As another big player collapses, trust is being eroded
The crypto market has just witnessed “one of history’s greatest-ever destructions of wealth.”
I won’t claim to fully understand the complexities of the saga involving the FTX exchange, Alameda Research and recently dethroned Crypto Golden Boy Sam Bankman-Fried. It’s not for a lack of trying; it’s just hard to make sense of things that don’t make sense. But the essential details are as follows:
- A Coindesk report revealed Sam Bankman-Fried’s Alameda Research trading firm was heavily invested in the FTX exchange’s FTT token.
- Days later, Binance’s CEO announced he was selling his remaining holdings of FTT tokens. In other words, he was spooked by the fact a huge chunk of Alameda’s assets were tokens from its sister company. Side note: what’re the bets Binance is the next domino to fall?
- The FTT token price plunged after the news, and, as always, customers rushed to withdraw their holdings, leaving big financial holes to fill.
- Binance suggested it would come to FTX’s rescue until it looked under the covers and got a fright. With no one coming to plug the holes, almost overnight, the exchange became insolvent and has since filed for bankruptcy. Sam Bankman-Fried has resigned.
- The exchange then got hacked — totally nothing to see here — to the tune of over $450 million.
It leaves behind a wreckage. Billions of dollars up in smoke — both seasoned and retail investors are facing huge losses. Sam Bankman-Fried (who goes by SBF, which tells you everything you need to know about the man and the bro culture of the crypto world) saw his estimated fortune of $15 billion implode 94% in a single day. It might even drop further, as the token has every chance of completely collapsing.
As an isolated incident, this car crash could be written off as a costly bump in the journey to realizing crypto’s “destiny.” But it’s far from isolated; we can now add the collapse of FTX to an increasingly large list that includes other failed ventures like Terra/Luna, Three Arrows Capital, Celsius, and Voyager.
With each collapse, billions are lost. Companies are lost. People lose everything. The ripple effects work through the interconnected chain, bringing everything down like dominos.
As vocal crypto critic Molly White wrote in The Guardian, “The aftershocks of FTX’s collapse will be protracted and devastating. Like a tsunami after an earthquake, the failure of a major player in the cryptocurrency industry reverberates outwards, battering other investors with exposure to FTX and Alameda. Any subsequent failures cause their own tsunamis, and so on.”
But it’s not just monetary damage.
Every collapse eats at the one thing cryptocurrency needs if it is ever going to be truly mass-adopted.
And that is trust.
Crypto is built on the notion that you can own and control your currency rather than trust the banks or other financial institutions with your money.
Crypto is built on the trust that it remains decentralized and not affected by the same external factors as our standard currencies. (Except, well, a lot of it runs through centralized exchanges and seems to suffer as much as fiat currency when shit hits the fan. I digress.)
Crypto is built on the trust that these exchanges are properly backing your money and have the capital to let you withdraw.
Crypto is built on the trust in the people building the future applications for crypto.
Crypto is built on the trust in the protocols that it works off.
For widespread public adoption, there needs to be total, unwavering trust that the whole thing isn’t just one big scam designed to enrich a few and harm the rest.
Yet each time one of these big players fails, more trust erodes. More doubts emerge. More people struggle to see past its current flaws, and no amount of “you’re missing out bro” calls from those holding their bags is helping to convince newcomers to join the movement.
The crypto industry might fight against the notion of regulation, but if this is how the landscape looks without it — a semi-ponzi scheme full of self-serving individuals who make reckless decisions with other people’s money — what choice does the industry have?
In an irony that will be lost on no one, SBF was advising regulators and legislators only weeks ago on potential policy. His collapsed exchange is now an example of why, without some form of consumer protection and regulation — or at the very least some guardrails — there will never be enough trust in the crypto market for it to live up to its promises.
What happens if trust erodes further? More people try to pull out their funds, and it will be abundantly clear whether the other exchanges should have trusted.
As Ed Zitron wrote in his latest newsletter, “If one major exchange dies in the next 2 weeks, this industry may be about to implode. If too many people want to cash out, one of the exchanges will fail to do so, and people will begin trying to liquidate their assets on other exchanges, which will also fail to do so. It will be grim.”