The central idea behind cryptocurrency has always been decentralisation. For crypto enthusiasts, central banks cannot be trusted; the public needs to have access to currencies that are not manipulated by the authorities, but rather respond to the free market. In an era where central banks are taking a lot of heat for over-cooling the economy by raising interest rates in an effort to fight inflation, crypto evangelists have had a lot to work with. Although crypto has its share of detractors, visionaries like Sam Bankman-Fried were supposed to help tame the Wild West that is the crypto market. But this past week, Bankman-Fried’s company, FTX, a well-respected and well-used central exchange, filed for bankruptcy after their customers withdrew over 6 billion USD in funds as part of a bank run. This has forced FTX to freeze its operations, and customers have potentially lost billions in assets.
Bankman-Fried was famous for always wearing shorts and being worth over 25 billion USD by age 30. He was lauded for lending further legitimacy to the crypto market by building a reputable, professional exchange and bailing out struggling firms like Voyager Digital and BlockFi Inc. this past summer. Bankman-Fried had also built up a considerable business portfolio during his short stint as a billionaire. For example, the stadium where the Miami Heat play is known as FTX Arena, although the Heat have announced that they are cutting ties. The Heat fallout is the first in what will be a long, arduous road ahead for everybody involved with FTX. BlockFi, for example, has suspended all operations. More broadly, when such a large pseudo-bank goes under, customers immediately want to claim their money. But given the frozen assets, it may be years before they get any compensation, and that compensation is likely to be far less than what its value was even a few days ago. It is estimated the FTX owes over 8 billion USD.
When it rains…
To make matters even worse, a day after it filed for bankruptcy, FTX said that it was investigating “unauthorized transactions” that left its supposedly frozen accounts. Crypto researchers noted over 515 million USD that left the company, possibly resulting from hacking or theft. When cryptocurrency is stolen, it’s often difficult for thieves to convert it into usable cash. Because crypto transaction records are public, experts can track the movement of the funds, gathering clues about the identities of the thieves.
But a major theft would make it even more difficult for FTX to refund customers and other creditors who have already lost billions of dollars in the firm’s collapse. Experts have advised crypto enthusiasts to hold currencies in self-custody, which means holding one’s own assets instead of storing them in an exchange.