It’s another crisis for crypto. Each one seems to be bigger than the last and this one—the collapse of the FTX cryptocurrency exchange—is said to threaten the whole industry.
The recent bankruptcy of the £26 billion company FTX—and the downfall of its creator Sam Bankman-Fried—is a story of unregulated fraud. The business is the second largest cryptocurrency exchange in the world. It’s an app where people can buy and sell digital currencies, trading in ownership of bits of computer code.
But earlier this month, a leaked balance sheet from Bankman-Fried’s trading company Alameda showed it had borrowed some £7 billion. Its ability to repay most of this was in a cryptocurrency created by FTX. What’s more, FTX had lent much of this cryptocurrency to Alameda using money its customers and investors had deposited on the app.
To cap it all off, Bankman Fried’s biggest and bitterest rival exchange Binance announced it was selling its own stock of FTX’s tokens, forcing the price down. It dangled the possibility of a buyout of FTX, then pulled out saying it found evidence of mishandling of funds.
FDX went bankrupt, and people who had deposited money there lost it all. Now there’s a wider run on cryptocurrencies as people rush to pull out their money from other exchanges. The whole debacle is revealing the nature of cryptocurrencies, and the system that they operate in.
First, it pulls the rug out from under the idea that they could be an alternative to state-backed currencies, or that they’re fundamentally different to trading in stocks, shares and bonds. Just like those “traditional” financial tools, the whole pack of cards ultimately stands on whether somebody somewhere has the actual money to back it all up.
So cryptocurrencies—just like stocks, shares and bonds—are examples of what the revolutionary Karl Marx called “fictitious capital”. “Real capital” is what’s invested in the things that actually produce wealth—workplaces, machinery, and the human labour it all depends on. Fictitious capital is what’s invested in the web of lending, borrowing and gambling that’s grown out of it.
This can mean speculating on the future values of real things, but also in debts and currencies. The whole process can obscure where wealth actually comes from, even to capitalists themselves. It can appear that the actual act of buying and selling debts, shares and currencies is what actually produces profits. Certainly that’s how many people treat cryptocurrency trading.
Cryptocurrencies can be used to buy stuff in certain corners of the internet. But mostly people invest in them in the hope of later selling them for a profit. This creates big bubbles, unstable because it all ultimately rests on the profits produced in the real economy that they’ve outgrown.
It also creates opportunities for people like Bankman-Fried to manipulate those bubbles through lying cheating and stealing—until it all comes crashing down.
In some extraordinary comments following FDX’s crash, Bankman-Field all but admitted that, in his world, lying and stealing can be justified if they turn a profit. And Bankman-Fried was no outsider. With the billions he made, the governing Democratic party in the US embraced him as its second biggest donor. And that gave him close access to Democrat politicians.
Now that FDX has collapsed, everyone around it would like to pretend that Bankman-Fried was a unique villain. Or that cryptocurrency is a dangerous Wild West that needs to be tamed by state regulation.
But when much larger financial institutions crash—revealing as they do corruption and dodgy dealing on a bigger scale—they get bailed out. The only real difference is a question of size. The rottenness of cryptocurrencies is just one small window into a rotten system.
This is part of a series of columns about economics
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