Let’s start with hope. Given the scale and complexity of this bankruptcy — more than 130 companies with tens of billions of dollars in assets and liabilities — customers have little reason for hope. It will take time and money to sift through claims, with customers at the back of the line if Celsius’ recent bankruptcy is any clue. Martin Finnegan, a partner at Punter Southall, is skeptical about the chances of recovery given the legal fees and what is likely to be a lengthy process.
Then the shock. Using this word means paying homage to Captain Renault in Casablanca, who was “shocked, shocked” when he discovered a gambling den – before his winnings were handed to him. Even if FTX’s collapse was triggered by competitor Binance’s market pressure on its proprietary FTT coin, it only brought to light deeper problems in the exchange — such as lending more than half of its client funds to risky bets of the supposedly separate Trading company Alameda to support the Wall Street Journal. The shock has extended to FTX’s former head of sales, who reportedly said he and his colleagues were “kept in the dark” on bankruptcy issues until it was too late.
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And then, finally, the apology itself. It deserves as much value as the FTT token that once backed Bankman-Fried’s empire. Is this an excuse to stoke speculative excitement with unsustainable leverage in good times, such as when Bankman-Fried explained his lucrative yield farming business in such a way that my Bloomberg Opinion colleague Matt Levine compared Ponzi schemes? Or his handling of the bad times when Bankman-Fried tweeted client assets were safe when FTX was on the brink? It’s unclear, although the latter tweet has disappeared.
The ex-billionaire’s self-confessed tweets sound so empty because FTX’s demise isn’t just about a seething market, much like inflation has hit big tech companies. It looks more like the combination of a good old-fashioned financial bubble and, as Larry Summers points out, the murky accounting complexity of Enron — whose executives were once dubbed the “smartest guys in the room” — with Bankman-Fried taking center stage.
Bankman-Fried finally knew how to ride the crypto craze: he reveled in his image of the quant trading prodigy who allegedly started out by spotting inefficiencies in bitcoin trading on various exchanges. His charisma became adept at segregating sophisticated investors, not just retail investors, from their money, even luring pension funds onto a platform that appeared to encourage dialogue with regulators and institutions. With one hand, FTX took money abroad through leveraged bets and operating its own token, and with the other, it donated to politicians and offered regulations to make the sector healthier.
While financial history should have encouraged caution – and I’ve pointed out on several occasions the risks that investors ignored when sending funds to FTX and other exchanges – it has instead instilled greed and confidence. William Quinn, co-author of a history of financial bubbles, likens the FTX-backed FTT token to an artificial boost in purchasing power that fueled the market bubble. Using this token as collateral increased Bankman-Fried’s fortunes and those of his clients, but also quickly increased the complexity and risk of his empire. The result was an untenable house of cards.
FTX wasn’t the first crypto exchange to fall. And it probably won’t be the last. There will be talk of better regulation, but enforcing existing laws and protecting consumers would be a better place to start. But in this case, one thing is for sure: sorry isn’t good enough.
Lionel Laurent is a Bloomberg Opinion columnist covering digital currencies, the European Union and France.
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