What future do cryptocurrencies have after the fall of FTX The Exchange platform has filed for bankruptcy leaving thousands of clients in the dark the immediate Fallout was a sharp four in the digital currency's price so what does this collapse mean for the industry and its investors this is Inside Story, Hello and welcome to the program I'm Hashem one of the world's largest crypto exchanges as it's investigating hundreds of millions of dollars of unauthorized withdrawals analysts say millions of dollars worth of assets have been moved from the platform FTX filed for bankruptcy on Friday it says it wants legal protection as it looks for ways to return money to customers former boss Sam bankman freed has stepped down as chief executive crypto prices have been sliding all year but the collapse of FTX stands out the platform had earned the trust of more than 5 million users worldwide and traded more than 700 billion dollars worth of crypto last year alone cryptocurrencies have seen an explosion in popularity since rising to prominence in 2009. today more than 20 000 cryptocurrencies are being used that's more than double those in circulation last year some of the major ones include Bitcoin and ethereum last year they jointly made up more than half of the crypto Market the digital currency emerged as an alternative to Money free from the control of governments and central banks they run across a network of computers and are underpinned by blockchain technology but the industry has its challenges bankruptcies have come fast and furious since the middle of this year the industry was once valued at roughly three trillion dollars it's now worth about 900 billion now let's bring in our guests in Los Angeles Robert cap is the Chief Executive Officer of geoeconomics a global economic and strategy advisory firm in Singapore Zen and Capron is the founder and director of cabernetia an independent research and consulting firm focused on the Asian Financial Services industry in London Glenn Goodman is consultant to the financial investment platform etoro and author of The crypto Trader welcome to the program gentlemen I would like to unpack with you exactly what went wrong with FTX and let me start with you Mr Robert what do you think was the main trigger for the collapse of FTX governance in a single word I it seems that everything started Roblin of course there was a lot other uh problems going on uh prior to this but just a week ago uh it was revealed in a report that uh the FTX uh exchange had been secretly shoveling funds into Alameda research uh two entities owned by the founder uh Sam bindman freed so it that that's what it comes down to bad governance uh it seems almost non-existent over a site Zen and said is that a secret transfer of uh customers funds from FTX all the way to Alameda another company owned by uh uh by Mr Freeze do you think that was a traditional case where people suddenly uh freak out decide to withdraw their cash the company cannot really handle their Rising demand and there you go the same crashing scenario sure I think you know over the past couple months we've seen a number of notable collapses in the crypto space and so I think people were very aware of where there's smoke there's probably fire and and so even when the first discussions of problems at FDX came up we started to see customer outflows and and certainly that was a large part of the problem but one of the biggest challenges is obviously the way that they were using customer funds because it appears that they were putting it into essentially what what banks do to a certain extent with fractional reserve and and actually lending it out into much higher risk product categories than we would expect to see uh an exchange use for something like that so I think it was a combination of multiple errors but certainly the outflow customer funds was not uh helping the situation Glenn in this particular industry the fact that you try to cushion against any losses or you're having an issue of liquidity you transfer cash from a company all the way to another one which you own ethically speaking is this something which is legitimate or no well we don't know all the facts yet and of course it depends partly on the jurisdiction where a company is based and as we know FTX is an offshore company it's not American it's not European uh it's based in Antigua and the Bahamas so the question over legality will be looked at and certainly the Americans are sort of uh flexing their muscles the SEC are getting involved even the justice department might investigate so we'll see what kinds if any illegality was uh was committed but you know legal questions aside in terms of the ethics of all of this what I would say is it seems like Sam bankman freed had that classic error of um doing what Icarus did flying too close to the Sun and getting his Wings burned we saw over the past couple of years this guy rise from seemingly nowhere nobody had heard of him a few years ago and then suddenly he's on a stage with Bill Clinton Tony Blair with Gisele Bundchen he's being hailed as one of the greatest philanthropists of of the modern era and nobody even heard of him five minutes earlier so you know even while I was watching those things I was thinking this is all a bit strange so incredibly quickly how did this exchange become so enormous so quickly and allegedly it seems like the answer to that will be using huge amounts of Leverage to grow much more quickly than would organically be the case Robert in trying to understand the economics of cryptocurrency the fall of this uh the Fall From Grace for Sam uh bankman freed is this something that has to do with the way he has been running the company or is it also different access particularly the CEO of binance who initially said he was willing to bail out the company and then decided wait a second I'm not going to go for the dealer just that answer itself it triggered this massive reaction well there's a lot with Optics I like what the previous discuss that mentioned how you've got someone who did kind of come out of nowhere he does have a Silicon Valley pedigree his father a professor a bankman is a well-known uh legal and business scholar at Stanford University uh and in fact that's one of the things that the people now piling on to the company asking for answers are hoping the family might exert some pressure here but you did have an interesting Clash of personality so uh Sam bankman freed um SBF as he's been known and Chang pong Zhao CZ you had these two guys with acronyms different personalities um you know bankman freed was kind of more of the relaxed guy uh he had testified before Congress uh he was seen as as the most sort of reputable I guess you could say he was he was easy going he he speculated he'd be able to buy out Goldman Sachs another you know just other element to this rise from obscurity into you know being the world's biggest uh Bank in the financial world uh at least of an investment uh was the notion there but anyway yes there was a lot of clash of personalities by uh you know the the move by CZ um and and binance to simply walk away from the deal without explanation it did create that run uh again I would go back to saying well that was all rooted in governance good points also that you know the SEC and others want to get involved because they're realizing what a mess this is it's a huge mess for us investors but it's really a mess for Global Investors this has all the components of an American Saga because just overnight an Empire fortunate reputation all eviscerated but when you look at the details oh this is really quite interesting the clash between the two Titans CZ and and SBF particularly when it comes to the moment when Caesar decided that he's going to look into acquiring FTX looks into the balance she says oh there is a massive black hole here he tweets saying that I'm pulling out and we know what happened later was this an attempt by CZ to undermine the man he has been saying he was backbiting him for quite some time yeah it would seem to indicate that way I mean when we look at how crypto exchanges are kind of proving their balances there's no simple way of doing it uh you know I think what we've seen in the past couple of days as well since FTX really kicked off is a number of the other crypto exchanges claiming of their proof of funds and and there's actually some questions about how they're doing that in terms of you know we see a lot of large transfers that are moving between fun or between crypto exchanges which could indicate that they're actually pooling funds to kind of prove their reserves and then they're moving their funds to a different exchange so indicating a certain amount of collusion within the exchanges so there could be other things that are happening around there but this is this is certainly something that's been there for a while and as was discussed earlier on you know I think when we look at uh the the positioning that FTX had and SPF it you know he was he was kind of seen as thisthis uh remarkable individual in the space and it's it's tough for a lot of people to have that proven wrong but that really seems to be the case because a lot of the decisions that were made must have been done over a course of time that that really caused this to cause these issues and cause the collapse Glenn we'd like to understand what does it mean when FTX flies for bankruptcy what does it mean for the company itself and for the customers and for the massive black hole of something like 9 billion US dollars well uh the first thing I'd like to address is um that previous Point um the problem is that when with proof of reserves as Xenon was saying is that you just get a snapshot so it would be interesting it would be good to uh see some of these exchanges uh showing their reserves in real time and that was kind of hinted at by CZ I think uh so it would be nice you know if we could see it in real time over time then nobody would be able to do any clever Shenanigans to do with moving money from one place to another and then back again or anything like that because we'd all see it happening when you just have a proof of reserves snapshot at One Moment In Time then obviously you know a company um I'm not implicating any company but I'm just saying hypothetically they could bump up their balance sheet with certain assets as anyone was saying and then move them somewhere else uh to another exchange and then they could do their snapshot we don't want to see any of that we want we want sort of convincing proof would be wonderful um as for the bankruptcy I'll just address that very quickly this you know it's going to be a long process of course these things always are work out what assets they've got what liabilities will start to find out what companies might be owed money by FTX so then we can find out what kind of companies might actually be in trouble because obviously the entire Market Bitcoin everything all the prices have been pushed right down by the uncertainty of not knowing exactly where all the liabilities are and which companies might be in more trouble than others as a result of having into linkages with FTX okay Robert usually when you file for bankruptcy there's always this understanding that potentially looking forward to see someone coming and bailing out the company FTX has a new chief executive John Jay Ray the turnaround specialist what can he offer what can he do except for perhaps asking the American Support or more of an aggressive regulatory uh apparatus to put an end to what's been going on with the crypto land the long-term impact I honestly cancel the question uh in terms of what's going to happen with this bankruptcy uh you know John Jay is is well known for restructuring Enron and that that wasn't much of a restructuring that's more of a cleanup uh we saw this similarly with Lehman Brothers so often these sorts of bankruptcies you know they're there's so little left that there isn't a lot to necessarily restructure other than to get a the platform kind of in order I suppose the infrastructure and and those asset Parts hard asset parts of the company might be valuable to some others there apparently was an investment bank at one time well indeed even binance was looking to buy out FTX until they found out all these issues but I think in to your point yes the long-term implications are likely to be more regulation uh so that that will probably be the the biggest impact to come out of this uh the investors who have put their money into FDX I think they're just wiped out all right uh Xenon I would like to see now what would be the reverberations of what happened to FTX across whole uh cryptocurrency uh Spectrum what is going to happen next is it still going to be the same fairytale that has been dominating the uh news over the last few years I think that that's the biggest question is where do we where do we go from here and I I think you know when you look across any of the players in the space it's it's not good right so institutional players that have been moving into the space are likely going to be rethinking things you know you have a lot of certainly here in Singapore you have a lot of private wealth managers that were moving in and investing client funds into these and some of them may have been using FTX for custody of some of those assets or for trading uh you know other institutional players that were just seeing what they could do in the crypto space it does really set us back in many ways and and for retail investors you know I can just speak with with what we've seen on the ground here in Singapore obviously there have been a number of exchanges binance included that were pushed out of Singapore because they weren't fully licensed and didn't want to go through that process and so when binance left FTX in many ways is very similar in terms of the the breadth of coins that they offer and the the trading mechanisms and products that are available and so many people moved to FTA X and now uh you know now their money is gone so there was a significant retail base in Asia uh not just Singapore but Taiwan uh many many uh large part of the losses there were of FDX were in Taiwan and and that really erodes retail confidence so where we go from here is is really up in the air but it's it's certainly not a good sign and it's really kind of pushed the crypto industry back uh by a period of time many people have said years uh potentially Glenn if the greatest strength of a cryptocurrency was basically this whole idea that a decentralized financial system is going to Prevail in the near future and would just put an end to the hegemony of the central banks and and governments when we look at the very last few days right after the collapse of FTX suddenly have those stories about someone trying to siphon 370 million dollars out of the accounts of FTX could be a hacker it could be an inside work then more Revelations about the accounts in the Bahamas being used by people all over the globe to try to salvage what they can do don't you think that could this is something that could push the world to rethink about the way this industry has been going because there's absolutely no trust here it's it's so frustrating from you know speaking of somebody who's been involved in the crypto world for many years now and believes that descent I believe that decentralization uh using blockchains can often be an extremely positive development it is so frustrating to see the industry being industry's reputation being um really damaged by this centralized entity FTX a central company run by a billionaire with Big Ideas it's like totally antithetical to what cryptocurrency was supposed to be all about in the first place we were supposed to be getting away from this whole billionaires running things and doing all kinds of secret things that nobody knows about that was is as you can tell it I find it really annoying and um but ultimately the Silver Lining is this was just a trading exchange right it's somewhere it does it's not cryptocurrency itself it's the place people go to buy and sell cryptocurrencies and only one of the places you know there are lots of other trading exchanges as well so yeah it's frustrating because it was such a big company and so many other companies were taken in and lent money and you know there are all kinds of linkages and it all has to be unraveled but by the same token this isn't what cryptocurrency is for decentralized finance is the future as far as I'm concerned of people transferring cryptocurrencies backwards and forwards and that involves smart contracts not billionaires in charge okay Robert uh on this very idea I'm just picking up from where uh Glenn has left which is cryptocurrency has been describing itself as the path to more Equitable Financial system some sort of over Far West a world where you don't have the traditional Financial Titans taking over but you end up having CZ and you're having SBF and many others who call the Final Shots which is anathema to what they preach initially yeah yeah what Glenn was just saying is it's totally correct I mean it it but but this brings back the whole problem I guess is that maybe it's a an element in the the rest of the world starting with investors individuals institutions the whole financial system needs to get used to this idea of what we call defy decentralized finance and that's not easy to do and indeed the huge irony is these personalities I mean we see this with the notion of big Tech Elon Musk uh who hasn't proven to be so genius-like when it comes to managing a relatively straightforward social media platform granted its issues were complex but anyway I you can you know revolutionize the Auto industry but but he can't manage a a pre-existing uh social media platform it all gets back to what we're talking about here and that is in this new territory we gravitate to these Larger than Life figures we we want this sense of stability we're not used D5 the whole idea of D5 blockchain distributed Ledger and all the transparency also again I go back to governance the transparency inherent in that means that there has to be this whole notion of peer-to-peer uh equal exchange and that it it's this hyper efficient mechanism of capitalism that we're talking about which just hasn't existed we've always had big you know players dominance monopolies or monopoly-like behavior and so that's the issue I think people aren't able to wean themselves out of that old mold of thinking and so we get these people who then do bad stuff okay Zenon in the crypto land you you would have people trading at a volume of three trillion US dollar which has been knocked down to something like 900 billion dollars is it normal or is it an indication of an era that is about to come to an end okay I think this is this is a much bigger issue and we're going to see a lot more contagion within the space uh you know there have been as I mentioned before you know questions about the capitalization of other uh platforms there are quite a few not just retail but institutional players that had money on FTX so I think you know the the we're already in a bit of a what you might call crypto winter I guess within the space but it's going to get a lot colder pretty soon uh because there's there is going to be more contagion that comes out of this and I I wouldn't be surprised if this isn't the first of a couple of exchanges that we see have trouble for various different reasons uh and and as mentioned before you know I think in during this discussion it's very difficult to tell When the tide goes out who's swimming naked uh you know in the traditional financial industry that's fairly straightforward because Regulators have a really good grasp of that and maintain and monitor that on a regular basis but within the crypto space there's just not enough regulation or oversight to really see what's happening behind the scenes uh you know how they how they make the secret sauce and so I think I think we're in for a little bit more turmoil over the next few weeks months and and potentially even years on this Glenn it's quite interesting that despite all these problems despite all this crunch people would still tell you that they are adamant about the fact that cryptocurrency is the future of Finance yeah I will still tell you that and as you say lots of other people will say that and you know the reason is is quite straightforward it's because it hasn't been done properly yet you know I know what the dream is I understand how decentralized Finance works and I've been following it very closely and you know there's a hell of a lot of potential there it's the best financial Innovation that I've seen in you know 20 odd years maybe longer you know since the since really the Advent of um of derivatives I guess in the 1980s and then in the 1990s you know those were big Financial innovations that caused a lot of problems but also did a lot of good in other ways similarly decentralized Finance it actually goes back to what Robert was just saying there really about people latching on to figures I guess we're human we latch on to Big human figures who we want to put our trust in but you know we do need to get away from that the dream of decentralized Finance is smart contracts is code is people buying and selling in ways that don't necessarily evolve human intermediaries and don't rely on trusting in human intermediaries and from the experiments that have been done so far for the most part it is worked out very well yes there are hiccups and some quite major hiccups but it's all experimentation and it's all going quite well and just one last point I'd like to make about regulation just picking up on what Xenon was saying there we do need good regulation but it must be good regulation because there is a danger now with a lot of regulators in Market they're not fully understanding how these things work they might over regulate defy which hasn't been the big problem and not do the right regulation on centralized exchanges so far we've had centralized exchange regulation in the United States that has pushed most of the training business offshore that's why people were trading on FTX based in the Bahamas because the exchanges that were based in the US like coinbase were hampered in many ways by vague regulation we need Clarity and we need sustainable regulation for exchanges to stay in the main jurisdictions and people to trade in those jurisdictions quite a fascinating story but I have to admit that this is quite an Uncharted Galaxy as well as I am concerned and many other millions of people all over the world but in the meantime Robert Kapp Zen and Capron and uh Glenn Goodman I really appreciate your Insight and thank you two for watching you can see the program again anytime by visiting our website Al jazeera.com for further discussion go to our Facebook page that's facebook.com forward slash AJ Inside Story you can also join the conversation on Twitter I'll hand it is at AJ and say sorry for me and the entire team here in Doha bye for now foreign
