Guest Editorials, Opinion

Cryptocurrency stars can flame out

But they can’t take customers with them

Out of nowhere, 30-year-old Sam Bankman-Fried became a billionaire mover and shaker in the world of cryptocurrency. He threw money around the halls of Congress — and everywhere else he went — while threatening to disrupt Chicago’s financial futures industry.

Known by his initials, “SBF” is a billionaire no more. The house of cards he built over the past several years came crashing down in a matter of days. His FTX crypto exchange and the entangled Alameda Research hedge fund are now in bankruptcy, amid reports that customer funds are missing. As many as a million of SBF’s customers may have lost whatever they had in their trading accounts, which, unlike traditional bank and brokerage accounts, are not guaranteed by the federal government against a company’s failure.

Media reports are drawing comparisons to the fall of Enron Corp. or the Bernie Madoff Ponzi scheme. Everyone from police in the Bahamas to U.S. Sen. Dick Durbin, D-Ill., is demanding answers from SBF.

It’s too soon to know exactly what happened, and whether criminal conduct was involved. The insolvency expert appointed to shepherd SBF’s businesses through bankruptcy says he’s never seen such a “complete failure” of corporate controls.

“From compromised systems integrity and faulty regulatory oversight abroad to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented,” John Ray III, who helped oversee Enron’s bankruptcy, wrote in a court filing.

A “substantial portion” of the billions held at FTX may be missing or stolen, he wrote.

After a bank-run-style failure like this, no reasonable person should place their confidence in cryptocurrency trading operations. However, we believe stronger rules and greater participation from mainstream financial firms will help this promising marketplace achieve its potential, minus the shady conduct that is giving it a bad name.

Cryptocurrencies are digital files that can be used as money and traded via blockchain, a digital ledger that permanently records transactions. The technology behind crypto is proven. It has the potential to reduce costs, speed up transactions and, yes, improve the security of financial operations around the world. So far, however, crypto markets have been used mainly for speculation.

As of today, there is no evidence that crypto’s latest failure is leading to a systemic financial crisis, as occurred when Bear Stearns, Lehman Brothers and AIG collapsed during the 2007-08 meltdown. It can take time for knock-on effects to reveal themselves, but with any luck the collapse of FTX will mainly be confined to those directly involved with FTX.

For now, the crucial responsibility of regulating crypto in the U.S. remains a jump ball among different agencies. No doubt, clarity is needed about which federal regulator should take on crypto. Beyond that, we’re not sure new rules are needed. If existing rules governing exchanges and public offerings had been applied and enforced in this case, customer funds would likely have been protected, as they are in other parts of the U.S. financial mainstream.

Crypto platforms operating in the U.S. should be welcoming the scrutiny needed to make their industry safe for the public to invest. That’s the path to future growth, and the wise course to follow for whoever’s left in this troubled business after the dust clears from the latest crypto bloodbath.

This editorial first appeared in the Chicago Tribune. This commentary should be considered another point of view and not necessarily the opinion or editorial policy of The Dominion Post.