Cryptocurrency must be protected from bad actors

In recent months, cryptocurrency has taken a serious blow, with major companies going bankrupt and popular currencies like Bitcoin and Ethereum losing more than half of their value.

While crypto holds promise as a store of value, now is the time to build strong defenses against the bad actors that contributed to this crash, made this currency less resilient and kept crypto from the strong rebound we’ve seen. . A look at the recent crisis speaks volumes about the need to recognize bad actors in this space and protect consumers with appropriate safeguards and rules.

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When a USD-backed cryptocurrency called Terra or UST began to break away from the dollar and lose value, companies began to sink. One of the first companies to fall was Three Arrows Capital, a major cryptocurrency lender that collapsed and eventually filed for bankruptcy.

Celsius – another “crypto bank” and lender – also suffered from this stock market crash. When investors sensed a “winter” in the market, they started selling their holdings, causing more tokens like stETH and Bitcoin to fall. As the value of their assets declined, Celsius filed for Chapter 11 bankruptcy.

3AC and Celsius were no small potatoes. They have handled over 100,000 users and billions of dollars in transactions and currently owe over $10 billion to investors. Unsurprisingly, retail crypto users have been hit the hardest. Many of them have lost their savings, frozen in the accounts of these platforms, and some of them have confessed to suffering from mental health problems and suicide.

There is a number that people have turned to in this crisis. Sam Bankman-Fried, the head of crypto exchange FTX and trading firm Alameda Research, has portrayed himself as a “white knight” in this space, but there are indications that trust in Mr. Bankman-Fried and his ventures needs to be reconsidered.

FTX is the second largest crypto trading platform in the world, valued at $32 billion in January 2022. Bankman-Fried also founded and owns Alameda Research, a trading firm that invests more than $2.5 billion in crypto to provide liquidity in the market.

The mere fact that Mr. Bankman-Fried runs both FTX and Alameda Research is problematic for both the industry and consumers.

A hip-joint stock exchange and trading company inherently carries the risk of being prime investors as the exchange has access to all non-public market data on transactions. In the case of FTX and Alameda, the exchange may be able to share personal user information with the partner trading company for profit.

In other words, Mr. Bankman-Fried controlling both Alameda and FTX gives them an unfair advantage over retailers and consumers and allows the trading company to make a profit at the expense of FTX’s own users.

A similar partnership between Robinhood – a popular stock trading platform – and Citadel, an asset manager, has sparked controversy. Fueled by investor anger that the two companies run them, Congress launched an investigation to determine whether Citadel had an unfair advantage in trading over Robinhood.

These allegations, if true, could indicate market manipulation and insider trading. If insider trading is scrutinized for traditional stocks, it should be the same for crypto, FTX and Alameda. The meteoric rise of cryptocurrency and the lack of a regulatory framework should not be an excuse to put consumers at risk.

Mr. Bankman-Fried’s public profile is equally misleading. His self-portrait as an “effective altruist” – who only wants to make money for the good of others – is a public image that makes his efforts more dangerous. He is one of the richest people in the world, with a fortune of more than $20 billion, but he promises to use most of his wealth for philanthropy.

Ironically, his definition of philanthropy seemed to be spending millions on politics. During the 2020 presidential campaign, Mr. Bankman-Fried gave the Biden campaign $5.2 million, making him the second largest donor. For this year’s midterm elections, he has already spent $31.5 million and said he is willing to spend up to $1 billion on Democrats.

In this fierce industry, Mr. Bankman-Fried’s actions may seem like a breath of fresh air, but his “altruistic” image prevents us from asking the right questions about his negative influence in this industry.

Take Celsius for example. When Celsius filed for bankruptcy a month ago, subsequent court documents revealed that FTX and its related entities may have left a huge hole in the company’s books. Not only did Alameda Research owe Celsius $12.8 million directly, but a little-known group called the Pharos Fund owed Celsius a whopping $81.1 million. Oddly enough, Pharos is run by another company called Lantern Ventures, whose CEO Tara Mac Aulay is the co-founder of Alameda Research.

Again, one has to wonder whether these ties to Mr. Bankman-Fried mean that he colluded to take more money out of Celsius than it could fund at the time and caused his insolvency.

If true, FTX and Alameda Celsius owe nearly $94 million. For a cash-strapped company like Celsius, this financial liability of FTX/Alameda must have been a fatal blow to the company and its innocent users.

2022 has shown that cryptocurrency can be a dangerous rollercoaster ride, reminding us to be careful who we entrust our cryptocurrency to. Figures and platforms like Mr. Bankman-Fried, FTX, and Alameda Research may present themselves as fair and responsible, but their dodgy business practices have hurt crypto users and don’t want their best. We need to protect crypto from these bad actors.

• Matt Mackowiak is the chairman of the Potomac Strategy Group, a Republican adviser, a veteran of the Bush administration, a veteran of the Bush-Cheney re-election campaign, and a former press secretary to two US senators.

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