As the crypto markets roil from the collapse of FTX, Coinbase, the publicly-traded cryptocurrency exchange domiciled in the U.S., is trying to assure investors that FTX was merely a bad actor and is not indicative of the rest of the industry.
“This is fraud,” Coinbase CFO Alesia Haas said in a Wall Street Journal livestreamed Q&A late yesterday afternoon when asked whether this was the crypto industry’s “Lehman moment.”
“The answer is no,” she said. “I do not think this is a Lehman moment because—again—this is fraud. So one could say this is a Madoff moment, an Enron moment, an MF Global moment.”
FTX, the Sequoia and Paradigm-backed crypto exchange started by Sam Bankman-Fried that was valued at $32 billion merely two weeks ago, spiraled into bankruptcy at the end of last week—not long after the extent of the ties between the exchange and its affiliated trading firm, Alameda Research, were brought to light two weeks ago.
As it turns out, FTX was allegedly lending about half of its customers’ assets—about $10 billion worth—to fund risky bets at Alameda, despite assurances it had made to customers that those assets were being stored at the exchange. When the company began experiencing heavy withdrawal requests last week, a liquidity crisis ensued, FTX froze withdrawals, tried to seal a deal with Binance, experienced a massive hack, filed for bankruptcy, yada yada yada. (FTX did not respond to a request for comment prior to publication.)
The spiral of events has reverberated through the industry—leaving pension funds and venture capitalists with writedowns and crypto startups with no treasuries. Crypto fintech Genesis is experiencing a liquidity crisis in its lending business and has suspended redemptions and new loan originations. The crypto exchange Gemini delayed redemptions for its yield product for retail investors. Then there’s BlockFi and Voyager, which had been in trouble just earlier this year. BlockFi is reportedly preparing to potentially file for bankruptcy, and Voyager is on the hunt for a new buyer. (CrossTower confirmed Monday that it intends to submit a revised bid for Voyager.)
All of this is on top of an already-troubled crypto market that has forced players like Coinbase into layoffs and tanked the value of Bitcoin to around $16,000.
Taken together, the contagion wreaking havoc across the industry is not unlike that of the 2008 financial crisis, Haas said yesterday. “It's exposing poor credit practices, it's exposing poor risk management, where companies had too many concentrated positions, not thoughtful risk management around asset liability matches. And so as they have withdrawals. They cannot liquidate their assets at the speed needed to meet the customer demand,” Haas said.
What is desperately lacking right now in the market is trust, and it will take time to rebuild it.
“Whenever you have something of this magnitude happen, it will impact trust,” Haas said. “And that's why, to me, it is so important to note that this was a bad actor in an offshore market with light regulation where this occurred.”
Haas spent a lot of time outlining Coinbase’s own operations, stating how the exchange holds currencies one-for-one in segregated accounts, which are mostly in cold storage offline, and explaining how the exchange uses third-party insurance providers, and, as a public company, publishes audited financials.
But no crypto company will be immune from the hangover from consumers losing so much money.
“I think there's going to be the impact of trust lost in the short term, but we're very optimistic that we can then rebuild piece by piece,” she said.
‘All the dumb shit I said'... In a thread of Twitter DMs posted by a Vox reporter yesterday afternoon, Sam Bankman-Fried admits that comments he has made in the past about balancing ethical imperatives were not true. “Man all the dumb shit I said,” he wrote to the reporter. “It’s not true, not really.”
“You were really good at talking about ethics, for someone who kind of saw it all as a game with winners and losers,” Vox reporter Kelsey Piper wrote.
“Ya,” he retorted.
“Hehe”
“I had to be”
“It’s what reputations are made of, to some extent”
“I feel bad for those who get fucked by it”
“By this dumb game we woke westerners play where we say all the right shiboleths [sic] and so everyone likes us”
Whew.
(Sam Bankman-Fried claimed yesterday on Twitter that he did not intend these messages to be public. He issued a response on Twitter, which you can read in full here.)
See you tomorrow,
Jessica Mathews
Twitter: @jessicakmathews
Email: jessica.mathews@fortune.com
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