6 takeaways from the FTX debacle

[ad_1]

With help from Derek Robertson

Poof.

Yesterday, amid growing concerns about its liquidity and entanglements with a crypto trading fund, the high-profile crypto exchange FTX halted withdrawals of customer funds and announced that its largest rival, Binance, was pursuing a potential takeover. (Late this afternoon, Binance walked away from the deal.)

It was a stunning downfall for FTX founder Sam Bankman-Fried, who had become the face of the crypto industry in Washington this year. It also has follow-on implications for an industry still sorting out its relationship with the governments and traditional finance channels that it hopes to supplant.

Here’s what else it means.

The industry is bracing for even more scrutiny.

Some of the biggest questions swirling around crypto just got more complicated: Who’s regulating it, and what are they looking out for?

The CFTC and Texas’s securities regulator have both said they are monitoring the situation, and Bloomberg reported this morning that the SEC is also probing the firm’s underlying liquidity problems.

But authorities are unlikely to stop at the borders of Bankman-Fried’s empire. “Regulators will scrutinize exchanges even more,” Binance CEO Changpeng Zhao predicted in a note to staff today. “Licenses around the globe will be harder to get.”

It’s possible that stricter U.S. laws shielded American customers.

While customers of the Bahamas-based FTX have been unable to access their funds, U.S. customers deal with a separate entity, FTX US.

Bankman-Fried said yesterday that customers of FTX US are unaffected by withdrawal issues and that FTX US is “fully backed.”

An FTX spokesman declined to comment on the reason for this difference, and Dennis Kelleher, president of the reform-minded group Better Markets, cautioned that such assurances to U.S. customers warranted “extreme skepticism.”

But Griffin McShane, an executive at crypto firm MPCH Labs who previously worked at Coinbase, said strict U.S. financial rules might account for the difference.

He pointed to collateral requirements for futures and options trading set out in the Commodity Exchange Act as one possible reason that U.S. customers would be shielded from withdrawal issues.

A big piece of crypto legislation has lost momentum.

Bankman-Fried used his D.C. clout to push for a bipartisan bill that would grant broad authority over crypto to the CFTC. The office of bill co-sponsor John Boozman (R-Ark.) told Morning Money that yesterday’s blowup has not affected work on the legislation, but crypto watchers view it as a setback.

“That’s pretty much dead in the water for the rest of the year,” said Dan Smith, a research analyst at Blockworks.

Crypto purists are claiming vindication.

Many of the most ardent crypto believers opposed Bankman-Fried’s regulatory agenda, arguing that it would clear the way for large corporations to expand at the expense of inhibiting more decentralized, experimental financial activity.

Now, they’re touting his downfall as an opportunity to push for a more radical, idealistic vision of DeFi.

Late last month, Erik Voorhees, a longtime Bitcoin evangelist, debated Bankman-Fried for two hours over these dueling visions. In the wake of yesterday’s meltdown, Voorhees was among those arguing that it illustrated the problems with importing the structures of “CeFi,” or centralized finance, into the realm of blockchain.

“I hope politicians see the clear distinction between opaque, centralized financial intermediaries (like FTX),” Vorhees wrote in an email, “and transparent, open-source, auditable defi apps.”

One potential reform is publishing proof-of-reserves.

Contrary to the crypto purists, maybe the solution is to become more like traditional finance? Some critics of centralized crypto exchanges said the FTX blowup illustrates a need for rules or norms requiring them to show they hold sufficient crypto reserves to meet their liabilities.

In his staff note, Zhao conceded his exchange had work to do on making its reserve levels transparent.

Though, in a blockchain-native twist, Zhao and other exchange executives have said they intend to use a cryptographic tool, merkle trees, to verify their holdings.

SBF’s DC standing is now in doubt

Before the current blow-up, Bankman-Fried had established himself as a fixture in Washington almost overnight. He even lured Bill Clinton and Tony Blair to share a stage with him in the Bahamas in April for an undisclosed sum.

Now, Bankman-Fried’s net worth has reportedly been decimated, calling into question the future of his efforts to establish himself as a mega-donor and philanthropist.

A spokesman for FTX declined to comment on what this week’s developments mean for its founder’s political and philanthropic endeavors. Spokespeople for two PACs funded by the mogul, Guarding Against Pandemics —which is helmed by his brother, Gabe Bankman-Fried — and Protect Our Future, also did not respond to requests for comment.

Did Peter Thiel’s big bet on the midterms pay off?

Well… it depends. Arizona is still counting its votes, but Thiel protege and first-time candidate Blake Masters appears to be headed for a loss to incumbent Sen. Mark Kelly, according to POLITICO’s count. Thiel’s other favored candidate, on the other hand, “Hillbilly Elegy” author J.D. Vance, has won his race in Ohio by (at the moment) a margin of fewer than seven points — running far behind Ohio’s Gov. Mike DeWine, who won re-election by a commanding 25-point margin, and Vance’s predecessor, the retiring Sen. Rob Portman, who won the seat in 2016 by a similar margin.

A win is a win, and given Thiel’s well-documented interest in influencing the American right, it’s money well spent for him to have a voice like Vance in the Senate espousing their shared brand of hard-right, techno-industrial politics. But in light of Vance’s relatively lagging performance in Ohio, accomplishing his often-stated goal of toppling “the regime” of elite institutional politics and mass culture looks like it might take not just more money, but a little more persuasion as well. — Derek Robertson

General purpose AI tools like OpenAI’s DALL-E and GPT-3 are increasingly ubiquitous online, but the European Union’s big AI regulation project might be approaching them all wrong.

That’s what the Mozilla Foundation is arguing in a new policy brief released this morning, in which it argues that the responsibility for complying with regulations in using these tools should be shared. As the EU’s AI Act stands now, responsibility for compliance falls on either “original providers,” that is, companies like OpenAI, or “those adapting GPAI to high-risk uses,” i.e. the actual users of the tools.

The risk, they say, is that this incentivizes developers to conceal the inner workings of their algorithms to protect them from scrutiny and liability.

“What we don’t want to end up with is a system where there are systems developed with a very specific purpose which are held to a higher standard of protection, and then these general-purpose systems, which are developed by some of the biggest companies in the world, aren’t held to the same standard just because they don’t neatly fit into the framework that the [European] Commission came up with two years ago,” Mozilla’s senior policy researcher Maximilian Gahntz told me. — Derek Robertson

Stay in touch with the whole team: Ben Schreckinger ([email protected]); Derek Robertson ([email protected]); Steve Heuser ([email protected]); and Benton Ives ([email protected]). Follow us @DigitalFuture on Twitter.

Ben Schreckinger covers tech, finance and politics for POLITICO; he is an investor in cryptocurrency.

If you’ve had this newsletter forwarded to you, you can sign up and read our mission statement at the links provided.



h/t – www.politico.com

[ad_2]