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The flight from the Bahamas and the first lawsuit for FTX founder Sam Bankman-Fried brings a dramatic end to the cryptocurrency bubble.
It follows guilty pleas to similar fraud allegations by two associates. The entire crypto system is exposed as a multi-trillion dollar pyramid scheme.
Companies that bought into the myth bolstered their balance sheets by trading crypto-backed instruments, allowing them to exert increasing influence.
Extradition: FTX founder Sam Bankman-Fried is escorted from the Magistrate Court building in Nassau, Bahamas
It is remarkable that even if the whole structure collapses, the crypto missionaries still preach the virtues.
Bitcoin is a long way from the staggering $69,000 highs it reached in November 2021, valuing the market at $3 trillion. That’s more than the UK’s total GDP.
Yet it’s still at an astronomical level, almost $17,000, even after a cascade of insolvencies and unveiling of a building built on lies, alleged fraud and money laundering.
Those who have drunk the Kool-Aid find it difficult to leave the cult. Just this week, the financiers of the ethereum blockchain trumpeted how upgrades, creating a more energy-efficient architecture, meant demand for crypto assets would return in 2023.
The enormous energy consumption of mining crypto has been a huge downer for those fixated on climate change.
Believing that next year will be all right is pure, unadulterated delusion.
It’s hard to get the message across that crypto and its cousin, non-fungible tokens (NFTs) don’t meet any of the criteria for a currency.
They cannot be used as a medium of exchange to trade goods, nor are they a store of value.
Many smart people played the bitcoin game as a one-way bet at the roulette table. They bought a few chips from the croupier, watched them increase in value as the wheel spun and stopped, and managed to cash in before the final stop.
Those on the winning side, including a hotshot New York lawyer I know, can’t believe their luck and keep talking about it.
The unlucky ones are clients of exchanges like FTX who have been saddled with frozen deposits in Chapter 11.
A group of FTX clients are asking the Delaware courts to indicate that their £1.3 billion in crypto on deposit with the defunct company is a “custody asset” that should be prioritized over trade creditors and banks. Good luck with that.
The closet is already looking bare after some $10bn (£8.3bn) of the $16bn (£13.3bn) in the FTX balance sheet mysteriously moved to another Bankman-Fried company, Alameda Research.
It is not complicated to understand how crypto fell to earth. As with any financial collapse — liability-driven investments (LDIs) are an example of this — leverage or borrowing is a factor.
When the “reddit” generation was able to borrow at ultra-low interest rates to fund bitcoin trading, it was all fine and dandy.
As the cost of borrowing rose in response to runaway inflation, there were margin calls (demand for more assets from lenders) and financing became too expensive.
It also became clear that the crypto building is built on weak ethical and legal foundations.
The executives of a handful of exchanges, including FTX, Binance, and Tether, have been busy exchanging assets with each other, inflating valuations.
The most disturbing aspect of the crypto crisis (NFTs won’t be far behind) is the way massive scams have been able to infect mainstream finance.
Bitcoin’s price is trumpeted on financial broadcasts alongside respectable asset classes such as oil, gold, and the dollar, giving it a false respectability.
The embrace of crypto and blockchain by respected and regulated savings providers such as Fidelity and JP Morgan (with half a dozen crypto funds) is nothing short of a disgrace.
Crypto, in its many guises, falls into the category of shadow banking or non-bank banking, so it falls outside the bounds of mainstream financial regulation. But one has to ask: where were the checks and balances?
Enthusiastic receipts for bitcoin and crypto IPOs suggest that stock markets, investment banks that sponsored the offering, regulators and accountants (FTX has been labeled the biggest accounting scandal since Enron) have all failed to do their job.
The US justice system will deal with Bankman-Fried and his cult.
The guilt doesn’t stop there.
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