The collapse of FTX, Sam Bankman-Fried’s exchange, has fueled the fire of cryptocurrency critics. The brokerage that was once among the five largest in the world has declared bankruptcy and will not be able to honor its obligations.
An article published by CoinDesk on FTX’s financials revealed holes in the balance sheet of sister company Alameda Research. After the news, customers rushed to withdraw funds from the brokerage, resulting in a liquidity crisis.
Charles Hoskinson, co-founder of blockchain engineering firm Input Output Global, Inc. and blockchain platform Cardano, expressed his thoughts in a video on his YouTube channel about the possible effects of the FTX crash on the cryptocurrency industry, showing a balance between apprehension and optimism about what will come next.
Here we select Hoskinson’s main arguments.
According to Charles Hoskinson, there were huge warning signs about the future of FTX, from the management to the company’s governance, through the tax strategy they followed, the way they invested their money, where they chose to apply it and the statements they made.
For the creator of Cardano, this happens when you put businesses that involve trust (read money and the future of others) in the hands of people without experience. For Hoskinson, it’s okay to have young entrepreneurs and inexperienced people with big visions and dreams. Still, when you’re a fledgling entrepreneur starting to make money, you must assemble a diverse team of people to build something solid.
Hoskinson exemplifies his claim by saying that IOHK and Cardano have internal and external consultants and people with experience in strategy, marketing and operations who have been responsible for billions of dollars in business over their careers. Having a team of experts at this level is especially important if your business operates like an exchange, trading desk or something where you have a fiduciary responsibility for other people’s money. Apparently, FTX wasn’t as careful as it should have been.
Mt. Gox, Celsius, Luna, and now FTX… the list of failures in the crypto environment has been growing in a short time.
But Charles Hoskinson points out that these were regulated businesses. We’re talking about procedural problems and failed business ideas.
Here is Hoskinson’s take on these missteps in the cryptocurrency industry:
“This is frankly a failure of centralized businesses. Bitcoin was not hacked. Ethereum has not been hacked. Cardano was not hacked. None of the major networks were hacked. Encryption did not fail. People failed, people in positions of trust. Ultimately, as much as we love to believe in the principles of cryptocurrency, this is all about people putting their money into centralized exchanges and organizations, trusting centralized companies to do something on their behalf. This is the same industry we are trying to get rid of with the cryptocurrency space.”
According to the creator of Cardano, there is a high possibility that the fallout from this will be new legislation - hopefully, decent legislation. Still, there is a strong possibility that it will not be.
“As members of this industry, we’re going to have to live with that and figure out ways to deal with it, but unfortunately, that’s the consequence when you have people who don’t know what they’re doing and who get into positions of power and trust, creating damage in catastrophic cascades,” said Hoskinson.
Speaking of the ripple effect, the FTX bankruptcy triggered a cash rush on Binance, the biggest exchange in the market. According to InfoMoney, investors withdrew 81,712 BTCs ($1.35 billion), which represent 15% of the exchange’s approximately 500,000 cryptocurrency units, over six days. Furthermore, 125,026 units of Ethereum ($155 million) and $1.14 billion worth of stablecoins were also withdrawn from the exchange in the same period.
Still according to InfoMoney, withdrawals are an industry-wide problem. According to data from the Coinglass tool, almost 200,000 Bitcoin units were withdrawn from exchanges in seven days, reducing the level of BTC held on exchanges to 1.88 million.
Charles Hoskinson said that, if you look at the financial relationships that FTX had, its bankruptcy could create a cascade of insolvencies - and he recalls that, unfortunately, cryptocurrencies do not receive redemption at these times.
“Our competitors do this every day. They should already be calling their friends in government and telling them how much check they can haggle for. With cryptos, we don’t get that. We just have the ‘privilege’ of cleaning up the mess only to be blamed for it and have to deal with the bottom line ourselves," says Hoskinson.
Charles Hoskinson doesn’t see it that way. On the contrary: he thinks that this industry will be much stronger in the future and believes that the best days are yet to come.
But Hoskinson does not downplay the weight of FTX’s failure in the crypto ecosystem. Bankruptcy affects, at least in short to medium term, how cryptocurrencies work in the US – in particular, the changes that lawmakers will impose on the industry.
“We could look at a world where non-custodial wallets are no longer allowed in the United States. We could look to a world where all cryptocurrencies except Bitcoin are labeled as securities and forced to comply with onerous regulations that will deprive them of liquidity and provide no consumer or investor protection. […] Do not believe for a moment that additional regulation, if applied blindly, will solve any industry-specific problem. But now [with the bankruptcy of FTX], that is a possibility.”
Charles Hoskinson also believes that there could be a mass consolidation of the regulated infrastructure of this sector in the hands of just a few players, which will form an oligarchy that is impossible to dismantle and that could basically end the American cryptocurrency marketplaces.
“I’m not saying it will happen. I’m saying that the likelihood of this sort of thing happening is now greater as a direct result of the FTX failure. The reason is that, unlike Celsius and Luna, FTX had a direct relationship with many politicians in Washington D.C.”, said the creator of Cardano.
Hoskinson remembers the photos that circulated on Twitter with Sam Bankman-Fried and his companions alongside politicians. Furthermore, Bankman-Fried never minded pouring millions of dollars into elections and lobbying to try to pass specific legislation. This means that there are many politicians who now don’t want this relationship to be public. As a result, they will likely try to erase that relationship by becoming unnecessarily tough on cryptocurrencies.
Another front of attack against cryptocurrencies could come from celebrities who have lost a lot of money with FTX. Tom Brady and Gisele Bündchen, for example, had a considerable amount of money on the exchange, as well as other celebrities who are likely to use their networks with thousands of followers to attack and criticize the crypto industry.
Charles Hoskinson remembers that last year he criticized DogeCoin’s massive growth, not because he had anything against the founders or the people who participate in it, but because the project perfectly epitomized the get-rich-quick attitude.
Cardano’s creator said that many people he knew were buying that coin because they mistakenly believed they could double, triple or quadruple their money in a matter of days, weeks or months, and the vast majority of them lost it.
“This is a mentality that, if preserved and maintained, will end the cryptocurrency space,” says Hoskinson. “I hope people start to get wiser. I also hope people understand that nothing is free in life. You cannot get massive returns and massive income. They have to come from someone.”
Unlike instant profit, Cardano has always focused on the pillars of use, usefulness and adoption of ADA, its cryptocurrency, with the certainty that this is indeed an industry that can fundamentally change things.
But, according to Hoskinson, there is no way we can get to a point where everyone is covered by the banking system, and has their own identity and the ability to move seamlessly from one financial system to another without blockchains and cryptocurrencies - and you don’t. You can’t separate the two.
Hoskinson warns that if you have a blockchain without cryptocurrencies, you have large multinational companies like Microsoft, Apple, and Google, and transnational bodies like the Bank of International Settlements (BIS).
“I didn’t sign up [in this industry] to build Apple’s next product line. They can do it themselves. I signed up to build protocols that give everyone freedom. Removing the token from blockchain technology is just functionally handing over those who already have the means to continue having it, rather than doing something different. Protocol economies, resource-based economies, this idea of combining the two [blockchain and cryptocurrencies] gives everyone freedom if done right. The problem is that many people in this industry seem pathologically addicted to taking advantage of others’ confidence in a better future, or desire for a better future, in exchange for a quick exit, and FTX is just another example of that.”
Charles Hoskinson believes that the next six to nine months will be very critical for cryptocurrencies. Therefore, he invites everyone who works in this field to ask themselves why they are here, aware that this industry was born with an idea of freedom, but that this is being quickly lost.
“The power of cryptocurrencies represents the first time in our lives that we really had the ability to do things differently. To think differently. To change the way the game works. To change the way we can achieve great things. We can fundamentally transform everything from how we vote to our sense of our identity to reclaiming our privacy, and even change all models of how businesses work. We can get rid of presidents and CEOs. We can own a little bit of everything, and we can thrive together.”
Hoskinson also urges the crypto community to empathize and be understanding with aggrieved persons who have legitimate reasons to be outraged, as many of them have lost money or know people who have lost money - in some cases they have been victims of fraud.
There is also a need to win the polarization and narrative wars within the crypto industry. The environment is contaminated with dirty practices inherited from the political arena and irresponsible conduct on social media. Furthermore, it is important to fight the immediate gain mentality, helping to educate people about the advantages of thinking in the medium/long term.
We close this article with an emblematic excerpt from Charles Hoskinson’s video, where he reflects on the work we will have to do to get where we want to be:
“You don’t deserve a beautiful city on a hill unless you’re prepared to go up the hill - in which case, in some cases, you have to build the city. We don’t deserve a great future unless we’re willing to fight for it, believe in it, and endure the hardships of the journey to get there. There is a promised land and something magical on the horizon, and I truly believe in the goodness of people. You can decide to be cynical or optimistic, it takes the same amount of energy. I’m optimistic that we can get there if we have the right mindset. FTX is a waypoint. It’s a crossroads. It accumulated with all the things that happened this year. It’s a lesson in what not to do. We just have to ask ourselves how to do it differently.”
Remember: the problem is with the mindset, not the technology. With our heads in the right place, we have all the tools to change the world for the better. And like Hoskinson, the CORA team prefers to expend energy on optimism.
CORA Team (Cardano Onboard Route Alliance)