COMMENT: The Wild West of crypto claims yet another victim

By Lionel Laurent

(Bloomberg Opinion) — Sam Bankman-Fried has in the past enjoyed media treatment akin to walking on water. Even amid the brutal cryptocurrency selloff, his exchange FTX was hailed as the buyer of last resort amid the wreckage. His geeky image, supposedly philanthropic motivations and crude online gags softened the edges of a billionaire whose business is risky crypto trading — most of it illegal in the US. But he’s been found wanting in the only three things that matter in finance — liquidity, liquidity and liquidity.

Rival billionaire Changpeng Zhao of Binance is buying him out. Zhao had earlier announced plans to sell Binance's $530 million stash of the FTX-run token FTT. The combination of selling pressure on an already battered and illiquid crypto market, coupled with vivid memories of past collapses in the space, snowballed into an existential FTX crisis. Some $1 billion was withdrawn from FTX in a week, according to Kaiko analyst Conor Ryder.

This is corporate blood-sport on a level that even crypto-land isn’t used to. One exchange billionaire seems to have triggered a run on a rival crypto king, forcing his peer out of business. That this was initially done in the name of transparency is doubly ironic considering Binance’s own controversies and its lack of an official headquarters. By vocally dumping a token Binance owns at scale, the panic-sale effect was entirely predictable. Bankman-Fried tried in recent days to reassure investors that all was well with FTX via Twitter — not very reassuring from someone once unironically compared to John Pierpont Morgan.

Binance might look like it’s emerged as the obvious victor in this game of thrones, with a combined potential 70%-plus share of the market for trading Bitcoin. But the speed at which investors took fright, and the extent to which the FTX token traded like a currency being defended from a speculative attack, point to high distrust and low transparency in this market. Given Binance’s own past exposure to collapsed tokens, reported sanctions violations and a crypto market bruised by evaporating confidence, there’ll be plenty for regulators to keep up the pressure.

Moreover, this episode has delivered an expensive lesson in counterparty risk. The question isn’t just working out who owns what or which business lines are being blurred, but what protections exist for investors posting funds on platforms located in offshore jurisdictions and that offer so many products with potential conflicts of interest. (Answer: Very few.) Even the term “exchange” isn’t quite accurate, giving the image of a traditional regulated trading venue — even though the mish-mash of token listings, proprietary coins, and trading services makes it anything but. So when fear strikes, money flees.

And in moments like this, even Bankman-Fried’s enormous wealth and carefully honed public image failed to reassure, because they were so tied to crypto. Exchanges are money-spinners — commissions are made on the way down as well as up — but the scale of the recent rout has been brutal. FTX’s estimated share of Bitcoin trading has fallen to around 3% from 16% in about six months, according to James Butterfill at digital trading firm CoinShares.

This goes beyond one exchange. While CZ has profited from Bankman-Fried’s woes, the bigger picture here is of a fight over scraps in a market that ballooned to a peak of almost $3 trillion and then shrunk by two-thirds. Demand has evaporated, with punters nursing burned fingers and institutional investors caught short by names like Three Arrows or Celsius. Rising interest rates and a war economy have chased away the crowds on which speculative trading depends — whatever Dogecoin fans think.

The optimistic view is that this sector is on the road to maturity, and strengthens with every collapse. After all, even this latest panic has been absorbed. But after several boom-and-bust cycles, it’s still not entirely clear if we are years, decades or eons away from a use case beyond trading. Crypto miners that took on debt are going bust. Regulators are cracking down on social media influencers, unregistered securities and dark web shoppers hiding Bitcoin in popcorn tins. Central bank digital currencies are in the works, potentially raising competitive pressure.

Whatever happens next, the most valuable lesson that Bankman-Fried is teaching investors isn’t about philanthropy, or a JP Morgan-style empire, but the risk of trusting trading venues in a market like crypto too readily. The latest sell-off, combined with increased regulation and recession, will be a test of survival. And the next time a big exchange faces a liquidity crunch, the only valid rescuer might need to be a firm that looks like the real JPMorgan and not its crypto equivalent.

(This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.)

Lionel Laurent is a Bloomberg Opinion columnist covering digital currencies, the European Union and France. Previously, he was a reporter for Reuters and Forbes.

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