The dramatic collapse of the cryptocurrency exchange FTX sent shockwaves around the world last week, especially after it emerged that company managers allegedly stole at least $1 billion in customer funds to finance risky gambles that never paid off. About 1 million people have money frozen in the bankrupt exchange, in a collapse that also looks set to hurt poor and working class people worldwide who never owned so-called “digital assets.”
In Canada, pensions managers had to reassure public school teachers that their exposure to FTX was limited after it emerged that the Ontario Teachers’ Pension Plan invested $75 million in the company. The investment might end up being worthless, but it represented less than 0.05 percent of the pension plan’s assets, fund managers said.
Meanwhile, in El Salvador, market turmoil caused by the FTX downfall sent one of the poorest countries in the Western Hemisphere one step closer to an economic crisis. The administration of right-wing president Nayib Bukele has banked on cryptocurrency’s growth by passing laws favorable to the industry and by using public money to bet on the price of Bitcoin. Although Bukele said that El Salvador had no money tied up in FTX, his plans to woo the crypto industry and to speculate on Bitcoin seem increasingly doomed in the wake of the company’s crash with mounting doubts about the long-term economic viability of cryptocurrency, which had already been plagued by criticism and questions about its usefulness before FTX went under.
Though Bukele remains widely popular in El Salvador, his government’s embrace of cryptocurrency has been widely unpopular. In September 2021, protests greeted the enactment of a law that made Bitcoin legal tender. Commercial developments designed to attract cryptocurrency investors have also been met with howls of dissent after displacing poor Salvadorans.
Overall public approval of the Salvadoran government could change drastically in January, when the country faces $667 million in debt repayments that it’s increasingly struggling to finance. This week, in an apparent attempt to pressure creditors into accepting new terms, Salvadoran Vice President Felix Ulloa claimed that the Chinese government was interested in buying the country’s debt. The Chinese Foreign Ministry responded by saying it was not aware of any such plan. Analysts have estimated that Salvadoran public is currently down $70 million on the government’s Bitcoin purchases.
Meanwhile, retail investors with direct exposure to FTX appear to include many people around the world with little room to fall. Studies have shown that the cryptocurrency industry — similarly to subprime mortgages and payday loans — has attracted people in the U.S. who are priced out of conventional financial services. The market has flourished over the past few years under false promises of instant wealth with the blessing of lawmakers and regulators who have failed to enforce consumer protections, ignoring centuries of lessons learned about speculative frenzies dating back to the Dutch Tulip Mania of the 1630s.
Many policy makers and regulators who have encouraged the hands-off approach that allowed crypto to mushroom were particularly enamored by FTX. In recent years, the company’s founder and its former co-CEO Sam Bankman-Fried was routinely invited to appear before Congress to testify on the industry’s behalf, and made $40 million in campaign donations this election cycle, mostly to Democrats. Ryan Salame, FTX’s other co-CEO, also gave generously to Republicans, granting them $24 million in campaign donations this cycle.
The full amount of retail losses isn’t clear yet. More will be known in the coming weeks, as court administrators tally up claims made against the company, which filed for Chapter 11 bankruptcy on November 11. But working- and middle-class retail investors from around the world have already told reporters about being unable to access money they held on FTX — from thousands each held by a tech worker in Alabama and a musician in Thailand, to an entire “life savings” that a man in Morocco said is trapped on the platform.
To add insult to injury, and creating more doubt for those who are worried about recovering their money, an apparent hack of the digital wallets that remain on FTX drained hundreds of millions of dollars from users with frozen funds. The Securities and Exchange Commission, the Commodity Futures Trading Commission and the Department of Justice have all said they are investigating alleged misdeeds related to the collapse of the exchange. The House Financial Services Committee announced on November 16 that it will soon be holding a hearing on the matter, and the Senate Banking Committee will follow suit, a spokesperson for the latter told Truthout.
“The SEC, DOJ and CFTC have announced inquiries into FTX’s bankruptcy and Sam Bankman-Fried’s misconduct,” the Senate Banking Committee spokesperson said. “The Banking and Housing Committee’s role is to understand the cryptocurrency industry’s structure, as well as look into the broader issue of how cryptocurrencies impact consumers, our markets and the economy.” The spokesperson noted that the committee “is working to schedule a hearing and details are forthcoming.”
The FTX crash was so sudden, unexpected and characterized by accusations of misdeeds that analysts and investors have questioned the long-term viability of the entire cryptocurrency industry in its aftermath. Yahoo Finance editor Brian Sozzi said the industry “now faces a major trust deficiency” because of the bankruptcy. And as the Wall Street Journal noted on November 17, it is “becoming harder to trust that crypto’s future looks anything close to its thriving past, with interest rates higher, crypto prices hovering around multiyear lows and FTX customers wondering whether they will ever get their money back.” The price of Bitcoin has dropped 25 percent after FTX folded, the paper pointed out.
Another regulatory agency, the Consumer Financial Protection Bureau (CFPB), gave a preview of the pain that will likely emerge as bankruptcy proceedings advance. On November 10, the agency published a report on the uptick in complaints with CFPB officials about cryptocurrency, which has accompanied the industry’s growth in recent years. The study noted that a clear plurality of the complaints allege fraudulent activity, and highlighted grievances from customers of two crypto finance companies that went bankrupt earlier this year, Celsius and Voyager, the latter of which falsely represented its accounts as being protected by the Federal Deposit Insurance Corporation.
In a footnote, the bureau also cited letters sent to bankruptcy judges by those who lost money in the companies. The testimonies detail anxiety, despair, unpaid bills and thoughts of self-harm. In a separate footnote, officials also flagged how in August, the FDIC sent a cease-and-desist letter to FTX saying the company had similarly been falsely representing its accounts as being insured by the federal government.
Stories about the FTX downfall are also likely to surface soon on the CFPB’s public complaint database, which publishes filings 15 days after giving the subject of the complaint an opportunity to respond. If the company doesn’t respond, the agency doesn’t publish the complaints, but it does pass them onto the Federal Trade Commission, which investigates deceptive commercial practices. The agency also makes the complaints “available to federal and state agencies via the CFPB’s secure Government Portal,” a spokesperson told Truthout.
Tragically, the situation is something that satirists warned about months ago. In April, for example, before the global cryptocurrency market took a sharp nosedive, The Onion ran a piece with the headline: “Man Who Lost Everything In Crypto Just Wishes Several Thousand More People Had Warned Him.”
But, unfortunately for those with money stuck in FTX, the safety and soundness of the financial system isn’t the responsibility of The Onion’s editors. Nor is it the responsibility of the individuals looking for a return on their meager savings in a world currently marred by a cost-of-living crisis. It’s the duty of regulators and lawmakers, both Democrats and Republicans, who have chosen, once again, to sacrifice working-class people on the altar of capital accumulation.
This post was originally published on Latest - Truthout.
