Sam Bankman-Fried, the founder and former CEO of defunct cryptocurrency exchange FTX, found himself in a courtroom in the Bahamas on Tuesday morning, arrested at the request of the US government over the circumstances surrounding the FTX implosion.
Bankman-Fried has indicated he will fight extradition to the United States, where federal prosecutors have charged him with fraud and conspiracy.
And on Tuesday in Washington (where the guest of honor would have been SBF but for the aforementioned allegation), the current CEO of FTX – who is leading the company through bankruptcy – said he suffered losses of over $7 billion and that what happened looks like “old-fashioned embezzlement.”
So, amidst this veritable tsunami of bad stocks, is it possible that cryptocurrencies will regain their appeal?
This moment may just be the beginning of the end for cryptocurrencies, according to Lee Reiners, director of policy at the Duke Financial Economics Center.
All signs pointed to it in Tuesday’s congressional hearing, he said. “The main finding has been a complete lack of internal controls at all FTX entities, including a lack of books and records.”
The problem isn’t the industry itself, “it’s the product that the industry is selling,” Reiners added. “Cryptocurrencies are just digital assets created out of thin air” – assets that, he said, are traded solely on the basis of speculation.
Reiners is among critics who say cryptocurrency has had 14 years to find what it calls its “killer use case”: its economic value. Meanwhile, supporters say they have alone he was 14 years old.
“This is a very new technology. There is a lot of development going on,” said Kristin Smith, executive director of the Blockchain Association. “And most of the promising applications in this space have not yet reached a point where they are ready for large-scale use, so we have to give it time to build.”
Even after the collapse of two cryptocurrencies, a crypto hedge fund and now FTX, Smith said the industry has the infrastructure to survive.
“This is a setback. But I think it’s one that the industry will eventually be able to overcome.”
But the industry can’t rebuild trust on its own, according to former Commodity Futures Trading Commission chairman Timothy Massad, who is now the director of the Digital Assets Policy Project at Harvard Kennedy School.
Regulators have to play a role, he said. “We need basic standards to adequately protect customer assets. We need standards to prevent conflicting businesses from operating” and prohibit entities from trading with themselves and their affiliates.
It would be good for the public as well as for the industry as they keep looking for that “killer use case”.
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