Without such regulation, any investor should not trust a crypto exchange any more than one would have faith in a casino table.
Admittedly, regulation can be overly cumbersome and disasters still fairly frequently occur in traditional finance. Yet, those who still remain crypto evangelists should pause and think – if FTX had been subject to greater oversight, a lot of grief would have been avoided and many individuals and business would still have access to their money.
Illustration: Rosie Bromiley
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