ALEX BRUMMER: Cryptocurrency is being exposed as a multi-trillion dollar pyramid scheme
- December 22, 2022
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The flight from the Bahamas and first court appearance for FTX founder Sam Bankman-Fried provides a dramatic book-ending for the cryptocurrency bubble.
It follows guilty pleas to similar fraud charges by two associates. The whole crypto system is being exposed as a multi-trillion dollar pyramid scheme.
Firms who bought into the myth propped up their balance sheets by swapping crypto-backed instruments, allowing them to assume ever more leverage.
Extradition: FTX founder Sam Bankman-Fried, is escorted out of the Magistrate Court building in Nassau, Bahama
It is remarkable that, even as the whole structure goes down, the crypto missionaries are still preaching the virtues.
Bitcoin has fallen a long way from the dizzy heights of $69,000 hit in November 2021, valuing the market at $3trillion. That is more than the size of the UK’s total GDP.
Yet it is still at an astronomic level, close to $17,000, even after a cascade of insolvencies and exposure of an edifice built on lies, alleged fraud and money laundering.
Those who have drunk the Kool-Aid are finding it hard to leave the cult. As recently as this week the backers of the ethereum blockchain were trumpeting how upgrades, creating a more energy-efficient architecture, meant the appetite for crypto assets would return in 2023.
The enormous energy consumption involved in ‘mining’ crypto has been a huge downer for those fixated on climate change.
To believe that it will be fine next year is sheer, unadulterated delusion.
There is difficulty in getting the message across that crypto and its cousin, non-fungible tokens (NFTs) meet none 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 soar in value as the wheel spun and stopped, and managed to cash in before the final halt.
Those on the winning side, including a hotshot New York lawyer of my acquaintance, cannot believe their good fortune, nor stop talking about it.
The unfortunates are clients of exchanges such as FTX who have been lumbered with frozen deposits in Chapter 11.
One group of FTX customers is asking the Delaware courts to declare their £1.3billion of crypto on deposit with the defunct firm is a ‘custody’ asset which should be prioritised above trade creditors and banks. Good luck with that.
The cupboard already looks bare after some $10billion (£8.3billion) of the $16billion (£13.3billion) on the FTX balance sheet mysteriously moved to another Bankman-Fried enterprise, Alameda Research.
It is not complicated to understand how crypto fell to earth. As in any financial meltdown – liability-driven investments (LDIs) are a case in point – leverage or borrowing is a factor.
When the ‘reddit’ generation was able to borrow at ultra-low interest rates, to finance bitcoin trading, it was all fine and dandy.
As the cost of borrowing surged, in response to runaway inflation, there were margin calls (demand for more assets by lenders) and financing became too expensive.
It also became evident that the crypto edifice is built on flimsy ethical and legal foundations.
The executives of a handful of exchanges, including FTX, Binance and Tether, have been busy swapping assets with each other, inflating valuations.
The most disturbing aspect of the crypto meltdown (NFTs won’t be far behind) is the way enormous scams have been allowed to infect mainstream finance.
Bitcoin’s price is trumpeted on financial broadcast outlets, alongside respectable asset classes such as oil, gold and the dollar, giving it a spurious 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 or non-bank banking, so it is outside the perimeter of mainstream financial regulation. But it has to be asked – where were the checks and balances?
Enthusiastic receptions for bitcoin and crypto initial public offerings suggest that equity markets, investment banks which sponsored the offerings, regulators and auditors (FTX has been labelled the biggest accounting scandal since Enron) all failed to do their job.
America’s court system will deal with Bankman-Fried and his cult.
Culpability does not end there.
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