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Another View | Chicago Tribune: Don't let crypto busts drag others down too

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Out of nowhere, 30-year-old Sam Bankman-Fried became a billionaire mover and shaker in the world of cryptocurrency. Careful to make friends of powerful Democrats and media columnists alike, he threw money around the halls of Congress — and everywhere else he went — while threatening to disrupt Chicago’s financial futures industry.

Known by his initials, “SBF” is a billionaire no more. The house of cards he built over the past several years came crashing down in a matter of days.

His FTX crypto exchange and the entangled Alameda Research hedge fund are now in bankruptcy, amid reports that customer funds are missing. As many as a million of SBF’s customers may have lost whatever they had in their trading accounts, which, unlike traditional bank and brokerage accounts, are not guaranteed by the federal government against a company’s failure.

Media reports are drawing comparisons to the fall of Enron Corp. or the Bernie Madoff Ponzi scheme. Everyone from police in the Bahamas to U.S. Sen. Dick Durbin, D-Ill., is demanding answers from SBF, who sent a series of tweets saying, among other things, he wants to make his customers whole.

Don’t count on it.

It’s too soon to know exactly what happened, and whether criminal conduct was involved. The insolvency expert appointed to shepherd SBF’s businesses through bankruptcy says he’s never seen such a “complete failure” of corporate controls.

“From compromised systems integrity and faulty regulatory oversight abroad to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented,” John Ray III, who helped oversee Enron’s bankruptcy, wrote in a court filing.

A “substantial portion” of the billions held at FTX may be missing or stolen, he wrote.

After a bank-run-style failure like this, no reasonable person should place their confidence in cryptocurrency trading operations. SBF had become the face of crypto, an innovator who supposedly had the money and brains to professionalize an upstart financial industry, which even before this latest fiasco was having a terrible year.

Good riddance, some might say. In August, we asked in these pages if the industry’s hard times meant the crypto craze was over. Our response is the same today as then: Let’s hope not.

We believe stronger rules and greater participation from mainstream financial firms will help this promising marketplace achieve its potential, minus the shady conduct that is giving it a bad name.

Cryptocurrencies are digital files that can be used as money and traded via blockchain, a digital ledger that permanently records transactions. The technology behind crypto is proven. It has the potential to reduce costs, speed up transactions and, yes, improve the security of financial operations around the world. So far, however, crypto markets have been used mainly for speculation.

As of today, there is no evidence that crypto’s latest failure is leading to a systemic financial crisis, as occurred when Bear Stearns, Lehman Brothers and AIG collapsed during the 2007-08 meltdown. It can take time for knock-on effects to reveal themselves, but with any luck the collapse of FTX will mainly be confined to those directly involved with FTX. Let’s hope that’s where the contagion ends.

Whether it’s the CFTC, the Securities and Exchange Commission or some other regulator isn’t as important as resolving who’s on point and giving their staffs the opportunity to close the knowledge gap with crypto entrepreneurs — who seem to come up with new gambits by the day.

To the extent that it is resisting oversight, the crypto industry is hurting itself.



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