November 15, 2022

FTX Goes Bankrupt

“Sam Bankman-Fried received numerous plaudits as he rapidly achieved superstar status as the head of cryptocurrency exchange FTX: the savior of crypto, the newest force in Democratic politics and potentially the world’s first trillionaire. Now the comments about the 30-year-old Bankman-Fried range from bemused to hostile after FTX filed for bankruptcy protection Friday, leaving his investors and customers feeling duped and many others in the crypto world fearing the repercussions. Bankman-Fried himself could face civil or criminal charges.” AP News

Both sides worry about the volatility of cryptocurrencies:

“My beef with the crypto market has always been that it is backed by nothing but air. At any moment, that support could disappear. For FTX it just did… The dollar and Treasurys are backed by the good faith of the U.S. government via its income-tax-generating ability. When stocks sell off, they eventually find a bottom so long as they are viable enterprises that can eventually make money. Real-estate loans are backed by the value of a home or building, but crypto has no backing.”
Andy Kessler, Wall Street Journal

“With inflation still roaring, it is a hard time to make a case for the value of central banks. But the boy wizards of cryptocurrency have done it… Any monetary instrument is a form of credit, and credit will always involve risk. Mr. Bankman-Fried discovered that. His putative savior, a crypto exchange known as Binance, backed out 24 hours after it had tentatively agreed to a rescue. On Friday, FTX filed for bankruptcy. Yet had the rescue deal gone through, Binance would have been on the hook for, reportedly, up to $8 billion in claims against FTX. Who would have come to the rescue of Binance?…

“The point of a central reserve, which is what Paul Warburg and Nelson Aldrich had in mind in 1913, is that the pooled resources of the nation are immeasurably greater than those of any single mogul. They offer, in times of need, an ocean of liquidity to iron out the inevitable fluctuations in individual, regional, and industry-specific credit. Would anyone in their right mind wish to entrust the nation to crypto — and trade the imperfect Fed for the likes of FTX and Binance?”
Roger Lowenstein, New York Times

Other opinions below.

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From the Left

A libertarian's take

“For all its prophecies of world-shaking change, crypto remains primarily the province of hobbyists, speculators and gurus… It took a lot of work to make the stock market boring enough to attract the wealth of more than half of all American households, a lot of institution-building to control fraud and limit the fallout from speculation. If crypto wants to become a world-changing financial technology, it will need to take the same journey…

“Decentralized finance! Permissionless innovation!… This all sounds very exciting when crypto nerds talk about it… But at present, too much of this freedom is being used to reinvent financial architectures that were de-permissioned for good reason — including the self-dealing clearinghouse, the undercapitalized market-maker and the Ponzi scheme. Crypto must find some way to rein this in, or let government do it. Otherwise, the best-case scenario is that it will remain irrelevant to the larger economy, as ordinary folks stick with the old-fashioned money they understand and the institutions they feel they can trust.”
Megan McArdle, Washington Post

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