FTX downfall threatens crypto existence

Crypto has an Enron 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 way, there is nothing new under the sun – even with the dizzying volatility that has come to characterize the nascent digital currency market.
• We’ve kind of 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.

Like Theranos/Madoff/Lehman, the main spark for FTX’s downfall was the founder’s staggering ineptitude and dishonesty, and the failure of anyone around him to notice (or at least care).

• “The fallout from [FTX’s] commingled client funds, poor disclosure and lack of internal controls should remind us that while the cast of characters and products may change, the script for financial market disruption remains painfully familiar,” wrote Robin Vince, president and CEO of banking giant BNY Mellon. in an article from the Financial Times on Friday.

Yes, but: What is specific to crypto is an untested, interconnected and interdependent ecosystem ripe for contagion and dramatic spillover effects. And since this fuse was lit, the fire spreads faster and wider.

• This means something a lot when it comes to crypto’s long-term prospects – and why it may take a very long time for investors (especially small ones) to trust the industry again.

What they say: FTX’s fall “will radically transform the crypto ecosystem, further shake confidence and cast doubt on its ongoing prospects,” analysts at Moody’s wrote last week.

• The firm’s failure “has left a void in market share that will prove difficult to fill without a renewed customer interest in cryptoassets, a scenario that we currently assign a very low probability.”

• Crypto firms have damage control. Voluntary audits are suddenly back in vogue, with crypto exchanges scrambling to stem a range of outflows. But even these have limitations in what they can prove.

Flashback: Crypto was born in the dark aftermath of the 2009 crisis; its main selling point was its decentralized nature.

• The idea was that individuals could not rely on traditional finance, and to give smaller players more power to make their own decisions without influence from larger players.

Bottom line: The crypto industry was already facing a trust deficit. And this has set it way back.

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