The fallout keeps growing for the cryptocurrency industry after an unexpected bankruptcy. It involved one of the largest and most well-known exchanges for buying and selling cryptocurrency such as Bitcoin.
As Amna Nawaz explains, there are now major questions about how this happened and what it may signal about the larger world of crypto finance. AMNA NAWAZ: Judy, that crypto exchange, FTX, was founded by Sam Bankman-Fried in 2019, and it had more than a million users.
The bankruptcy came just days after a published report raised questions about whether FTX had adequate capital. Investors pulled out in what amounted to a bank run on FTX. Now FTX's downfall has renewed concerns about the safety and credibility of many cryptocurrencies. Their values have plunged as well.
Roben Farzad follows this all as the host of the podcast "Full Disclosure," and he joins me now. Roben, welcome back to the "NewsHour." Thank you for joining us. ROBEN FARZAD, Host, "Full Disclosure": Thank you. AMNA NAWAZ: This is complicated stuff. So let's just start with this. You have this crypto exchange, FTX. And it goes from being a cryptocurrency empire one week to bankruptcy the next. How does that happen? What happened here? ROBEN FARZAD: Sure. It should have been simple stuff. If you have an exchange, it's capturing a spread between the bid and ask. And it's kind of a market-maker and kind of a depository for people to put their crypto assets in, and is a toll keeper, in effect. But when the market got wind, I think, at the beginning of November the fact that other things were in play, namely that it was siphoning, funneling money to a related hedge fund, Alameda Capital, Alameda Research, and that its underlying currency, its own token, was being sold left and right, that just left the doors open for investors to demand their money back from FTX. And that was, as you called it, a run on the bank.
It's so difficult to explain this in normal terms, because it is, by its nature, decentralized. There isn't a Central Bank out there. There isn't Federal Reserve stress tests or the Treasury Department breathing down their neck. They're based in the Bahamas. So we're untangling this all in real time. And it seems like, every day, another new revelation drops about what was going on behind the scenes. AMNA NAWAZ: And we should mention that hedge fund, Alameda, was run by Sam Bankman-Fried, right? That is the connection between those two companies there. ROBEN FARZAD: That's right. AMNA NAWAZ: But the damage here is not just limited to FTX, right? What does this collapse of this exchange mean for -- just for the broader -- broader cryptocurrency market right now? ROBEN FARZAD: It's a bad look for all of crypto, I mean, people who face margin calls. There are people who had tokens who have to sell them, who thought that it was a diversification scheme.
We were told that crypto is supposed to prevent something like this, that it was a distributed ledger, that blockchain does not require regulators out there with their microscopes, with their magnifying glasses looking at this stuff, because it's self-behaved and it's self-restricted and it's impossible to lie. In truth, behind the scenes, it's still open to have messy finance -- financial controls for people to funnel money to a closely related bank. Like, imagine if Bank of America was behind the scenes funneling money to Merrill Lynch customer deposits. That was, I think, the most egregious thing. And when customers caught whiff of that, they started demanding their money back. And it was a run on the bank. They did not have the collateral. There are no capital requirements.
There's no regulation for a Bahamian-domiciled firm. And it's just been a catastrophe. And it's rippled to other -- all manner of crypto assets. AMNA NAWAZ: Well, outside of crypto assets, is there any institutional exposure here? I mean, if you are an individual who has never bought or sold or held cryptocurrency, could you be impacted by this massive collapse? ROBEN FARZAD: I think that's what's keeping certain regulators up at night. Once this jumps the pond from kind of the crypto Westworld into regulated banks, the too-big-to-fail banks, I mean, J.P. Morgan, Citi, some smaller bank and Paris suddenly went off the reservation and bought all these things. But I will say that these banks have been susceptible to stress tests since the financial crisis, since they did go off the reservation, if you will, and regulators, at least in the United States, demand that they keep cash on their balance sheets, and that they're there in case a run like something like this happens. So it's not as fungible as saying, I have a ton of these tokens, it's cash-like. Investors here -- regulators have really looked askance at that. They said, you have to have a firm balance sheet. And crypto is something you can dabble in. It can't be a bedrock asset on your balance sheet. But it remains to be seen if there's something we don't know about. AMNA NAWAZ: Well, you have mentioned a few times in there, Roben, crypto is decentralized, unregulated by design, by nature, right? So what does all of this mean for future regulation? ROBEN FARZAD: Does the Fed want to intervene at this point? I mean, this was -- did you guys want this? You guys want it to be decentralized. You want it to be exotic. You want it to have these outsized gains. Look what -- Bitcoin went from a couple pennies to $60,000, fell back to $15,000. It was what excited people. You saw those breathless Super Bowl ads. Do you want to bring it back and call it a security? And, if it is a security, are you open to the transparency demands and disclosure demands, being accountable to the SEC, Federal Reserve stress test? I think that puts a -- it harshes the mellow of crypto, if you will, for a lot of players out there.
They'd be less inclined to dabble in this asset class. AMNA NAWAZ: Roben, in the few seconds we have left, we know the SEC and Justice Department are now looking into this. You mentioned we're learning something new every day. What questions do we still have about what went wrong here, what could have prevented it? ROBEN FARZAD: How could you just take customer assets and use them to fund risky bets in a related hedge fund? I mean, how can there not be internal controls about that at the CFO level, at the board level, that you just have some -- I think, when a rising tide, when crypto is constantly going up, you don't worry about these things. But something as basic as a skeptical report on a rival outlet caused a run on this bank. It shows you how flimsy the foundation is. And you have to look at the other exchanges. You have to look at the other currencies, the other institutions that say, we're good for the money, when the money is actually a token that's kind of built on faith and credit of what? Where's the cash? You ultimately have to be backstopped by hard capital.
