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Cryptocurrencies: No child’s play

BY: Hadiza Nuhhu-Billa Quansah
Recent episodes show how private cryptocurrencies struggle to earn public trust

Well, the headline is not a reference to Don Mancini’s character, Chucky, the notorious serial killer, in the American horror movie, Child’s Play. In that movie, Chucky the bad guy could frequently escape death by performing a voodoo ritual to transfer his soul into a “Good Guy” doll. The original film, according to available records, was released on November 9, 1988, and Mancini has created a media franchise around this popular episode. 

Now, my child’s play is about the real “prodigy”, the “child” who has managed to promote himself as an “eccentric genius” within the crypto ecosystem—Sam Bankman-Fried, described as a 30-year-old billionaire. On November 8, while the world’s attention was focused on the climate conference that was taking place in Sharm El-Sheikh, Egypt, because of its importance to addressing rising global temperatures due to climate change, there was a cold freeze taking place in the crypto ecosystem. Bankman-Fried, according to reports, was forced to sell his crypto firm empire due to cash crisis. And that was a very significant move in the market.

Commenting on the development, the Wall Street Journal (WSJ) wrote that: “The young 30-year-old billionaire was just before that day considered the tutelary figure of the crypto sphere. A sort of godfather to turn to when things go wrong”.

“He owed this image to his tour de force during the summer to bail out and save crypto firms struggling due to a credit crunch caused by the sudden collapse of the cryptocurrencies Luna and UST or TerraUSD, two tokens issued by the Terraform Labs platform”, WSJ added.

In fact, at one point Bankman-Fried was valued at US$15.6 billion but following the developments on November 8, there were conflicting reports about his net worth. While some measured his net financial position at below US$1 billion, others said he could have lost it all, given the uncertain nature of the market.

“Bankman-Fried promoted himself as an eccentric genius. In reality, his image was a distraction from what was going on inside FTX”, David Gerard, writing about the spectacular collapse in the UK-based Financial Times stated.

“After a stupendously profitable asset bubble in 2021, the cryptocurrency industry suffered harsh reversals in 2022. A string of high-profile collapses – Terra-Luna, Three Arrows Capital, Celsius Network, Voyager Digital – lost investors a fortune, tanked prices and demolished market confidence. But FTX’s sudden collapse caught almost everyone by surprise”, Gerard added.

And this is also the background information provided by Gerard about Bankman-Fried: “FTX was founded in 2019 by Sam Bankman-Fried, the child of two Stanford academics. He had worked at quantitative trading firm Jane Street Teuntil 2017, when he struck out on his own with his Alameda Research crypto hedge fund. With Alameda as its market maker, FTX rapidly became one of the most popular crypto exchanges. Traders loved its complex futures and options products. A more restricted branch for US customers, FTX US, opened in 2020.

“When bitcoin and crypto-assets hit the headlines in 2021, Bankman-Fried positioned himself as a billionaire public intellectual. Bankman-Fried would only be photographed in shorts, a T-shirt or hoodie, and untied shoes. He marketed himself to venture capitalists as a genius eccentric, beyond their comprehension. How did this mere boy of 29 hit the heights so quickly? What was his secret?”
The secret we may never know fully. However, what we do know at this point in time is that the crypto market is no child’s play!

As you can infer, Bankman-Fried has no Chucky image, and can only be described as a “serial entrepreneur” and not a “serial killer” like Chucky. But the striking feature is that the collapse of his empire calls for a rethink about the whole market for crypto assets, and perhaps the time for the “soul” of that market to be transferred to a “good market” to avert these high volatilities that could create a contagion effect of some sort in the future.

As l have always maintained in this column, the real intrinsic value of crypto assets is still a subject of considerable academic debate, and that marks out these assets as truly uncertain. Well, in case you are wondering, what l mean by this statement is that one would expect asset classes to rather enjoy considerable debate among market participants and those who are investing in them. But with the crypto assets, there is so much talk about their value by those mining the nuggets (pumping) but more talk about its uncertainty by policymakers, governments and other academics with interest in the subject.

As l wrote in the July 23 edition of this column, it shouldn’t be a big surprise to market watchers to witness yet another period of unexpected negative developments in the crypto ecosystem. “In fact, in the June 18 edition of this column, l stressed on how a volatile day for crypto market on June 13 saw a drop in bitcoin to a 17-month low, to US$23,629, after the announcement by Celsius Network that it had halted withdrawals because of ‘extreme market conditions’. At the time, the Binance exchange temporarily suspended bitcoin withdrawals and the total value of the digital asset market dipped below $1tn (£820bn). The decision by Celsius meant that all withdrawals and transfers between accounts for its 1.7 million customers were stopped”, this is how I explained the impact of the other periods of crypto market meltdown in the July 23 edition.

“As l have always maintained in this column, current developments in the crypto market point to a bumpy road ahead for investors. So why are crypto assets allowed to enjoy strong patronage despite the high market volatility? As a store of value, crypto assets seem to be short-changing many due to its high volatility”, I further stated in that edition.

All in all, technology development, undoubtedly, comes with risks and opportunities. On April 19, 2021 for instance, Rishi Sunak, then UK Chancellor of the Exchequer, announced that plans were afoot to help ensure that fintechs remained at the forefront of the digital finance agenda, and further highlighted the importance of technology adoption in the global growth agenda. Good, but where products such as blockchain-enabled crypto assets create market distortion then the downside risk of technology adoption must be strongly mitigated. That must start with strong crypto market regulation.

Mr Agustin Carstens, General Manager of the Bank for International Settlement, has this to say about cryptocurrencies: “Many cryptocurrencies are ultimately get-rich-quick schemes. They should not be conflated with the sovereign currencies and established payment systems that have stood the test of time. What makes currencies credible is trust in the issuing institution, and successful central banks have a proven record of earning this public trust. The short experience of cryptocurrencies shows that

technology, however sophisticated, is a poor substitute for hard-earned trust in sound institutions”.
“Recent episodes show how private cryptocurrencies struggle to earn public trust. Cases of fraud and misappropriation abound. Above all, the technology behind cryptocurrencies makes them inefficient and certainly less effective than the digital payment systems already in place,” he added.
I hope you now see the drift, but if you don’t just remember this: Cryptocurrencies is no child’s play!
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