We still do not know what happened to FTX customer funds or the precise amount that was lost. That’s because the collapsed cryptocurrency exchange’s founder, Sam Bankman-Fried, may have inflated these figures by “exaggerating the returns or stuffing them,” Breitbart Economics Editor John Carney explained.
In an interview Tuesday on Larry Kudlow’s eponymously named Fox Business show, Carney was asked if he thinks Bankman-Fried is “going to jail” for his handling of FTX.
“I do believe he is,” Carney said. “We still have a lot to learn. But he has lost a lot of money, and he was apparently transferring customer funds into a hedge fund that he managed. We don’t know what happened. How did they lose all of that money? The exchange FTX is stuffed with its own currency—its own coins that it creates out of thin air. So where did the client money go? Was it ever really there?”
Carney reminded Kudlow’s viewers that the notorious Ponzi Scheme fraudster Bernie Madoff lied to his customers about the size of their investments, and FTX’s customers may have fallen victim to a similar deception.
“Remember, under Bernie Madoff, a lot of people thought they lost more than they really did because he had lied to them about what the returns were,” Carney explained. “I suspect we may discover something like that here—that [Bankman-Fried] never really did have $16 billion of customer money, that he had half of that or a quarter of that, but it got inflated by him exaggerating the returns or stuffing them. Again, I don’t know this. We’re still finding stuff out. I suspect we’ll be talking about this for several more weeks, maybe years.”
Bankman-Fried, whose nickname is SBF, is “quickly becoming one of the most notorious financial villains of the modern era,” Carney wrote in Tuesday’s Breitbart Business Digest:
The collapse of FTX is still shrouded in a lot of mystery. There are credible allegations that he secretly transferred customer funds to the hedge fund he managed—and then somehow obliterated them. It’s said FTX had $16 billion of customer assets, but its balance sheet shows its holdings were largely vaporware coins of its own creation. So what happened to the money? People are debating whether he is more like Bernie Madoff, Lehman Brothers CEO Dick Fuld, or MF Global’s Jon Corzine. If you manage money for other people or institutions, it would be very hard to hand over any of that to SBF in good faith.
FTX’s collapse has given new urgency to the calls for more regulation and oversight of the largely unregulated cryptocurrency market.
“We’re going to need some kind of guardrails here,” Kudlow said. While not disagreeing with this assessment, Carney argued that the collapse of the FTX crypo exchange doesn’t undermine the legitimacy of cryptocurrency or, more specifically, Bitcoin, which remains the most popular cryptocurrency.
“The hardcore Bitcoin people actually say this proves that you should use Bitcoin and not the exchanges,” Carney said. “They say the problem is really the ecosystem that was built up around cryptocurrency and not the cryptocurrency. If you keep it on your hard drive, then it’s safe. The problem was, everybody put it into the exchanges because it was very convenient. We’re learning that without any regulation, that’s a disaster.”
Kudlow asked if FTX’s demise could also spell doom for other crypto exchanges like, for example, the popular Coinbase exchange. However, there is a key difference between the U.S.-based Coinbase and the other offshore crypto exchanges, Carney explained.
“Because [Coinbase is] a publicly traded U.S. company, there’s a lot more scrutiny on what they’re doing,” Carney said. “These offshore exchanges are really a big problem because we don’t know the regulatory regime that they operate under at all.”
The Bahamas-based FTX fell under the category of an “offshore exchange,” and Carney said the failed firm’s balance sheet was glaringly different from what one would expect from a company operating under regulatory oversight.
“The published balance sheet that Sam Bankman-Fried was going around showing to investors, [while] trying to raise more money, looked like it could have been written in crayon,” Carney said. “It made no sense, and it was not the balance sheet of a sophisticated financial institution by any means.”
The collapse of FTX could have quite a few ripple effects, not just for Bankman-Fried—who maybe be facing a federal investigation—but also for other crypto exchanges, Carney explained.
“We haven’t seen a lot of ripple effects yet from the crash of FTX,” he told Kudlow. “But more of these exchanges are very likely—if not to go under—to face immense pressure because people are withdrawing from them. They don’t know what the risk is. And we’ve seen this before. It’s a classic financial panic. People pull their money out.”
FTX is certainly “one of the biggest collapses,” Carney said. But “some of the smaller [exchanges] are probably also in trouble.”
Because the crypto industry operates without a central bank to play the role of “lender of last resort,” a crypto exchange can be “vulnerable to a ‘run on the bank’ event when customers ask for their money back faster than the exchange can liquidate its investments,” Carney explained in Monday’s Breitbart Business Digest. “The rush to liquidate to meet withdrawals can send the prices of assets spiraling downward. This can spread to other funds and exchanges as investors seek to withdraw from those seen as exposed to the plunging asset prices or failing exchange, a phenomenon typically referred to as ‘contagion.’”
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