FTX Crypto Victim card can be tricky to play

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The crypto industry has gone through many booms and busts in its brief lifespan, but nothing like it. Sam Bankman-Fried, currently incarcerated in a prison in the Bahamas, has been accused by the US securities regulator of orchestrating a years-long fraud that diverted billions of client funds from the opaque and offshore exchange FTX to a now bankrupt business empire.

The outrage among FTX, which has around 1 million creditors, is understandable, as is the nervousness of investors withdrawing money from other crypto platforms like Binance. Bankman-Fried has tried to portray himself as a naïve 30-year-old who’s outgrown his skis, but every day brings new reports of elaborate in-house tools being used to support the profits of trading company Alameda.

Less comprehensible, however, is the narrative of victimization emerging from crypto-friendly companies that have done business with FTX as a seemingly trusted counterparty.

This includes entities that themselves went bankrupt months ago, such as crypto hedge fund Three Arrows Capital whose co-founder recently claimed FTX colluded to take him down and crypto lender Voyager Digital , who said he was shocked, unhappy and dismayed by the collapse of FTX. (Voyager had agreed in September to be bought out of bankruptcy by FTX.)

Meanwhile, Silvergate Capital Corp., which provided banking services to FTX and Alameda, is now in the crosshairs of three US senators who want information on transfers of funds between the two entities. Silvergate says he was a victim and will cooperate fully.

The causality of some of these claims is a bit ironic, given that Three Arrows Capital and Voyager first went bankrupt following a market-wide loss of confidence in crypto following the collapse. of stablecoin Terra and they explicitly said so to time. Huge swathes of the crypto market were imploding long before FTX finally defeated promises of a bailout.

The biggest problem is that these are sophisticated financial institutions whose job it is to manage counterparty risk. Even without knowing the gory details of the alleged Bankman-Frieds deception, it was clear that FTX was an offshore exchange in the Bahamas, whose income was derived primarily from illegal trading instruments in the United States, in an industry where exchanges assume conflicting roles such as as broker and lender and issuing tokens with minimal oversight.

There was too much greed and not enough fear. Three Arrows Capital co-founder Kyle Davies argued that his fund was initially skeptical of FTX but ended up using it in part because of the implied stamp of approval from equity investors- risk such as Sequoia. Yet, it’s more likely that these big crypto exchanges have become impossible to ignore due to their booming size and success, attracting huge stacks of money from customers with high-risk products. And for Silvergate, FTX helped grow customer deposits in digital currency from $1.2 billion to $14 billion in about a year.

At a time when supposed hedge funds were pouring money into web3 and DeFi games rather than real hedges, was it really a black swan event that FTX turned out to be a fraudulent bucket store trading for its customers, as Davies recently told hedge funder Hugh Hendry on a podcast? For an industry younger than the iPhone, where a young billionaire could explain his company in terms remarkably close to a Ponzi scheme, maybe not. As Hendry deadpan in response: Well, such is life.

If the victim card should be questioned, it is not because it would shield Bankman-Fried from the full force of accusations of fraud, but because it is legally selfish for those who play it. 3AC is going through its own liquidation process and its co-founders are clearly considering a chance at takeover. The liquidators’ legal team recently noted that Davies and his co-founder only began blaming FTX after the stock market collapsed, while warning that the co-founders failed to cooperate in addressing claims from creditors.

The chances of crypto markets ever advancing past speculative highs and lows will be slim to non-existent without more humility, transparency and a stronger anti-fraud mindset from regulators. and attendees. This in turn necessitates an account for all industry institutions that present FTX today as an unpredictable one-time event in an otherwise healthy market. We are far.

More from Bloomberg Opinion:

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FTX used imaginary money to get real money: Mark Gongloff

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Lionel Laurent is a Bloomberg Opinion columnist covering digital currencies, the European Union and France. Previously, he was a reporter for Reuters and Forbes.

More stories like this are available at bloomberg.com/opinion

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