Moneycontrol Pro Panorama | Crypto crash signals need for more regulation

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Dear Reader, 

Once upon a time, a partner at blue blood venture capital firm Sequoia Capital believed that Sam Bankman-Fried had a “real chance” of becoming the world’s first trillionaire.

That was then. Now, FTX, the group founded by Bankman-Fried has filed for bankruptcy ­— a $32 billion empire reduced to almost nothing in a matter of days. Sequoia has written down the value of its FTX investments to zero.

Some are calling it crypto’s Lehman moment. Cryptocurrencies across the board have lost value in another bout of all-too-familiar volatility hitting this asset class. In US dollar terms, bitcoin is down almost 67 percent from the beginning of the year.

Now, crypto exchanges are hurrying to present proof of their reserves as contagion risk increases among digital assets. The key question is whether these reserves would be enough to cover liabilities.

In FTX’s case, they did not, revealed an FT report. FTX had reserves only around $900 million, or a tenth of its liabilities of $9 billion. The newspaper also reported that the exchange had billions of dollars locked in illiquid venture capital investments.

Now, as is usual in such cases, the dirt is flying around. Binance withdrew from its deal to buy FTX after a due diligence. The US Securities and Exchange Commission has started investigating the FTX exchange and its management of customer funds, the FT reported.

FTX itself is said to be investigating some “abnormal transactions” after a potential hack.

We will get more clarity when the dust settles after the bankruptcy proceedings, but the FTX story caps a tumultuous year for cryptos. Celsius and Voyager Digital, two crypto lenders, filed for bankruptcy earlier this year. The stablecoin terraUSD collapsed in May. On the top of this, crypto hackers stole overs $3 billion across 125 hacks in 2022 alone.

There is a crying need for regulation in the sector in terms of disclosures. FTX’s illiquid investments and the fact that its high level of leverage was not disclosed to some investors are symptomatic of the larger problems in the crypto sector as a whole. Transparency and corporate governance seems to be non-existent and even sophisticated investors have been lured in with promises and charismatic founders. That must change.

Does the crypto crash have larger financial stability implications? Read our piece to find out more.

The FT's Lex column also spots three silver linings in the crypto cloud. Read here.

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Moneycontrol Pro