Looking beyond FTX: Why the crypto collapse matters

moneycontrol.com:

Erin Griffith

How could a $32 billion company vaporize overnight? That’s what anyone watching the sudden collapse of FTX, a hot cryptocurrency start-up that plunged into bankruptcy last week, might be puzzling over.

It will take time — and multiple federal inquiries — to fully understand what happened behind the scenes at FTX, a Bahamas-based crypto exchange.

But here is the simplest explanation that I can manage: FTX let people and companies buy and sell digital currencies, holding billions of dollars’ worth of customer deposits. FTX’s founder, Sam Bankman-Fried, also created an investment fund called Alameda Research that trades cryptocurrencies. The businesses were supposed to be separate, but this year, Alameda needed cash and apparently dipped into FTX’s customer deposits. Then, this month, FTX customers became worried about their deposits and rushed to withdraw them, setting off a bank run and pushing FTX into bankruptcy.

The apparent commingling of funds between Alameda and FTX is highly suspicious and could lead to criminal fraud charges and lawsuits. The Securities and Exchange Commission (US SEC) and Justice Department are investigating.

I want to explain why the disintegration of FTX matters — it’s more than simply one man’s financial catastrophe.

1. Crypto went mainstream in the COVID-19 pandemic. Regulation has yet to catch up.

Cryptocurrencies were part of overlapping investment manias — including meme stocks, trading cards, non-fungible tokens (NFTs) and sneakers — that got people chasing speculative investments over the past few years. But not everyone buying in understood the level of risk involved.

If a bank fails, the government might bail it out. But crypto is largely unregulated — buyer beware. Hacks can’t