Crypto has an Enron-sized scandal that threatens to completely undermine the trust proposition for its existence, regardless of Sam Bankman Fried’s mea culpa tour.
Why it matters: The house of cards built by Bankman-Fried has drawn several parallels, including Enron, Theranos, Bear Stearns, Lehman Brothers, and Madoff Investment Securities.
- In that vein, there is nothing really new under the sun – not even with the dizzying volatility that has come to characterize the burgeoning digital currency market.
- We’ve seen this movie before and we suspect we know how it will end.
The big picture: FTX’s “first day statement” in bankruptcy court confirms the picture that has emerged over the past month.
As with Theranos/Madoff/Lehman, the main cause of FTX’s demise was the founder’s staggering incompetence and dishonesty, and the inability of anyone around him to notice (or at least care).
- “The consequences of [FTX’s] combined 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,” wrote Robin Vince, president and CEO of banking giant BNY Mellon, in a Financial Times op-ed on Friday.
Yes but: What is specific to crypto is an untested, interconnected and interdependent ecosystem ripe for contagion and dramatic spillovers. And since this fuse has been lit, the fire is spreading faster and wider.
- This is important a lot when it comes to crypto’s long-term prospects – and why it could take a very long time for investors (especially small ones) to trust the industry again.
What they say: FTX’s demise “will radically transform the crypto ecosystem, further shake confidence and cast doubt on its ongoing outlook,” Moody’s analysts wrote last week.
- The company’s failure “has left a market share void that will be difficult to fill without renewed customer interest in crypto assets, a scenario we currently assign a very low probability.”
- Crypto companies are in the business of damage control. Voluntary audits are suddenly back in vogue, with crypto exchanges scrambling and trying to counter a series of outflows. But even these have limitations in what they can prove.
review: Crypto was born in the bleak aftermath of the 2009 crisis; its main selling point was its decentralized nature.
- The idea was that individuals could not trust traditional finance and gave smaller players more power to make their own decisions without the influence of larger players.
It comes down to: The crypto industry was already dealing with a trust deficit. And this set it way back.