The scale of financial damage to crypto investors last year was colossal. Not only FTX International is failing, but also others: Three Arrow Capital, Celsius, Genesis, Gemini, Voyager Digital and BlockFi.
The price of Bitcoin still hasn’t recovered from the cryptocurrency’s continued string of bankruptcies, although it has erased some losses from the FTX fiasco. Through crypto exchanges, BTC has been heavily discounted throughout the year. Every new bankruptcy headline sent the price of Bitcoin lower.
There’s no telling whether Bitcoin’s latest rally to $21,000 is a breakout or a January bull trap. Meanwhile, last year’s bankruptcies continue to unravel in bankruptcy and criminal court.
Bankruptcy attorneys said Wednesday that FTX has found $5 billion in liquid assets. While under house arrest on $250 million bail, Sam Bankman-Fried started blogging on Substack on January 12th. He wrote the following in a post titled “FTX Pre-Mortem Overview”:
“In November 2022, an extreme, rapid, targeted crash instigated by Binance’s CEO rendered Alameda insolvent.”
Note that the final point of SBF’s “post-mortem” is not that FTX did not have its customers’ money. It’s about a competitor’s CEO telling the public that FTX doesn’t have their customers’ money.
Bankman-Fried himself was not some unregulated cowboy on the digital frontier. Satoshi Nakamoto was. The SBF was effectively a political mega-donor who cultivated cozy relations with the US regulatory regime.
Furthermore, TradFi’s attitude towards finance which hit crypto last year is exactly why we need crypto. Bitcoin should fix that. Like other open source, peer-to-peer books.
How Wall Street’s TradFi Bros Ripped Off Crypto Rumors
At the end of the year, Bloomberg Businessweek published a follow-up to its extensive October 2022 presentation, “The Crypto Story”.
The next article was about Sam Bankman-Fried and the weaknesses of Alameda FTX. The story is entitled “How not to play the game”. The article skillfully diagnoses the TradFi import problem in crypto:
“You might find yourself building a sleek user interface and a fast, smart trading algorithm because those are fun and profitable things, but you might ignore the accounting department because it’s boring. You could be very good at attracting customer money, with your wacky interface and sense of fun, but also very bad at tracking customer money with a lack of accountants and sense of fun.”
Crypto is basically a no-nonsense, hard-earned, anti-Wall Street industry. But the TradFi brothers turned it into Wall Street’s evil twin. They created a parallel crypto menagerie of financial shenanigans and accounting horrors:
“One imperfect but useful way of thinking about crypto is that it allowed for the creation of a toy financial system. There was already a regular financial system, a set of abstractions and procedures… And then crypto came along with a new set of things to fund.”
But as seasoned financial columnist Matt Levine describes it: Crypto needs more regulation. Where the article goes wrong is leaving government influence out of the picture. Because the story does not address the impact of government regulation on the insolvency crisis in the past year.
As “How Not to Play the Game” goes, the government was not involved in this game. But it’s not quite like that. The article itself presents some of the evidence against this characterization.
Because in it the author talks about how “crypto” companies resold the worst excesses of Wall Street as crypto products. These bad business ideas did not arise on Wall Street in a vacuum. They happened with the permission and even the support and design of the regulator:
“This game was played by young people who came from the world of traditional finance, from banks and hedge funds and quantitative equity trading firms, people who already loved finance and wanted to play with a toy version of it that they could shape however they wanted. . “
Could the picture be any clearer? The cryptocurrency bubble was not started by a humble miner powering his own ASIC devices. It was started by these new Wall Streeters who brought with them the highly regulated reckless financial culture of Wall Street.
What else should investors expect from any significant government interventions in crypto markets other than more misaligned incentives and unintended consequences?
US TradFi regulation hurts investors’ finances
The US financial regulatory regime allowed the Dot Com bubble in 1999 and 2000. Regulators allow people to trade dot com stocks with large market caps for celebrated startups.
An advocate who yearns to regulate cryptocurrencies looks and sees that 91% of altcoins from 2014 are now defunct and sees reason to enact additional rules for cryptocurrencies.
But they want regulation from the same authorities that fueled the Dot Com bubble. They conveniently forget the record of regulated securities that performed exactly as the crypto sector did in 2020-2022. For example, they ignore the Dot Com companies that spent hundreds of millions of dollars on their way to bankruptcy.
Moreover, regulators have been sleeping through the housing savings and loan crisis. This created a real estate and financial bubble from 2005 to 2007. By 2008, it had thrown the entire world economy into recession.
Huge government-sponsored financial institutions like Fannie Mae and Freddie Mac fueled the low-interest loan craze for subprime mortgage customers.
Wall Street giants, with a close regulatory partnership with the government, invented mortgage-backed securities as exotic fixed-income derivatives for big financial firms to sell to each other.
By 2007, the chickens had come home to roost. Real estate prices began to fall. At that point, the involvement of the regulated traditional financial sector in the bubble was beyond insane. It was unethical.
Warren Buffett and Charlie Munger of Berkshire Hathaway would call it decadent and immoral. Long before the inevitable collapse of the real estate bubble, Buffett and Munger warned against it.
In 2005, they considered the housing bubble and the destabilizing effect of hedge funds on financial markets to be the greatest threats to America after a nuclear terrorist attack.
How did regulation prevent the above?
These crises occurred under the supervision of American financial regulators. And it was in traditional financial firms that were compliant with regulation, if not directly responsive to regulatory incentives.
The damage to investors and household finances continues to this day. The U.S. Treasury Department estimates that the housing bust cost the economy $19 trillion in household wealth.
Furthermore, it is the SEC that allows algorithmic trading deadlocks, arcane derivatives, and crazy leveraged trading. That TradFi mess masqueraded as “crypto” and made a ton of money while damaging many people’s finances. So that doesn’t make what FTX did the same as what Bitcoin created the crypto segment to do.
Crypto is supposed to be a movement towards financial sanity, propriety and honor. While the traditional financial world was going through the shocks of 2000 and 2008, so much for regulation, the world was blissfully unaware that Bitcoin would be one of the answers to solving the problems of finance in our modern, connected, global world.
It was inevitable that the forces of reaction would appropriate the good reputation and glamor of cryptocurrencies like Bitcoin. But these so called crypto projects running funny money business as usual are counterfeit crypto not the real thing.
What happens when crypto agrees with government and regulation
The crypto businesses that fared the worst of all were the ones with the most government influence.
There were, of course, many reports that the SBF was very active in US federal politics after the FTX collapse. Open Secrets, a nonprofit group that keeps records of public federal election donations, reported in November:
“Sam Bankman-Fried, the founder of the cryptocurrency exchange platform FTX, was a favorite in some political circles in Washington DC. He proselytized digital assets during testimony on Capitol Hill and gave more than $990,000 to candidates plus an additional $38.8 million to outside groups this election cycle, making him the sixth-largest single donor to the 2022 midterm elections.”
Before Alameda-FTX flipped, SBF planned to give more than $1 billion to support select candidates and issues in the 2024 election.
The Winklevoss brothers and their Gemini exchange are also very comfortable in Washington. Like SBF, they bring a big financial mindset to cryptocurrencies and are very active in lobbying and talking to regulators. Their advice to Mark Zuckerberg when Facebook was working on Libra was:
“Working with regulators. Talk to them. You know, we’ve definitely gone through the big door and tried to educate regulators and shape regulations in a thoughtful way, because if you get the regulations wrong, it can stifle innovation, but the right regulations allow innovation to flourish, and I think we’ve struck the right balance with New York.”
So there have been a lot of reports about the involvement of these companies with the regulators. But has anyone made the connection that TradFi’s regulatory mindset is the cause of the insolvency?
A regulatory mindset is not a business mindset. It is a control function. It is not concerned with how to produce anything. It deals with how to control an already productive system and how to freeze it from competition from new entrants to give it time to grow.
Crypto ethos is that it does not need special treatment and protection. It does not need regulatory reinforcement to thrive. Crypto thrives on openness and freedom, not barriers and regulation.
The Bitcoin community hopes that its great-grandchildren will use the money and make it more valuable than ever. It is a currency launched by an online community without borders and nations. Therefore, it does not see its future based on TradFi government regulation. He sees his future in the code working as it is.
Governance through the Code without trust, not through regulation with trust
Cryptocurrencies are something that may be subject to government regulation. The government can pass laws that outright ban crypto, as China has done. But crypto is not an agent of the government.
Companies, even private companies, are agents of the government. They register with the government, ostensibly comply with its regulations and pay taxes from their wages and profits.
While a cryptocurrency platform or its money may be subject to government action, they are not a government entity. In this way, they are more like commodities (like gold or oil) than stock corporations.
Cryptos like Bitcoin are not constituted the way private and public companies are. They are simply software scripts and databases that serve platform users.
Bitcoin’s origins are not in regulation, but in code and a market economy. The market economy is regulated automatically and naturally by its reality and the self-direction of its participants.
Meanwhile, crypto companies like FTX or Binance are agents of the government and are subject to its regulation the day they register with the government to trade. While Bitcoin and most crypto projects are open source, FTX, Genesis, Gemini, Three Arrows, Voyager (etc.) were regulated private companies.
This does not mean that they are doomed from the start. Binance has remained solvent and is a regulated private company. It even buys its competitors that failed in the bankruptcy crisis.
Many of the world’s best-loved brands and greatest fortunes have been created by private and public companies guided by government regulation.
But Bitcoin is just one of the amazing new products that represent a complete paradigm shift away from government regulation. It belongs to a paradigm shift called open source, and the open source movement is just beginning to create exciting new possibilities for the world.
In open source, the best solutions to age-old human problems will be found in autonomous network management.
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