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Shockwaves caused by FTX collapse could just be the beginning

Following the bankruptcy of the digital currency trading platform, economists and politicians are warning that the financial system could buckle if crypto assets are not immediately regulated

FTX Cryptocurrencies
Cryptocurrencies have become a highly-speculative asset.Jonathan Raa (NurPhoto via Getty Images)
Paloma Llaneza

Weeks after the collapse of the FTX cryptocurrency trading platform, Sam Bankman-Fried – the 30-year-old founder and CEO of the company – has been arrested in the Bahamas. Yet, even with the mastermind in police custody, the business network he created still remains indecipherable. And, among the thousands of crypto traders who lost everything, confusion continues to reign.

At the first bankruptcy hearing, held on November 22, John Ray III – the famed attorney who oversaw the liquidation of Enron – noted that a “substantial amount” of the company’s assets were missing or stolen. Ray also opined that the crypto empire had been run as a “personal fief” by Bankman-Fried.

Despite his decades of legal expertise in overseeing bankruptcies, the liquidator expressed his astonishment at the absence of documentation regarding the firm’s activities. This will make it extremely difficult to track down any existing assets, which will need to be sold off to pay the traders and creditors who are owed money. While Bankman-Fried has admitted to losing $51 billion that was under the control of FTX, he claims that he was forced to file for bankruptcy in a Delaware court under pressure. According to him, this extreme situation – which resulted in the shuttering of one of the world’s principal crypto trading platforms – could have been avoided.

A file photo of Samuel Bankman-Fried, founder and CEO of FTX.
A file photo of Samuel Bankman-Fried, founder and CEO of FTX.SAUL LOEB (AFP)

“As soon as I signed the Chapter 11 documents [which govern the filing of bankruptcy in the US] we received a potential offer worth billions of dollars in financing,” he told media, indicating that unspecified sources could have saved his company. None of this has been confirmed. Bankman-Fried has said nothing about the multiple confirmed loans that FTX made out to him and other executives.

Sequoia Capital – a venture capital firm – lost $150 million that it invested in FTX. The crypto lender Genesis, meanwhile, is unable to access the $175 million that it had within the FTX platform, as all withdrawals have been frozen. But the damage from the fall of FTX – which followed an already-turbulent year in the crypto world – extends far beyond the companies that it had relationships with.

Democratic Senator Elizabeth Warren – who serves on the upper chamber’s Finance Committee – explains that the damage caused by Bankman-Fried affects the integrity of the financial system as a whole. She warns that the economy could take another big hit if crypto assets are not immediately regulated by the federal government.

Politicians are not the only ones advocating for tougher restrictions. Paul Krugman – who won the 2008 Nobel Prize in Economics – believes that regulation will kill the crypto-financial mirage: “If the government finally decides to regulate crypto-industry firms – which would prevent them from promising unobtainable returns – it’s difficult to identify any advantage they could offer compared to ordinary banks. There is every reason to hope that the crypto industry – which seemed so imposing just a few months ago – will end up in oblivion.”

Stephen Diehl – an active campaigner against the crypto asset market – told the Financial Times that, in his opinion, cryptocurrencies are nothing more than symptoms of the “commodification of populist anger, gambling and crime.”

In Popping the Crypto Bubble – his self-published book – Diehl traces the history of Bitcoin, from its birth during the global financial crisis (2008-9) to the post-2016 cryptocurrency rush, which he refers to as the “Age of Scammers.” He argues that cryptocurrencies are slow – as they rely on transactions moving through decentralized networks – and unreliable, given that investors are totally responsible for securing their digital assets. If they lose their passwords or pass away, there is no way to recover their money.

For Diehl, it is clear that crypto assets cannot be both a great investment – which only goes up – and a viable currency, which offers stable value. He also highlights the absence of a productive market economy around cryptocurrencies. There is no underlying collateral and no recognition from the general population.

Satoshi Nakamoto – the pseudonymous individual who created the first blockchain database in 2010 – wanted to create a virtual currency that would give economic control to a decentralized, libertarian community. In fact, the opposite has happened. Cryptocurrencies have become a highly-speculative asset subject to traditional capitalism. While the people who invest in it are driven by an ideological component, those who have siphoned off their money have deliberately created confusion, pretending that crypto is a safe way to collect huge capital gains with limited risk. The case of FTX demonstrates that none of this has proven to be true.

Following the arrest of Bankman-Fried, even long-time advocates of digital currency have turned on the crypto whiz kid. Elon Musk mocked the FTX bankruptcy on Twitter, writing that his “bull***t meter was redlining” when he previously met with the young CEO. However, it has also been alleged that Musk asked Bankman-Fried to invest $100 million in his bid to take over Twitter. While nothing has been verified, these scenarios certainly fit the tone of the times we are living in.

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