Will The FTX Crash Kill Crypto?

The collapse of crypto exchange FTX and the arrest of FTX founder Sam Bankman-Fried charges on securities fraud and money laundering, has given fresh hope to crypto skeptics—and they are legion—that this entire episode with its estimated $8 billion in losses, will signal the demise of crypto. It’s a demise they’ve predicting and waiting for since BitcoinBTC
first broke on the scene.

In fact, it’s possible FTX’s crash will have the opposite effect. It may in fact breathe new life—and a new realism—into the industry, not least with the help of government regulators. But unless the industry and those same regulators confront an even greater danger lying ahead, we could be looking at crypto becoming a greater threat to global financial stability than anyone can imagine.

It will be awhile before the entire sordid story of FTX’s collapse gets sorted. Certainly SBF’s arrest brings a slew of questions in its wake. For example, why was an arrest warrant issued on the eve of SBF’s testifying before Congress, when he would face serious questions about the political connections he forged to protect his malfeasance.

Another question is why was the SEC so oblivious to the signals that SBF was running a fraudulent scheme—and why an investment stalwart like Shark Tanks’ Kevin O’Leary became an FTX booster and attached himself to the FTX payroll.

But those who expected—or hoped—that FTX’s collapse would blight the entire crypto industry, have been disappointed. Here it must be pointed out that FTX was a crypto exchange and crypto hedge fund, not an cryptocurrency firm. And although FTX’s downfall adminstered a hard hit on crypto stalwarts like EthereumETH
and Bitcoin; they have since recovered their market footing.

FTX’s crash also failed to trigger a larger ripple effect across the markets, as many feared.

But the continuing existence of crypto still infuriates its detractors. They like to point out that with crypto there’s “no there there,” i.e. there’s no actual commodity being traded with crypto, just flashes of light crossing the computer screen. Some have dubbed the crypto market a delusional “digital mania,’” comparable to the tulip mania that obsessed Dutch investors in the 1630’s or even pet rocks. Although at least when the rock proved worthless, you still had a rock.

With crypto, they point out, there’s nothing.

This objection misses the point about crypto. Hype and mania aside, the crypto boom followed the refusal of the Federal Reserve and central banks to confront the growing reality of inflation. I believe a historical graph would show, that when those authorities began to respond to the inflation threat, Bitcoin and the others started to see a steady slide in value if not in trading volume. This point highlights crypto’s real value: i.e. as a hedge against bad decisions by policy makers and central bankers. While not a substitute for gold as some enthusiasts liked to claim, cryptocurrencies do offer a speculative hedge against other investments and currencies being buffeted by regulators and other political headwinds.

That includes digital currencies. This the irony which Mises Institute scholar Alex Pollock points out in his new book, Surprised Again!, coauthored with Howard Adler : that crypto’s problems may well speed the digitization of national currencies and increase the power and influence of central banks—the crypto enthusiast’s No. 1 nemesis.

Perhaps so. But whether crypto stays or fades away, when the final post-mortem is in, the crypto phenomenon will leave two imperishable legacies. One (as I’ve written about many times in this space) is establishing blockchain and Distributed Ledger Technology as the digital transaction system of the future. Nothing about the FTX scandal has upset that proposition.

The other is that crypto is another example of how vulnerable our vital financial sector remains to future quantum computer attack. Our Hudson Institute Quantum Alliance Initiative study has shown that such an assault will do more than trigger a sudden sickening crash—a mega-FTX, if you will. It will lead to a protracted and catastrophic winding down of crypto positions and monetary value that will have exactly the ripple effect across the financial system that crypto critics most fear.

In fact, our analysis estimates that the overall cost of a major hack and devaluation of Bitcoin alone could be as much as $3 trillion.

So here’s a role for crypto regulators—perhaps in the end, the most important regulatory reform of all. That’s requiring a timeline for quantum protection for all crypto and crypto transactions, as well as for all digital currencies—just as last month the Office of Management and Budget began requiring all federal agencies to develop a timeline to quantum protection. Likewise, for financial institutions doing business with the Fed.

In the meantime, these institutions need to think seriously about how to protect themselves from the coming quantum computer threat.

So whatever the fate of SBF, and whatever failures or collusion with SEC regulators and politicians this scandal may expose; it looks like the crypto industry is ready to weather this particular storm. But it won’t survive a quantum storm—any more than any other financial sector—when, not if, one finally hits.