Cryptocurrencies, experts say, have mainly been a speculative investment, which only worked as long as real dollars were there.
John Jay Ray III took control of the failed cryptocurrency exchange FTX in the small hours of November 11. Ray was asked in a US House Hearing on Financial Services to compare FTX to Enron, another financial debacle he cleaned up after. “This is just plain old embezzlement,” said Ray. “Not sophisticated at all.” FTX simply took customer money and used it for their own purposes.
FTX and its sister firm, cryptocurrency hedge fund Alameda Research, both operated out of the Bahamas, with zero oversight. At least $8bn in customer funds is now missing, causing cryptocurrency enthusiasts to rethink the future of finance and politicians to call for tighter reins on the cryptocurrency space.
Is this the end of cryptocurrencies?
“In its present form, yes,” Frances Coppola, an independent financial and economic commentator, told Al Jazeera. She pointed out that in its 14-year existence, the cryptocurrency world has failed to generate any significant real-world use case apart from the financing of crime. It has mainly been a speculative investment, which only worked as long as real dollars were entering the system.
“Crypto has never known anything but easy money,” she said. “Now central banks around the world are rapidly raising interest rates and unwinding quantitative easing. There’s a brutal liquidity squeeze going on in global markets, and money is being sucked out of risky asset classes.”
Cryptocurrencies have been about as risky as it gets. “The valuations that crypto was enjoying only a year ago are gone, and I don’t believe they will return for a long time, if ever,” she said. “I actually think crypto prices have further to fall. There’s still too much leverage in the space and central banks are by no means done with tightening yet,” she said.
Carol Alexander, a professor of finance at the University of Sussex, did not think cryptocurrency will disappear completely. She argued non-fungible tokens will definitely survive as metaverse development continues. “However, we are undergoing a shake-out now similar to the burst of the dot-com bubble with numerous small companies defaulting.”
Alexander believed that the survivors will be smart contract blockchains like Ethereum, a few regulated exchanges like Coinbase, and futures exchanges like the Chicago Mercantile Exchange.
Charles Whitehead, a professor at Cornell Law School in New York, agreed. “It may be too early to sound the death of crypto, but we are clearly late in efforts to regulate it,” he told Al Jazeera.
“The theoretical promise of cryptocurrency was a payment system not subject to the control of intermediaries,” Nicholas Weaver, a researcher at the University of California at Berkeley who has been an outspoken critic of cryptocurrencies, told Al Jazeera. But the real promise was that cryptocurrency would always go up in price, he said.
“FOMO, or fear of missing out, is as old as money itself,” said John Stark Reed, a cryptocurrency sceptic who once led the US Security and Exchange Commission’s internet enforcement office. The promise in cryptocurrencies has always been “get rich quick with no effort, no experience, and no risk,” he said.
Bankman-Fried’s smooth-talking also played a role in making people think FTX was a safe way to store their money and a safe bet for an investment.
“Some investors seem to have been blinded by SBF’s charisma in much the same way that Softbank’s Masayoshi Son was blinded by WeWork’s Adam Neumann’s fast-talking,” explained Coppola. “There wasn’t much due diligence going on.”
Masayoshi Son invested his first $4.4bn after Neumann gave him a 12-minute tour of a WeWork in 2016. Similarly, investors in FTX handed over $2bn, bringing FTX’s valuation to $32bn, without bothering to learn more about the company’s operations.
FTX went on a massive buying spree from late 2021 to 2022, spending nearly $5bn on a myriad of cryptocurrency businesses. FTX also spent $256m on 35 properties in the Bahamas. SBF and Ryan Salame, the CEO of FTX Digital Markets in the Bahamas, spent tens of millions on political donations. Salame was buying up restaurants in Western Massachusetts. Bankman-Fried also gave money to charities and several media outlets.
Ray’s role in the Chapter 11 proceedings will be to try and get as much of that money back as possible, a process that he has already begun. In the meantime, Bankman-Fried has been extradited to the US to face charges and FTX co-founder Gary Wang, and the former chief executive of Alameda Research, Caroline Ellison, have admitted to the charges against them and have agreed to cooperate with authorities in the continuing investigations,
“I think a lot of investors thought FTX was safe, even though the reality is no cryptocurrency exchange is regulated enough to be considered safe,” Weaver said.
Most of the influx of actual money into cryptocurrencies dropped off in 2021. The rest stopped in May 2022, when the TerraUSD stablecoin collapsed, destroying $18bn of purported value and blowing out the account books of many other cryptocurrency firms. The fall of FTX followed that of cryptocurrency hedge fund Three Arrows Capital and cryptocurrency lending platforms Voyager Digital and Celsius Network.
Now even Binance, the world’s largest cryptocurrency exchange, has started to wobble. Binance’s accounting firm Mazars recently announced it was pausing all cryptocurrency work, and the firm scrubbed all mention of such work from its website. Binance customers withdrew $6bn in cryptocurrency assets in the week Mazars halted its cryptocurrency work.
One theory among critics was that all cryptocurrency exchanges are broke because they are over-leveraged and full of unsaleable cryptocurrency assets that have no market demand, but are still accounted for at full mark-to-market value – and not at what a seller could actually get for them. If that is true, then the future of cryptocurrencies may involve even more cryptocurrency firms filing for bankruptcy in the near future.
There were many views of what the death of cryptocurrencies even meant. According to Weaver, it meant, “We don’t care any more.” He envisioned a world where there are no more Crypto.com logos at the racetrack, no more commercials on TV touting cryptocurrencies as some future of financial investment. “Those who put their money into cryptocurrency in the last few years have already lost most of their money. Extinction is admitting they lost it all.”
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