Panic has gripped the cryptocurrency industry. While the FTX exchange just filed for bankruptcy, hundreds of thousands of creditors have lost everything and trust in the platforms is at half mast. For their part, regulators are all the more motivated to act more firmly to better regulate the market and its players.
Faced with this very grim observation, we spoke about it with Antonio Fatàs, a professor of economics at the European Institute of Business Administration (INSEAD), a private management school based in Fontainebleau, Singapore and Abu Dhabi. Holder of a doctorate in economics from Harvard, he also acts as an external consultant for international organizations such as the International Monetary Fund, the OECD and the World Bank. He is also the author of works on cryptocurrencies.
Lemon Squeezer: FTX’s bankruptcy has created a sense of panic among investors. Do you think a contagion effect to the real economy is possible and what would be its impact?
Antonio Fatas: It is very difficult to imagine a contagion to the real economy as the links between cryptocurrency and the real economy are still tenuous. Naturally, the volatility associated with this event may have negative effects on investor confidence or their willingness to take further risks in the future.
Lemon Squeezer: In the face of mounting criticism, the cryptocurrency industry has been scrambling to become a legitimate asset. Do you think the latest events will challenge these strategies?
Antonio Fatas: Yes, these events show that some who were obviously trying to work with regulators, like FTX head Sam Bankman-Fried, weren’t genuinely concerned about regulation, but were just lobbying and taking action so they could continue to push forward. a high-risk business without worrying about traditional financial instruments.
How it startedHow it’s going pic.twitter.com/hLYcM35dJq
—Antonio Fatas (@AntonioFatas) November 14, 2022
This is not just another scandal, but a reflection on a significant part of the projects in the cryptocurrency world. They feel superior to the rest of the world, are overconfident and ignorant of the basics of financial markets.
Lemon Squeezer: In the US and Europe, top-level politicians and regulators have called for regulation of the cryptocurrency market. Can you remind us of the recent progress in this regard?
Antonio Fatas: Regulators have been slow to regulate these markets. There are two reasons for this. The first: it’s not easy, some of these projects are too different from traditional financial instruments – for example with decentralized finance.
Regulators have been slow to regulate these markets. There are two reasons for this.
The second reason is that regulators hoped that some innovation would come from these projects and did not want to stifle innovation through excessive regulation. Today they realize that these markets are large and that there is significant fraud and limited innovation.
We are therefore witnessing an acceleration of regulatory efforts. On a European scale, MiCA is an example of this. But be careful, if the regulation of national activities is possible, that of offshore activities is far from obvious. It is therefore foreseeable that unregulated markets will continue to operate in some parts of the world.
Juicers: Is there a risk that the current crisis will reinforce these calls for stricter regulation?
Antonio Fatas: Not just a risk, but a certainty. We now know that a large number of major stock exchange sites have been caught in the act of questionable activity and/or fraud. Regulators need to step in and protect consumers as they do everywhere.
Juicer: From an investor’s point of view, can you remind us of the risks faced by people who register on stock exchange platforms?
Antonio Fatas: There are two types of risk. First, the one associated with the assets you are buying. Most of the assets traded on these platforms have no associated fundamentals. These are purely speculative assets.
Secondly, there is a risk that your funds will be misused, as is the case with FTX, and the company will lose all of your money. That’s not a very real risk given what we’re seeing in some of these companies. But how do you know if your stock site is “good”? Well you can’t. You can try to work with regulated exchanges, but look what happened to FTX.us which was fully regulated in the US – same fate as FTX.
But how do you know if your stock site is “good”? Well you can’t.
Lemon Squeezer: No one can predict the future, but do you think it’s just a passing crisis for the cryptocurrency industry or is this phase a long-term threat?
Antonio Fatas: This is a massive warning shot against a market that had developed without clear financial principles. A market led by strong and atypical personalities, very good at generating interest and attracting funds, but incapable of doing business. The information coming from FTX is simply surreal.
Granted, not everyone is created equal in these markets, but a number of companies have exhibited similar behaviors—enough to cause investors to have serious doubts about the industry as a whole.
This is a massive warning shot against a market that had developed without clear financial principles.