Crypto Updates

FTX fiasco means coming consequences for crypto in Washington DC

FTX fiasco means coming consequences for crypto in Washington DC

On Nov. 11, while the rest of the country was celebrating Veteran’s Day, Sam Bankman-Fried announced that FTX — one of the world’s largest cryptocurrency exchanges by volume — had filed for bankruptcy. Lawmakers and pundits quickly latched onto the rapid disintegration of FTX to call for more regulation of the crypto industry. “The most recent news further underscores these concerns [about consumer harm] and highlights why prudent regulation of cryptocurrencies is indeed needed,” said White House Press Secretary Karine Jean-Pierre.

It remains unclear what exactly transpired at FTX. Reports indicating that between $1 billion and $2 billion of customer funds are unaccounted for are deeply troubling. Widespread consumer harm and indications of corporate impropriety only increase the likelihood that Congress will take action to regulate the crypto industry. As Congress looks toward overhauling the regulatory environment around crypto, it is important that lawmakers provide regulatory clarity without hindering positive innovation.

Anatomy of a collapse

Sam Bankman-Fried was once the golden boy of the crypto world. Launching his career in traditional proprietary trading at Jane Street, Bankman-Fried left Wall Street and founded a crypto-focused quantitative trading firm called Alameda Research in November 2017. Three months later, he rose to fame by being the first to significantly profit by arbitraging the difference in the price of Bitcoin in Japan and the United States, purportedly earning him and his team $25 million per day. Just over a year later, he founded FTX. One needs only read the laudatory, now-deleted profile of Bankman-Fried from Sequoia Capital (which invested $214 million in FTX) to see how many believed him to be a financial savant.

Bankman-Fried eventually left Alameda to focus on FTX while retaining a significant stake in the fund. FTX quickly grew to become one of the largest crypto exchanges in the world as revenues grew over 1000% between 2020 and 2021. In January, FTX was valued at $32 billion. But, on Nov. 2, leaked documents indicated that Alameda Research held a large about of FTX Tokens (FTT). Four days later, Changpeng “CZ” Zhao — CEO of rival exchange Binance — tweeted that his company would liquidate approximately $2.1 billion worth of FTT. CZ’s statements, coupled with fears of illiquidity, led to a classic bank run on FTX.

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