In November 2022, one of the largest cryptocurrency platforms in the world collapsed. The crash of the FTX company made headlines in many newspapers, and is reminiscent of the gigantic scam of Bernard Madoff, whose Ponzi scheme consisted of paying old investors with money from new entrants. Sam Bankman-Fried aka SBF – young American investor, founder of FTX and rising star of cryptocurrencies, is suspected of a similar fraud.
The cryptocurrency exchange platform FTX (already the second largest platform in the world behind Binance) allegedly allowed its founder to raise funds from users to reintroduce them into his investment company Alameda Research, with which he engaged in risky bets. In other words, Sam Bankman-Fried has invested, like Bernard Madoff, the assets of his clients to make bad investments. The transactions between FTX and Alameda would also serve to make up for the losses of Alameda, which found itself in difficulty last spring following the collapse of the Three Arrows Capital fund. Exchange platform FTX has reportedly lent up to $10 billion to Alameda, according to the New York Times.
The other aspect of the scam concerns FTT, the FTX token, an “internal currency” whose highly volatile value essentially depends on the company’s reputation. However, it turned out that Alameda’s funds were largely denominated in FTT and that the company was subsequently unable to repay its customers with its severely devalued “currency”.
A growing need for regulation
What will be the consequences of this industrial collapse for the cryptocurrency ecosystem? “There is a significant risk of seeing a contagion effect”observes Alexandre Stachchenko, Blockchain & Cryptos Director of KPMG France. “FTX also played a banking role: private individuals but also companies – most of them related to the crypto world – had funds at home. The actors will probably find themselves in difficulty, or even in default with their clients, in the coming weeks. »
The FTX affair is shaking investor confidence in cryptocurrencies in general, and it is not excluded that frauds similar to the one implemented by SBF are repeated among other players. Regulation has thus become the keyword among the main players in the sector. The platforms themselves, and in particular Binance, have made a transparent effort in recent days to show their solvency, in the hope of reassuring their users at all costs.
It will undoubtedly soon be essential to organize a large international meeting like Bretton Woods to regulate cryptocurrencies and make their speculation less risky. The main objective of the Bretton Woods Accords, signed on July 22, 1944, was to establish a world monetary organization and to promote the reconstruction and economic development of war-affected countries. Bretton Woods overhauled the International Monetary System, making the US dollar and the British pound (until 1947) the main players in the International Monetary System.
It is now urgent to clarify the very place of these cryptocurrencies in the International Monetary System at an international level and from a legal point of view, starting with releasing the creators of cryptocurrencies from anonymity.
Since cryptocurrencies are not currencies in the strict sense, it is also essential to imagine a system that allows them to be compensated. In this way, cryptocurrencies, despite having their independence of listing, would in fact become official and monetary vehicles of a global currency that can be used by the greatest number of natural persons (individuals) and legal entities (companies). In the macroeconomic sense, these new currencies would finally satisfy all the conditions (unit of account, function of store of value and intermediary of exchanges) which would make them compatible with the traditional currencies issued by central banks.
The president of Binance, the world’s leading crypto platform, is convinced of this, as he stated at the recent G20 summit in Bali: “We really need regulation, it has to be done correctly, it has to be done in a stable way”. Will it be heard?
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Georges CASTEL is permanent professor of “Finance: vanilla and exotic derivatives” at the ESLSCA Business School in Paris. He is also director of the school’s Trading & Market Finance MBA program, co-founded with other traders in 1988/89, and recognized today as one of the best references in Market Finance. With 15 years of options trading and 35 years of teaching, Georges CASTEL has extensive experience in the financial markets, especially in Forex, interest rate markets, stocks, oil, sugar, cocoa, coffee and all their derivatives classic and exotic. Furthermore, since 2018/2019, he is a PhD candidate in Management Sciences at the PRISM Finance Laboratory of the University of Paris I Panthéon Sorbonne.