What could possibly go wrong with an alternative, decentralized, non-governmental virtual currency system utilizing a new generation of connective exchanges “protected” by blockchain verification being promoted by geeks, hustlers and celebrities? One based on private party beliefs and trust, not appropriately regulated, and capable, based on potential scale, to circumvent national monetary and fiscal policies? One that could be used for both legitimate and questionable financial transactions with wild price fluctuations based on the actions of private individuals?
So many tech geniuses, trendy Y and Z Gen believers, hosts of celebrity followers and millions who just did not want to be left behind as tales of fabulous riches made quickly floated in mass and social media all the time… invested, proselytized and smiled. A little volatility, sure, but the overall trended appeared to be upward. Many still believe.
While some nations banned this alternative currency (e.g., China), others made it official tender (e.g., El Salvador). The United States is still wallowing in a confused effort to contemplate how digital currencies (also including those “non-fungible tokens” – NFTs – that hovered between being collectibles vs investments) could and would be regulated. At its peak, estimates place the overall market capitalization of the 50 largest cryptocurrencies at a startling aggregate of more than $800 billion.
For those who entered the market early, took their newfound riches and left earlier in the game, their smiles turned into gales of laughter. Bitcoin soared. They made their fortunes already. But then it happened. A major crypto Tsar and purported mega-billionaire (and political contributor) watched his world collapse… dropped from super-wealth to around $100,000 in cash or equivalents… with a whole lot of liabilities and US criminal charges staring him in the face (arrested in the Bahama on December 12th on a US want). Sam Bankman-Fried’s (“SFB’s”) baby, the crypto-engine FTX exchange (once the world’s second largest), crumbled before his very eyes. Bankruptcy. And a whole lot of very angry users and investors. From billions to dust. Crypto’s future was very much in doubt, even though the damage occurred primarily at only one particularly large crypto-trading entity. Governmental inquiries. Private lawsuits.
Most crypto users truly had/have no genuine understanding about how what was effectively a belief-based private currency worked. Many “investors” remain in crypto to this very day, convinced that the effects of the FTX collapse will pass, allowing crypto to continue, albeit better regulated. They just see appreciating value. And yes, since the US went off the gold standard over half a century ago, even the US dollar is effectively a belief-based currency. But the dollar has an entire nation behind it, as the dollar continues to be one of the world major reserve currencies (a global standard for international transactions).
Yale School of Management Professor of Accounting, Rick Antle, took a quick walk through this nascent debacle in the December 2nd issue of Yale Insights: “It is not surprising, then, that regulators have been a bit behind the curve in the crypto world. (Are they ever ahead? Can you regulate something before there is some experience with it?)
“The intangible nature of crypto assets means also that volume can be cranked up very, very quickly. There are no beer barrels to store, no cars to manufacture and ship. You just move around some symbols. This is where the ‘garden-variety scam’ comes in. Business history is full of examples of companies that grew too fast with little attention to controls and accounting, which tend to slow things down. As attorney John Ray—now FTX’s CEO—wrote in a bankruptcy filing, having control rest in the hands of ‘a very small group of inexperienced, unsophisticated and potentially compromised individuals’ who in turn are enabled by ‘compromised systems integrity and faulty regulatory oversight’ is a tried-and-true recipe for disaster. Even so, this situation seems quite extreme. Mr. Ray, who is extremely experienced in bankruptcies, states: ‘Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.’…
“[Ray’s bankruptcy declarations include:] The FTX Group’s approach to human resources combined employees of various entities and outside contractors, with unclear records and lines of responsibility. At this time, the Debtors have been unable to prepare a complete list of who worked for the FTX Group as of the Petition Date, or the terms of their employment. Repeated attempts to locate certain presumed employees to confirm their status have been unsuccessful to date. (Emphasis added.)…
“Of course, there will be big effects on individuals who will lose assets in the FTX failure. At this point, it is difficult to estimate how deep the losses will run or how many people will lose. Because FTX was a trading platform, it held customer assets. The Ray Declaration contains a balance sheet for the parts of FTX labeled the WRS Silo [comprised of the US side of the business] that contains the following qualification: ‘Balances of customer crypto assets deposited were not recorded as assets on the balance sheet and are not presented.’ (Emphasis in original.) The qualification for balance sheet for the Dotcom Silo [FTX’s total holdings in this market] is: ‘Balances of customer crypto assets deposited are not presented.’ (Emphasis in original.) These customer assets likely far exceed the assets on the balance sheets of those two silos, which were $1.36 billion and $2.26 billion respectively… So if customer assets were lost or stolen, we really have no idea how much might ultimately be lost.”
I will not tell you that cryptocurrency is dead; it certainly continues with many believing that FTX was just a signal for some needed course correction. But Professor Antle summarizes the inherent weakness in the crypto system: “Crypto assets are pure information assets. They have no tangible existence and can therefore be easily moved, stored, sold, etc., at least from a physical point of view. Crypto assets signify rights that exist only to the extent that people believe they do. For example, Bitcoin is valuable because it gives you the ability to acquire goods and services in exchange for Bitcoin.” And if you do not understand how crypto works, should you indulge?
I’m Peter Dekom, and if your crypto trading portal has no regular office hours, are you worried that the executives behind it might soon be offering visiting hours?
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