Cryptocurrency or crypto-mirage?

By: Clément Inbona, Fund Manage

The total value of cryptocurrencies has fallen 70% versus the US dollar. While it stands at over USD 800 billion, the bursting of this bubble, trailing a haul of scandals in its wake, will undoubtedly go down in the annals of history.

The most recent event in the series is FTX – the second-largest cryptocurrency exchange worldwide – filing for Chapter 11 bankruptcy protection in the US. The company has since been mired in scandal and the collateral damage to the sector is mounting. What has caused this debacle?

Firstly, it’s worth remembering that cryptocurrency is a currency in name only. Use of the term “crypto-asset” seems more appropriate. A cryptocurrency does not fulfil three of the essential functions of a currency. Firstly, it is not a store of value – its often stratospheric volatility proves the contrary. Nor is it a widespread medium of exchange – who can claim to use it exclusively for all of their day-to-day financial transactions? And lastly, it is not a unit of account – how many households or businesses use it for their accounts? The definition given by the French Financial Markets Authority (AMF) is crystal clear: “A crypto-asset is not a currency.” Furthermore, it is not an asset that generates income as traditional assets do in the form of dividends, coupons or rent.

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How ironic then that the founder of the FTX platform, Samuel Bankman-Fried, is a banker in name only. His platform has been subject to something akin to a bank run, with investors rushing to withdraw their assets and provoking its collapse. But it isn’t a bank – it isn’t regulated by a supervisory authority or subject to a tax authority worthy of that name, as the Bahamas features on the European Union’s blacklist of tax havens. Nor is it a listed company subject to transparency obligations.

Since this event, the bad news has been piling up for players in the sector: some have blocked withdrawals, others been subject to bankruptcy rumours, and not a day goes by without more collateral damage.

This unrest has, so far, been restricted to the world of crypto-assets. Traditional assets seem relatively untouched by the upheaval. This may be surprising given the amounts in play but seems quite logical knowing that the core feature of the crypto-asset universe has been to break free from the straitjacket of traditional finance, existing at its margins.

With over 150 crypto-assets each totalling more than USD 100 million, plenty of players in the world of decentralised finance may yet be caught swimming naked when the tide goes out.