Why FTX, a crypto exchange, imploded
During the past few days, FTX, a Bahamas based cryptocurrency exchange, which was until recently valued at more than $30 billion, went bankrupt. In 2019 FTX created the FTX Token, or FTT as it is more widely known, which in 2021 was valued at almost $80. Customers who bought FTT did not know that those tens of millions of tokens weren’t widely distributed, which is key in having a market determine the price or value of any currency. Instead, a lot of the FTT was owned by FTX through its affiliate hedge fund Almeda Research. Almeda Research, on the other hand, used FTT to make speculative bets on other cryptocurrencies and complex financial products. After an article in CoinDesk earlier this month raised questions about FTX’s financials, Changpeng Zhao, the CEO of Binance (the largest crypto exchange in the world), decided to offload his company’s sizable FTT holdings. As a result, an old-fashioned bank run followed, and soon, the tokens were practically useless.
Should cryptos be regulated?
From Stephen G. Cecchetti and Kermit L. Schoenholtz:
In the aftermath of FTX, the question is what will happen next? The crypto system as it currently exists is unsustainable. Absent clear and easily enforceable property rights, a system that relies solely on private investors to monitor and discipline the behavior of opaque intermediaries has never been safe and effective. So, the big question is whether authorities ought to create a regulatory and supervisory framework that protects property rights and enforces the principles of safety and soundness.
Our hope is that governments will stand back and let the crypto world implode under the pressure of its unsafe business practices. Of course, officials should insist that traditional financial intermediaries avoid crypto exposure.
From Scott Sumner:
So what is the specific argument for additional regulation of crypto? To “protect crypto investors”? Why would we want to do that? To protect the banking system? I’ve seen no evidence that crypto threatens the banking system.
Do we really want to make people who invest in crypto feel safer about their investments? Wouldn’t that make “bubbles” even more likely? Isn’t it healthy for crypto investors to fear they might lose their investment? Wouldn’t it make them more careful?
And what is the social value of crypto? Why should social policy encourage investment in that area?
Tales from the Crypt(o)
By: Stephen G. Cecchetti, Kermit L. Schoenholtz – Brandeis University, New York University
Crypto regulation bleg
By: Scott Sumner – George Mason University
Financial stability and cryptos
In this paper, Azar et al. argue that although the digital asset ecosystem has recently proven itself to be highly fragile, adverse digital asset market shocks have had limited spillovers to the traditional financial system. Nevertheless, if the digital asset ecosystem becomes more systemic, emerging interconnectedness could pose risks to financial stability in the future. The authors focus on Binance, FTX, and Coinbase to illustrate the growing interconnectedness with the traditional financial sector. They point out that:
- Traditional brokerage firms are incorporating access to crypto markets into their product offerings.
- Traditional exchanges have begun to list financial products tied to crypto assets.
- Banks may hold deposits from companies offering stablecoins or hold private equity investments in crypto-asset-related companies on their balance sheets.
- Venture capital firms have invested $9.2 billion in crypto-asset-related firms in Q1 2022.
- Hedge funds are launching dedicated crypto divisions.
- Some public and private companies have crypto-assets on their balance sheets.
The Financial Stability Implications of Digital Assets
Authors: Pablo D. Azar, Garth Baughman, Francesca Carapella, Jacob Gerszten, Arazi Lubis, JP Perez-Sangimino, David E. Rappoport, Chiara Scotti, Nathan Swem, Alexandros Vardoulakis, Aurite Werman
From: Federal Reserve Bank of New York
