These are difficult times for financial markets as a series of bank failures provide a nasty shock at a time of high inflation.
An unlikely winner of the market turmoil: cryptocurrencies. The price of these digital assets has skyrocketed in recent weeks as traders, spooked by an apparent irritation in the bank-dominated financial system, offer an alternative known for its underdog status.
Here’s the rich irony for those who remember crypto’s early days: Even as crypto prices soared, cryptocurrency companies in the US attempted to become financial industry insiders, embracing traditional business models they intended to disrupt not so long ago .
As a sign of the times, consider the standard attire at the Futures Industry Association’s annual conference earlier this month at a chic Florida resort.
Last year, teenage visitors in black t-shirts, shorts and hoodies signaled that outsiders were actually storming Boca Raton’s gates. This year, crypto operators have dusted off their blazers and pants, emphasizing the benefits of being registered and regulated like other trading firms.
“Crypto people are coming to the traditional model,” observed Walt Lukken, who runs the trade association. “There’s a reason the traditional model exists.”
Crypto still has a long way to go before anyone would call it traditional, but the change in attitude is welcome news for Chicago and other global trading hubs. As noted on this page, tighter rules and more involvement from mainstream financial firms may help this promising marketplace live up to its potential – minus the shady behavior that has given it such a bad rap that some crypto operators have dubbed “crypto ‘ in favor of ‘blockchain’ or some other less depraved name for their industry.
Cryptocurrencies are digital files that can be used as money. They rely on blockchain, a digital ledger that permanently records transactions. This sophisticated technology allows participants to trade with one another person-to-person without a central counterparty guaranteeing the trade, as in the Chicago financial markets.
Rebranding this industry will be difficult as the bad news keeps coming. For starters, the banking crisis that hit in recent weeks has brought down lenders heavily exposed to crypto, most notably Signature Bank and Silvergate Bank, which until recently were among the most aggressive financiers in the industry.
Bigger still is Sam Bankman-Fried, the one-time face of the company whose FTX exchange imploded in November, capping a disastrous 2022 for the crypto business. The criminal case against “SBF,” as it’s commonly known, looks worse by the day as additional details provide ammunition for those who dismiss not just SBF and FTX, but the entire industry, as one large, unregulated scam. SBF has pleaded not guilty and has stated that he is not guilty of any criminal wrongdoing.
Federal prosecutors last month filed additional charges against SBF, who faces decades in prison if convicted over the sheer scale of FTX’s losses. He and a handful of suspected accomplices are accused of stealing billions in customer funds.
In recent days, creditors learned that the dozens of companies that make up FTX had a staggering $6.8 billion in deficit when they filed for bankruptcy last year, with $4.8 billion in assets versus $11.6 billion owed to customers, suppliers and others that will likely never be whole again.
FTX further revealed that SBF received $2.2 billion in payments and loans before the company failed, while several other top executives paid out hundreds of millions. One of his most prominent lieutenants, Caroline Ellison, who ran struggling crypto hedge fund Alameda Research, which was said to be a channel for siphoning off client funds, received $6 million.
Of course, that $6 million is a large sum, but many women working in finance will find that even for an upstart who claims to be progressive, the most senior female executive received far less than the men who supposedly did their peers were. Ellison has signed a plea deal and is expected to testify for the prosecution at the criminal trial scheduled for October.
Against this disastrous backdrop, how could the price of crypto surge? Many market veterans believe that those who continue to trade in places where client accounts can go “poof” (no FDIC coming to the rescue) deserve all sorts of losses. While prices have skyrocketed, crypto markets are not as deep and liquid as they were a year ago, suggesting participants have scaled back activity.
Still, crypto isn’t dead, and that’s a plus in our view. While some would celebrate if this financier was smothered in his crib, we see potential. For example, the technology underpinning the industry could reshape international payment systems, emphasizing greater efficiency.
We are committed to seeing crypto adopt basic rules that other financial players take for granted – namely, don’t play with client funds – and continue efforts to earn a place in the financial mainstream.
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