FTX Collapse Reaffirms Bitcoin Is Not ‘Digital Gold’
John Ray III oversaw the bankruptcy winding up of Enron when the giant energy trading firm collapsed in an inferno of fraud and abuse in 2001.
Last week, Ray was appointed to handle the liquidation of cryptocurrency exchange FTX. He had the following to say, and that is a lot given his experience:
Never in my career have I seen such a complete failure of corporate controls and such a complete absence of reliable financial information as occurred here.
The failure of FTX continues to reverberate through the crypto markets. The collapse of FTX took almost 20% of the total value of all cryptocurrencies, almost overnight.
Many obscure tokens essentially lost all value. The carnage may continue for some time as the deadly combination of collapsing token values combined with a lot of leverage takes its toll.
Sam Bankman-Fried, the politically connected founder of FTX, was inadvertently candid about a fundamental problem with many (most?) of the cryptocurrencies now being traded.
In an interview with Bloomberg in April, he described a token as a “box” that only has value because people keep putting money into it. When the Bloomberg interviewer observed that he was essentially describing a Ponzi scheme, Bankman-Fried admitted that there was a “depressing degree of validity” to it.
The collapse in crypto prices over the past year, crowned by the implosion of FTX, should finally put an end to at least one dangerous claim. Bitcoin is certainly not “digital gold”.
The comparison has always been silly. Bitcoin lacks thousands of years of adoption and use. It is not tangible, durable and beautiful. None of the trust that underlies the value in Bitcoin and many other cryptos is inherent, as it is in a gold coin or bar. Their value can therefore go to zero.
Fraudsters and bureaucrats can still kill most cryptos by destroying trust and adoption.
The collapse of FTX and its affiliates is a lesson in exactly how that can happen.
High-profile scams are unfortunately a regular occurrence in the crypto markets ever since the twenty-something owner of Mt. Gox was caught nearly 10 years ago defrauding the customers of his exchange.
Bitcoin price cratered after this debacle. Since then it has accumulated wonderfully. But it has not yet overcome this major challenge.
It’s a box that has value because people keep putting money into it. If people ever stop, the value will disappear. For Bitcoin and other cryptos to have lasting value, they will need widespread adoption and use beyond being a speculative asset.
There are many honest people developing bitcoin and trying to build a better world.
The horrific collapse of FTX symbolizes the shift in industry leadership from heroes like Satoshi Nakamoto to villains like Sam Bankman-Fried. Satoshi built Bitcoin as a decentralized and incorruptible digital asset, beyond the reach of central bankers and politicians.
Bankman-Fried has no interest in the principles that motivated Satoshi. He spent his time and his millions seeking political favor and appearing altruistic.
The FTX scandal was very bad news for cryptocurrency investors. The regulation that is likely to follow will be worse.
The idea behind regulation seems to be that Wall Street Banks should have unfettered access and control over the cryptocurrency market. People should expect a scheme similar to what was built around gold and silver futures, with similar outcomes, including dishonest price discovery.
The fraud-driven implosion of the FTX exchange practically paves the way for progressive politicians, many of whom were lavishly supported by Bankman-Fried, to ride to the industry’s rescue.
Gary Gensler, chairman of the Securities and Exchange Commission, made his career turning a blind eye to massive fraud in gold and silver trading when he headed the CFTC.
Gensler met with Bankman-Fried several months ago to discuss cooperation on rules. And FTX hired Mark Wetjen, another discredited CFTC commissioner, as head of policy and regulation.
Bankman-Fried appeared to be taking a page from Bernie Madoff’s playbook. Madoff was cozy with regulators. He sat on advisory committees for the SEC and worked with officials there. Perhaps that’s why the agency ignored complaints that outlined the Madoff fraud in fine detail.
Bitcoin has potential, but not as a replacement for gold. And not as a government-regulated get-rich-quick asset for people to gamble on in Wall Street’s rigged casinos.
