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Cryptocurrencies are going through a spectacular crash and the head of one of the biggest crypto exchanges claims that the Federal Reserve is responsible for this slowdown.
“The main driver of this has been the Fed,” said Sam Bankman-Fried, CEO of FTX, whose app and sites are used by investors to buy and sell digital currencies.
The Fed is aggressively raising interest rates to fight high inflation, which has led to a “recalibration” of risk expectations, Bankman-Fried told NPR.
The billionaire said he appreciates the difficulty of what the central bank is trying to do, noting that it is “caught between a rock and a hard place”. But Bankman-Fried said much of his own outlook for his business now hinges on the decisions the Fed makes in the months ahead.
This week, the Fed announced the largest interest rate hike since 1994. With the era of cheap money fast becoming historic, financial markets are already extremely jittery and cryptocurrencies are in meltdown mode.
“Literally, the markets are scared,” Bankman-Fried said. “People who have money are afraid.”
The best-known cryptocurrency, Bitcoin, fell around 20% in the past week and continued to sell off over the weekend. This is now worth less than half of what it was at the start of the year. Other digital currencies have seen even more dramatic falls – Ether has fallen over 70% over the same period.
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The biggest concern is what effect this will have on the vast universe of amateur investors who have been stocking up on cryptocurrencies over the past couple of years. In 2021, the total value of cryptocurrency swelled to $3 trillion as the crypto industry did its utmost to attract amateur investors and increase brand recognition.
FTX bought the naming rights to an arena in Miami and did a Super Bowl commercial with comedian Larry David.
All this attention has attracted a lot of newbies. A December survey found that a quarter of investors own Bitcoin and more than half, or 55%, of them started investing in the past 12 months.
Some have even placed their money in crypto lenders. Over the past week, a few lenders have blocked their customers from getting their money back and the ensuing chaos is fueling fears of contagion to the wider financial system.
On Friday, crypto lender Babel Finance temporarily suspended cryptocurrency redemptions and withdrawals as it “faces unusual liquidity pressures.”
It followed another lender, Celsius Network, which had previously frozen withdrawals and transfers. Its CEO called it “a difficult timeCelsius said he made the decision “to stabilize liquidity and operations while we take steps to preserve and protect assets.” Now a handful of state regulators are investigating the company’s practices.
A crypto-focused hedge fund called Three Arrows Capital is at the center of another ongoing crisis. He has invested heavily in two digital currencies, TerraUSD and Luna, both of which recently crashed. And this week the fund reportedly missed margin calls from lenders, meaning it couldn’t find what it owed its lenders.
Bankman-Fried suggested the fallout could shape the regulation of crypto, which is hotly debated in Washington. He said it’s likely there will be increased scrutiny of how leverage is used in the crypto industry and corporate transparency about the potential dangers.
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In the meantime, crypto companies are looking for cover.
When there have been crises of confidence in the past, investors like Bankman-Fried and big companies like FTX, which was recently valued at $32 billion, have helped contain the losses.
“I think we have a responsibility to seriously consider intervening, even if it’s at a loss to ourselves, to stem the contagion,” he said. “Even though we weren’t the ones who caused it, or weren’t involved in it. I think that’s what’s healthy for the ecosystem, and I want to do what can help it grow and prosper.”
Bankman-Fried noted that this had happened “a number of times in the past,” and he pointed to one incident in particular. Last year, hackers attacked Japanese crypto exchange Liquid and stole nearly $100 million worth of cryptocurrency.
FTX provided Liquid with $120 million in funding. Shortly after, FTX announced its intention to acquire Liquid for an undisclosed sum.
“We, I think about 24 hours later, stepped in and gave them a large enough line of credit to cover all their demands, to make sure the customers were happy, while thinking about the longer term solution. “
In recent days, some of the biggest players in the crypto industry BlockFi, Crypto.com and Gemini have announced layoffs, and in a note to staff, the CEO of Coinbase, one of FTX’s biggest rivals, said the company was downsizing. by almost a fifth.
“We grew too fast,” wrote Brian Armstrong. “Bear markets are difficult to navigate and require a different mindset.”
Bankman-Fried’s company did not announce any job cuts, but in a Twitter threadhe said the company has slowed its hiring.
Today, Bankman-Fried is based in the Bahamas, where FTX recently opened a global headquarters.
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Shortly last week, Bankman-Fried was in Washington to meet with lawmakers and regulators, many of whom are watching the ongoing crypto crash and worried about the risks to investors, the crypto industry, and the financial system in the process. wider.
But he said he sees signs of progress, especially on Capitol Hill, where Senators Cynthia Lummis (R-WY) and Kirsten Gillibrand (D-NY) just launched the most sweeping crypto legislation in this day, which, among other things, defines cryptocurrencies as commodities and not securities. This means that regulation would fall under the jurisdiction of the Commodity Futures Trading Commission, not the Securities and Exchange Commission.
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