The collapse of one of the world’s largest crypto companies has sent ripples throughout the cryptocurrency ecosystem.
If the sector goes up in flames, the writing was likely on the wall, according to Dennis Kelleher, one of DC’s most influential voices in banking and finance.
Kelleher is the co-founder and CEO of Better Markets, an independent organization that for the past decade has sought to reform and improve the U.S. financial system. And Kelleher, who in 2012 was referred to by the New York Times as “one of the most powerful lobbyists on financial regulatory reform,” is no fan of cryptocurrency.
“No one should be shocked by FTX’s demise,” Kelleher wrote in a scathing statement released on Sunday. “The fiction of crypto was visible to all who wanted to see.”
Kelleher is of course referring to the spectacular meltdown of FTX, one of the largest crypto exchanges that declared bankruptcy last week. The company’s downfall has been compared to a Lehman’s Brothers moment for the sector, sparking fears of contagion across the industry and sending the value of most cryptocurrencies plummeting over the past week.
Kelleher said that FTX’s collapse was clear to see “as long as you weren’t on the payroll of FTX/crypto (directly or indirectly) and didn’t let FOMO and greed cloud your judgment,” but that too many investors had been swayed by the industry’s promise and the charm of its figureheads.
“To this day there is no valid use case for crypto, and no amount of personality cult or hype will change that fact,” he wrote.
Crypto meltdown
Many crypto observers were shocked by the FTX collapse, and especially by how far the once-shining star of company founder and former CEO, Sam Bankman-Fried had fallen. Commonly referred to as SBF, his affable demeanor and discussion of philanthropic philosophy won him many admirers.
At the center of SBF’s sprawling crypto empire was FTX, which earlier this year was worth $32 billion. But the company turned out to be a delicate house of cards that came tumbling down last week after a tweet from Changpeng Zhao, CEO of rival exchange Binance, helped spark a run on FTT, a token native to FTX, that caused the exchange’s value to plummet. Just days later, the Wall Street Journal reported that SBF had been dipping into customer funds to invest in his other company Alameda Research. FTX declared bankruptcy on Nov. 11, and announced SBF’s resignation.
The chaos wiped out billions of dollars in value at FTX, and the fiasco isn’t finished. Over the weekend, FTX shared it was investigating a number of “unauthorized transactions” as over $600 million was siphoned out of FTX users’ wallets. A hacker is believed to be responsible. And as for SBF, he’s reportedly “under supervision” by authorities in the Bahamas, where FTX is based, and could face U.S. criminal charges.
But for skeptics like Kelleher, SBF, FTX, and the entire crypto industry was just a delusion people let themselves believe in exchange for a big payout.
“FTX/SBF/crypto spent enormous amounts of money to make sure many people (including smart and influential people who should have known better) had gigantic financial incentives to not understand, see or question the fiction and fraud that is crypto,” Kelleher wrote.
Kelleher described a meeting between Better Markets and SBF and his team one year ago at which the FTX founder was unable to provide satisfactory answers to “tough factual questions.” The watchdog then accused investors of not completing proper due diligence when it came to crypto companies, and added that the “vision” crypto investors were being sold on was little more than “hope, smoke, and the desire to make a quick buck.”
‘A lawless industry by choice’
In recent years, major public companies including software developer Microstrategy and Elon Musk's Tesla have bought Bitcoin and declared it on their balance sheets.
But 2022 has been a rough year for crypto bulls. The so-called crypto winter has been raging for months, and the FTX meltdown has only darkened the sector’s outlook.
Kelleher wrote that JPMorgan Chase CEO Jamie Dimon has been one of the few to share his views on cryptocurrency’s shortcomings, but that he was “bullied into silence” by other banks who “wanted to get some of the crypto cash for themselves before the crash.”
Earlier this year, Dimon said that he doesn’t think cryptocurrencies can be called real currencies, preferring to call them “crypto-tokens.” Last year, the banker called Bitcoin—one of the first cryptocurrencies to hit the market—worthless, and in 2017, he referred to the same currency as a “fraud” that was inevitably set to “blow up.”
Binance’s Zhao said last week that the crypto market would eventually “heal itself,” but only if regulators stepped in to steer the industry, a view shared by several other industry leaders. But Kelleher wrote that not even regulation would be enough to save the sector, as it had become a “lawless industry by choice.”
“Rather than being a legitimate business that constructively engages with regulators and complies with the laws and rules as other legitimate companies do, crypto’s chosen strategy is to fight against regulators and regulation, while trying to get the easiest regulator and most favorable legislation,” he wrote.
