SIPC

• In the fast-paced world of cryptocurrency, vast sums of money can be made or lost in the blink of an eye.
• In early November 2022, the crypto exchange FTX was valued at more than US$30 billion.
• They explain how and why this incredible collapse happened, what effect it might have on the traditional financial sector and whether you should care.

1. What happened?

• FTX was where many crypto investors traded and held their cryptocurrency, similar to the New York Stock Exchange for stocks.
• Bankman-Fried also founded Alameda Research, a hedge fund that invested in cryptocurrencies and crypto companies.
• But in early November 2022, news outlets reported that a significant proportion of Alameda’s assets were a type of cryptocurrency released by FTX itself.
• This left huge numbers of investors who bought cryptocurrencies through the exchange with no good way to get their money back.

2. Did a lack of oversight play a role?

• Liquidity is the ability of a firm to sell assets quickly without those assets losing much value.
• Solvency is the idea that a company’s assets are worth more than what that company owes to debtors and customers.
• But the crypto world has generally operated with much less caution than the traditional financial sector, and FTX is no exception.
• In addition, nearly 40% of Alameda’s assets were in FTX’s own cryptocurrency – and remember, both companies were founded by the same person.

3. Why is this a big deal in crypto?

• Bank runs are rare in traditional financial institutions, but they are increasingly common in the crypto space.
• Given that Bankman-Fried and FTX were seen as some of the biggest, most trusted figures in crypto, these events may lead more investors to think twice about putting money in crypto.

4. If I don’t own crypto, should I care?

• While investors and regulators are still evaluating the consequences of this fall, the impact on any person who doesn’t personally own crypto will be minuscule.
• In high-risk environments like crypto, it’s possible to lose everything – a lesson investors in FTX learned the hard way.

5. What does the trial reveal about the regulatory environment for crypto?

• The trial of Bankman-Fried has brought attention to the ever-evolving and complex nature of cryptocurrency regulation and oversight.
• At the conclusion of the case, Damian Williams, the federal prosecutor for the U.S. Justice Department, underlined the department’s dedication to fighting fraud, even in the relatively new crypto space.
• Despite a recent crypto crackdown by the SEC, the U.S. continues to lag behind other nations in establishing comprehensive crypto regulations.
• This is evident in the formal regulatory frameworks introduced by places such as the U.K. and the European Union.

The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.

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