And the dominos keep falling...
The stunning collapse of the Bahamas-based cryptocurrency exchange FTX continues to be felt throughout the crypto verse.
During The New York Times DealBook Summit, Treasury Secretary Janet Yellen, who has been calling for tighter government oversight of cryptocurrencies, compared FTX's situation to Lehman Brothers' collapse in 2008, the largest bankruptcy filing in U.S. history.
Yellen said cryptocurrency "is an industry that really needs to have adequate regulation, and it doesn’t.”
FTX Founder Sam Bankman-Fried was also at the summit, making his first public appearance since his Bahamas-based empire collapsed on Nov. 11. He admitted to having made "a lot of mistakes."
"I didn’t ever try to commit fraud on anyone,” he said via Zoom. "I saw it as a thriving business and I was shocked by what happened this month.”
FTX's top 50 creditors are claiming at least $3 billion from the company, according to court documents.
Amid all this, bitcoin was off slightly to $17,015.98 on Dec. 1, according to data firm CoinGecko. Ether, the native currency of the ethereum blockchain, was up modestly to $1,273.91, while dogecoin gained 0.5% to 0.102806.
FTX 'Death Spiral'
Winston Ma, managing partner of CloudTree Ventures, said BlockFi's Chapter 11 bankruptcy filing "underscores significant asset contagion risks in the crypto world."
"With the FTX 'death spiral' spreading to more crypto entities like BlockFi, the lack of investors’ fund protection in the crypto markets is further highlighted," said Ma, author of "Blockchain and Web3: Building the Cryptocurrency, Privacy, and Security Foundations of the Metaverse."
Ma said a regulatory crackdown on crypto seems inevitable, and the safety of consumer funds will probably be a big focus. The market may see tighter custodian rules for crypto assets from the U.S. Securities and Exchange Commission and all related regulators, he said.
Prior to the events of this year, Ma said, BlockFi had raised $1 billion in venture funding from investors like Tiger Global and Bain Capital Ventures.
"The decision by BlockFi to file for Chapter 11 shouldn't come as a surprise to anyone," said James Edwards, a crypto specialist with Finder. "The lender was bailed out by FTX in the wake of the Celsius collapse earlier this year and had been signaling for some time that it would not be able to continue operations."
Edwards said the big news is that BlockFi is owed about $1 billion by FTX and its sister company Alameda Research, which its bankruptcy lawyer says it will attempt to claw back from the failed firms.
"This revelation sparked theories that FTX purchased both BlockFi and Voyager earlier this year in order to hide its bad debt and delay any repayments," he said. "This is a major setback for the industry with no primary crypto lender left standing in the U.S."
'Before the IRS Comes Knocking...'
David Lesperance, managing partner of immigration and tax adviser Lesperance & Associates, said that Bankman-Fried is not the only who should be worried about the future.
"All U.S. FTX customers at the time of bankruptcy will be publicly listed as creditors, whether they like it or not," he said. "Those who “forgot” to note on their IRS 1040 tax returns that they 'at any time during 2021, I received, sold, exchanged, or otherwise disposed of any financial interest in any virtual currency' will be outed."
Lesperance added that those who got their crypto out of FTX before the gates closed are not out of the woods either, as there is sure to be a detailed financial audit of all transactions that FTX undertook.
"Time to do a voluntary disclosure before the IRS comes knocking," he said. "Of course, this same problem exists for Celsius holders or any other crypto firms that have or will go into bankruptcy."
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