FTX collapse ‘does not represent the promise of this technology’

Those campaigning for a fairer financial system suffered a major setback last week when it was revealed that the so-called white knight of crypto, Sam Bankman-Fried, was reportedly selling customer deposits in FTX (FTT-USD), the crypto he founded stock market, used to make risky bets at Alameda, a sister company he owned.

The bankruptcy of one of the world’s largest crypto exchanges and subsequent allegations surrounding its demise have rocked the crypto industry and shaken confidence in a trust-based system. Competing crypto platforms, including BlockFi, have halted customer withdrawals, while the likes of Crypto.com have gone to great lengths to reassure customers that their funds are safe, in part by offering to disclose proof of reserves.

Despite the fallout from this, Jeremy Allaire, co-founder and CEO of fintech firm Circle, said the basic case for crypto remains intact, largely because of the in-game allegations. In an interview with Yahoo Finance Live (video above), Allaire argued that FTX doesn’t represent “what the promise of this technology represents.”

Circle hasn’t gotten off scot-free, in part because of its equity stake in FTX, which stems from a $10.6 million investment in the group during its Series B funding round last year. While calling the stake “tiny,” Allaire explained on Twitter last week that Circle has never lent to FTX or lending platform Alameda, also owned by Sam Bankman Fried.

“What I can say is that, taken at face value, the numbers FTX presented and the growth they demonstrated in the business of FTX and their burgeoning US business were incredibly impressive,” Allaire said. “This was certainly at a time of significant growth in this industry. I think the lack of insight into the underlying risk controls of financial management, treasury management and other things certainly surprised everyone.”

Allaire also stressed the irony in the fact that many of the largest financial institutions in the crypto space operate offshore without any regulatory oversight.

“Honestly, most of them focused on creating platforms for speculators and creating platforms that are basically focused on people speculating on digital tokens,” he said.

Sam Bankman-Fried, Founder and CEO of FTX, Testifying Before Congress December 8, 2021.  (Photo by Tom Williams/CQ-Roll Call, Inc via Getty Images)

Sam Bankman-Fried, Founder and CEO of FTX, Testifying Before Congress December 8, 2021. (Photo by Tom Williams/CQ-Roll Call, Inc via Getty Images)

“Companies have 0 compliance guides here in the US”

Bitcoin (BTC-USD), the world’s first major cryptocurrency, was launched in the depths of the 2008 financial crisis.

Amid deep skepticism among bankers and regulators and their ability to oversee an opaque system, the idea was to create a new system on top of a decentralized ledger, known as blockchain, that would allow more transparency into the system.

Still, Allaire blamed FTX’s collapse on the lack of regulation, particularly for offshore crypto companies, which often operate with little transparency and few guard rails.

Responding to a tweet by Senator Elizabeth Warren (D-MA) following the collapse of FTX, Allaire and CEOs of other American crypto exchanges, including Coinbase and Ripple, argued that a lack of guidance from the Securities and Exchange Commission (SEC) is doing much reviewed offshore US trading activity, adding that US lawmakers bore some responsibility for crypto’s recent meltdown.

“To protect consumers, we need regulatory guidance for businesses that ensures trust and transparency,” said Brad Garlinghouse, Ripple CEO tweeted. “There’s a reason most crypto trading happens offshore – companies have 0 guides on how to follow here in the US,” citing Singapore as an example to follow.

According to Allaire, companies that “operate primarily out of the US” have submitted to both state and federal oversight, citing Coinbase and Circle as two examples.

“Whether you’re an institution or an individual, whether you’re thinking about which exchange to use, wallet to use, or stablecoin to use, you’re going to look for the rigor that comes with being a regulated American financial institution,” he said.

In recent days, Allaire has urged lawmakers to act more urgently on regulating the crypto space amid the implosion of FTX. In a letter to members of the House Financial Services Committee, he urged lawmakers to pass comprehensive stablecoin legislation for payments.

“The consequences of inaction in the United States are significant, putting consumers at risk, allowing continued regulatory arbitrage abroad, and weakening America’s voice in harmonizing the use of exponential technologies in financial services and beyond,” he wrote. “The United States risks missing an opportunity to set the rules that will determine the future of payments, money and other sectors of the global economy.”

Akiko Fujita is a presenter and reporter for Yahoo Finance. Follow her on Twitter @AkikoFujita

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