The future of crypto may be shared, not dead

Just when it seemed that Cryptoland couldn't become crazier - that's it. Last week, Sam Bankman-Fried, the 30-year-old child prodigy, supervised a $ 32-billion empire, which was made up of the FTX crypto brokerage and the Alameda Fund. He was a sports sponsor, philanthropic and was supported by mainstream financiers like Blackrock. When I recently met "SBF" (as he is called) at a conference, he was surrounded by Wall Street and Washington players.

not anymore, not longer. This week, SBF revealed that FTX recorded customer withdrawals of $ 6 billion and tried (and failed) to sell his arch-rival Binance to sell the largest crypto exchange. If he cannot close the reported liquidity hole in the amount of USD 8 billion, bankruptcy threatens.

This is the crypto version of the Lehman Brothers shock from 2008. Not because it could cause the imposion of mainstream finances; The entire crypto universe is only $ 1 trillion (one third of the last year) and its tokens usually work like chips in a casino (ie they can only be used there). But the FTX saga triggered a crypto attachment and further emptied a bladder that was previously inflated by cheap Fiat currency.

In fact, the sector is a key example of how the risk of risk of investors was affected by the tightening of the central bank (which, as I have already noted, is ironic, since crypto was charged as a protection against central bank excesses). And just as the collapse of Lehman triggered a rethink at subprime, FTX will cause a re -evaluation of crypto. Threaten allegations.

So

does that mean that crypto will die now? Not necessarily. But in the short term, many mainstream investors and institutions will probably run away, unless there is a comprehensive regulatory reform. Because the FTX Implosion has shown that the sector has at least two large Achilles' heels.

On the one hand, it is difficult to know which assets are based on digital tokens (except blind belief), since balance sheets are often opaque. In the past, FTX and Alameda were considered to be capitalized. But last week a report indicated that their balance sheets were filled up by massive stocks of a digital token called FTT that no one else had spent on FTX itself.

ftx did not confirm this. However, it is clear that Binance boss Changpeng "CZ" Zhao then tweeted plans to shed off his stocks to FTT, which let the price of the tokens break-and triggered a downward spiral for SBF. Opacity is expensive.

The second problem is custody, where practices have long been a dangerous mess (as I recently warned). The SBF empire was also a broker, owner, lender and storage for the crypto world and reported to a large extent. This created concentrations of power (which, in a different irony, mock the decentralized mantra of crypto). It also means that customers may not receive their money back. Hence the panic in view of the lack of a security network for investors-or a lender of the last instance-in the crypto country.

Theoretically, these problems could be resolved if crypto were forced to take over the same regulatory principles in terms of custody and transparency as Fuddy-Duddy Fiat-based finances. In this case, mainstream investors could remain involved. Conterproof congress laws are already in circulation that try that. However, these have not yet been implemented due to the political standstill. And in practice, the cessation of crypto players for regulation-at best-is mixed.

take Binance. This week, CZ announced a number of transparency initiatives and criticized FTX for using its own tokens as security and giving it without reasonable reserves. But Binance mainly operates abroad, and CZ says he unloaded FTT-TOKEN because "we will not support people who do lobbying against other industry players"-presumably with regulatory authorities. Welcome to another crazy action that is frightened (rightly) institutional investors.

However, it would be a mistake to assume that this means that all cryptos are dead. One reason for this is that there are still a large number of players who use digital assets to avoid government controls - be it due to libertarian ideologies or to participate in shameful activities or to move money from countries like China.

The FTX implosion will probably not change this; After all, Tether remains the largest stable coin today, although the US supervisory authorities repeatedly criticized him for misleading balance sheet information.

Secondly, the governments copy some of the underlying technologies themselves, even if crypto assets of the private sector lose value. Above all, the experiments with digital currency of the central bank or CBDC heat up, not least because, as I was told last month, the government of China (and to a lesser extent Europe) wants CBDCs to suppress private digital assets.

It is unlikely that the retail version of CBDCs will fly in the foreseeable future. But many European and Asian central bankers think that wholesale CBDCs could be useful. And while the Federal Reserve is less enthusiastic, Jerome Powell, her chairman, recently suggested that he could accept dollar stalls of the private sector if (and only if) they were regulated by the Fed.

The crypto future could be made: a sphere of shady offshore activities and another sober, strictly controlled central bank experiments. This is certainly not what the libertarians who first launched the crypto dream had ever expected. But it seems to be the most likely bet - unless there is an urgently needed regulatory reform. In any case, prepare for more twists.

gillian.tet@ft.com