Beware! What Have We Really Learned From the FTX-Binance Debacle?
Cryptocurrencies were supposed to usher in a new and better era of finance. Instead of relying on fragile, stodgy and often discriminatory banks for deposits, loans and the like, people could transact directly through platforms brilliantly designed to obviate the need for trust.
If further evidence was required, the travails of cryptocurrency exchange FTX.com this week have demonstrated just how far from that ideal crypto remains.
Most of the millions of people who have piled into Bitcoin, Ether and other digital tokens make little to no use of the underlying technology. On the contrary, they blindly put their trust in a panoply of intermediaries. These are strikingly similar to traditional banks and brokers — taking deposits, borrowing, lending — but typically more opaque, often more leveraged and largely lacking regulation to protect consumers or ensure safety and soundness.
FTX appeared to be among the best-run of those intermediaries. Even as others failed amid this year's broader cryptocurrency meltdown, Chief Executive Officer Sam Bankman-Fried positioned himself as a savior, buying up competitors and making their customers whole.
The problem was that the extreme leverage FTX offered — effectively borrowing from some customers to lend to others — rendered it highly dependent on trust. If customers started to doubt its ability to pay, they would in all likelihood rush to withdraw what they could, in a classic bank run.
That's what transpired this week, forcing Bankman-Fried to seek (unsuccessfully) a bailout from rival exchange Binance, eviscerating his wealth and triggering a broader selloff in crypto. FTX's capital shortfall, which Bankman-Fried has reportedly put at as much as $8 billion, doesn't bode well
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