Despite Sam Bankman-Fried’s apology tour, crypto has an Enron-sized controversy that threatens to undermine the trust argument for its existence utterly.
FTX’s downfall now finds parallels with similar crises from commercial entities such as Enron, Theranos, Bear Stearns, Lehman Brothers, and Madoff Investment Securities.
Like Theranos, Madoff, and Lehman Brothers, Sam Bankman-Fried’s dishonesty and the governance failure of the FTX board served as the primary catalyst for the company’s demise.
Robin Vince, president and chief executive officer of banking behemoth BNY Mellon, wrote in a Financial Times op-ed, “the fallout from [FTX’s] co-mingled client assets, poor disclosure and missing internal controls should remind us that while the cast of characters and products may change, the script of the financial market disorder remains painfully familiar.”
What is unique to cryptocurrency is an unproven ecosystem that is interconnected, dependent on one another, and ripe for infection and spillover effects. Additionally, the fire has grown and spread faster since this fuse was set.
This is significant for crypto’s long-term prospects and explains why it can take a very long time for investors to start believing in the sector once more.
According to analysts at Moody’s, FTX’s demise “will radically transform the crypto ecosystem, further shaking trust and raising doubts around its ongoing prospects.”
The sector’s revival, post-FTX saga, rests with a resurgence in client interest in crypto assets (which looks bleak as of now)
Voluntary audits are back as cryptocurrency exchanges scramble to stop a wave of outflows. However, even these have limits to what they can demonstrate.
Crypto was created after the 2009 financial crisis, and its main selling point was that it was decentralized. However, the sector always had this element called ‘lack of trust’ and the FTX mess fuels it further.
While Binance saw a 30% trading jump on its platform amid the FTX fallouts, Bitfront and BlockFi went for bankruptcy. Given the FTX’s popularity of being one of the biggest crypto exchanges, any entity, which had business exposure with the SBF-led company, is in deep crisis now. And not to forget the overall negative volatility of these digital currencies as well, as bankruptcies, and staff downsizing from crypto firms continue to dominate the headlines as well.