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The recent crisis speaks volumes about the need to protect consumers
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OPINION:
(Correction: A paragraph alleging an inaccurate relationship between Robinhood and Citadel was removed.)
Over the past few months, cryptocurrency has taken a serious hit, with major firms going under and popular currencies like Bitcoin and Ethereum losing more than half their value.
While crypto holds great promise as a store of value, now is an opportune moment to establish robust protections from bad actors which contributed to this crash, made these currencies less resilient, and hold back crypto from the solid rebound we have witnessed with equities. A glance at the recent crisis speaks volumes about the need to recognize bad actors in this space and protect consumers with proper safeguards and rules.
When a USD-backed cryptocurrency named Terra or UST began to depeg from the dollar and lose value, companies began to sink. One of the earliest firms to go down was Three Arrows Capital, a major crypto lender that collapsed and eventually declared bankruptcy.
Celsius — another “crypto bank” and lender — also suffered from this market crash. As investors sensed a “winter” coming in the market, they began massive selloffs of their holdings, leading to more tokens like stETH and Bitcoin to fall. With the value of their assets dropping, Celsius declared chapter 11 bankruptcy.
3AC and Celsius were no small potatoes. They managed more than 100,000 users and billions of dollars in transactions, currently owing more than $10 billion to investors. Unsurprisingly, retail crypto users were the ones most hurt. Many of them lost their life savings, frozen in these platforms’ accounts, and some of them confessed to suffering mental health and suicidal issues as a result.
There is one figure people have looked to in this crisis. Sam Bankman-Fried, the head of crypto exchange FTX and trading firm Alameda Research, has portrayed himself as a “white knight” in this space, but evidence suggests that trust in Mr. Bankman-Fried and his businesses is worth reconsidering.
FTX is the world’s second-largest crypto-trading platform, valued at $32 billion in January 2022. Mr. Bankman-Fried also founded and owns Alameda Research, a trading firm that buys and sells over $2.5 billion worth of crypto to provide liquidity in the market.
Just the fact that Mr. Bankman-Fried heads both FTX and Alameda Research at the same time is problematic — for both the industry and consumers.
An exchange and a trading firm joined at the hip inherently pose the risk of them front-running investors, as the exchange will have access to all the nonpublic market data on transactions. In the case of FTX and Alameda, the exchange can potentially share private user information to the partner trading firm to make profit.
In other words, Mr. Bankman-Fried controlling both Alameda and FTX gives them an unfair advantage over retail traders and consumers and allows the trading firm to profit at the expense of FTX’s own users.
These allegations, if proven, could suggest market manipulation and insider trading. If insider trading is heavily scrutinized for traditional equities, the same should be the case for crypto, FTX and Alameda. The speed of cryptocurrency’s rise and its lack of regulatory framework should not be an excuse to endanger consumers.
Mr. Bankman-Fried’s public profile is equally deceptive. His self-portrayal as an “effective altruist” — who seeks to make money only for the benefit of others — is a public image that makes his businesses more dangerous. He is one of the world’s richest people in the world, with a fortune of more than $20 billion, yet he promises to use most of his fortune for philanthropy.
Ironically, his definition of philanthropy seemed to be spending millions in politics. In the 2020 presidential campaign, Mr. Bankman-Fried gave the Biden campaign $5.2 million, making him the second-largest donor. For the midterm elections this year, he already spent $31.5 million and said he is willing to spend up to $1 billion for Democrats.
In this cutthroat industry, Mr. Bankman-Fried’s gestures may seem like a breath of fresh air, but his “altruistic” image blinds us from asking the right questions about his negative influence in this sector.
Take Celsius for example. When Celsius filed bankruptcy a month ago, subsequent court filings revealed that FTX and its related entities may have created a huge hole in the firm’s books. Not only did Alameda Research directly owe Celsius $12.8 million, but a little-known group called Pharos Fund owed Celsius a staggering $81.1 million. Curiously enough, Pharos is managed by another firm named Lantern Ventures, whose CEO Tara Mac Aulay is a co-founder of Alameda Research.
Again, one must wonder whether these links to Mr. Bankman-Fried mean that he conspired to withdraw more money from Celsius than it could finance at the time and caused its insolvency.
If this is true, then FTX and Alameda owe almost $94 million to Celsius. To a cash-strapped entity like Celsius, this financial liability from FTX/Alameda must have been a killing blow to the company and its innocent users.
2022 has shown that cryptocurrency can be a dangerous rollercoaster ride, reminding us to be careful about to whom we entrust our money in crypto. Figures and platforms like Mr. Bankman-Fried, FTX and Alameda Research might paint themselves as honest and responsible, but their dubious business operations have hurt crypto users and do not have their best interests in mind. We must make crypto safe from these bad actors.
• Matt Mackowiak is the president of Potomac Strategy Group, a Republican consultant, a former Bush administration, a Bush-Cheney reelection campaign veteran and a former press secretary to two U.S. senators.
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