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Firms Now Playing the FTX Crypto Victim Card

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In its brief history, the cryptocurrency industry has experienced numerous booms and busts, but nothing comparable to this. The US securities regulator has accused Sam Bankman-Fried, who is currently detained in the Bahamas, of planning a multi-year scheme to steal billions of dollars from customers of the secretive, offshore exchange FTX and transfer them to a now-bankrupt trading empire.

It is understandable that the roughly 1 million creditors of FTX are incensed, and that investors are hesitant to withdraw funds from other cryptocurrency exchanges like Binance. Despite Bankman-best Fried’s efforts to portray himself as a gullible 30-year-old who fell off his skis, fresh information about the complex internal strategies employed by trading company Alameda to support its profits surfaces every day.

Less comprehensible is the victimhood narrative coming from crypto-friendly businesses that transacted with FTX, an ostensibly reliable counterparty.

That includes companies that themselves failed months ago, like the cryptocurrency hedge fund Three Arrows Capital, whose co-founder recently alleged FTX conspired to bring it down, and the cryptocurrency lender Voyager Digital, which expressed shock, displeasure, and dismay over FTX’s demise. (In September, Voyager had consented to FTX purchasing it out of bankruptcy.)

Three US senators are currently looking into Silvergate Capital Corp., which offered banking services to FTX and Alameda. They want details on money transfers between the two organizations. Silvergate claims it was a “victim” and is willing to fully cooperate.

It’s a little ironic that some of these claims are causal, as companies like Three Arrows Capital and Voyager explicitly stated when they first failed that the collapse of stablecoin Terra caused a general loss of confidence in cryptocurrencies. Large portions of the cryptocurrency market were collapsing before FTX’s ultimately meaningless bailout promises.

Greed & fear as the real reasons

The bigger issue is that these institutions are highly developed financial ones, and their responsibility is to manage counterparty risk. Even without knowing the grisly specifics of Bankman-alleged Fried’s deception, it was obvious that FTX was an offshore exchange in the Bahamas whose revenue primarily came from trading instruments that are illegal in the US. This was true in a sector where exchanges often take on contradictory roles, such as broker and lender, and issue tokens with little regulation.

Too much greed and not enough fear were present. According to Kyle Davies, co-founder of Three Arrows Capital, his fund initially had doubts about FTX but ultimately decided to use it in part due to the implicit endorsement it received from venture capitalists like Sequoia. However, it’s more likely that these large cryptocurrency exchanges became intractable due to their expanding size and success bringing in massive sums of money from customers with high-risk products. Additionally, FTX assisted Silvergate in expanding its customer deposits for digital currencies from $1.2 billion to $14 billion in just over a year.

Well, such is life

Was it really a “black swan” event that FTX turned out to be a “fraudulent bucket shop” trading against its clients, as Davies recently told hedge-funder Hugh Hendry on a podcast, in an era when purported “hedge” funds were pouring money into web3 gaming and DeFi rather than actual hedges? Maybe not for an industry that is younger than the iPhone and where a young billionaire could describe his company in terms that are strikingly similar to a Ponzi scheme. “Well, such is life,” Hendry deadpanned in response.

If the victim card needs to be called into question, it’s not because it would protect Bankman-Fried from all fraud allegations but rather because it is selfish for those who play it from a legal standpoint. The co-founders of 3AC are obviously interested in a chance at redemption as the company is going through its own liquidation process. The legal team representing the liquidators recently pointed out that Davies and his fellow co-founder didn’t begin blaming FTX until after the collapse of the exchange and warned that they hadn’t been helpful in settling creditor claims.

Without greater humility, transparency, and a stronger anti-fraud mentality from both regulators and participants, the chances of crypto markets ever moving beyond speculative booms and busts will be slim to nonexistent. All institutions in the sector that are currently marketing FTX as an unpredictable one-off in an otherwise healthy market must therefore face the consequences of their actions. We still have a ways to go.

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