New York University Professor Nouriel “Dr. Doom” Roubini, who warned in 2006 that the U.S. housing bust would cause a financial crisis, has described crypto and its recurring crises as the mother of all Ponzi schemes.
Roubini tweeted on Nov. 11 to his 560,700 followers: “99.9% of crypto should be banned or regulated out of existence as it is the biggest criminal scam in financial history! The crypto world must be made safer for investors and users. Recurring crises mean the industry must accept regulation and controls”.
The crisis at the collapsed crypto exchange FTX — which was preceded by recurring crises including the collapse of crypto lender Celsius, collapsed crypto firm Voyager, collapsed hedge fund Three Arrows Capital and collapsed digital tokens TerraUSD and Luna — has little do with cryptocurrency as a technology, financial commentator Frances Coppola wrote for Financial Times.
“Rather, it exposes what financial systems look like when there are insufficient checks and balances. Crypto people rail against central banks and regulators, but they exist for good reasons,” Coppola wrote.
An Iranian-American economist, Roubini is the chairman of an economic consultancy firm Roubini Macro Associates LLC.
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When crypto exchange Binance stepped in Tuesday with a potential takeover deal to rescue rival FTX — whose founder Sam Bankman-Fried himself was seen by many as a “lender of last resort” after he bailed out struggling crypto firms this summer — that was proof, Roubini tweeted, that crypto is a Ponzi scheme.
Bankman-Fried lent troubled crypto lender BlockFi $250 million in June and tried to bail out Voyager Digital.
Within about a day, the Binance bailout itself had collapsed and FTX filed for bankruptcy on Nov. 11, announcing it on Twitter.
Roubini suggested via the tweets that there are parallels between the cascading bailouts and a Ponzi scheme, where existing investors are paid returns using funds collected from new investors.
It’s still not exactly clear what went wrong at FTX, Coppola wrote. CEO Bankman-Fried “insisted it was just a liquidity failure. But Binance, which initially agreed to buy FTX to shore up liquidity, pulled out of the deal after looking at its books. There are reports that FTX has a balance sheet hole of about $8bn … Investors are bracing themselves for the worst: Sequoia Capital has already written down its investment to zero. More worryingly, it appears that customer funds are compromised. Indeed, it is hard to see how a balance sheet hole of such size could have developed unless the exchange had been lending out customer funds.”
Reuters reported that FTX lent customer funds to sister company Alameda Research after it was slammed by the failures of Three Arrows Capital and Voyager in May 2022. The Securities Exchange Commission and U.S. Justice department are investigating the relationship between FTX and Alameda, including whether customer funds may have been misused.
FTX customers are set to lose a substantial part of their funds, Coppola wrote. The crypto exchange attracted retail traders and encouraged ordinary people to deposit their wages into its accounts. They will suffer hardship.
Coppola identified four major weaknesses in the crypto ecosystem including too much reliance on personalities:
“Crypto was supposed to eliminate the need for trust between people. ‘Don’t trust, verify’ was the mantra. But the entire system now seems to depend on a few big personalities, trusted by thousands. Bankman-Fried is one. He built up a huge empire in a short period of time and has given lots of money to good causes. He seemed an all-around good guy. So people trusted him with their money. Investors, particularly, have shown a remarkable willingness to back his ventures without the usual financial due diligence.”Frances Coppola