Editor’s Note: A version of this story appeared in CNN Business’ Nightcap newsletter. To get it in your inbox, sign up for free, here.
There’s an old Warren Buffett quote that’s become something of a cliché: “You only find out who is swimming naked when the tide goes out.”
But the Oracle of Omaha’s words have become cliché only because of how reliable they are. Markets fall, and suddenly the hucksters and schemers have lost their cover. Look no further than the crypto industry circa 2020-2023.
After a pandemic-driven boom, huge swaths of the digital asset space are going bust. Even the seemingly mainstream, strait-laced players, appear suspect.
See here: In just the past few days, at least four crypto and crypto-adjacent giants have made headlines that have sent a chill through an already anxious community. It’s the kind of negative press that the crypto faithful want to either ignore completely or denounce as a fringe, one-off scandal. But crypto is a tight-knit web, and when one corner collapses it puts the whole lot at risk. (Bloomberg News built a handy chart to illustrate those complex connections.)
First, the elephant in the room: Sam Bankman-Fried, the former crypto golden boy, pleaded not guilty Tuesday to federal fraud and conspiracy charges linked to his failed exchange platform FTX.
In the two months since FTX and dozens of its affiliates collapsed — an implosion sparked by a liquidity crisis that exposed what prosecutors have called one the biggest frauds in American history — dozens of firms have been hit with losses or even gone bankrupt.
On Thursday, Silvergate Capital, a crypto-focused bank, said that total deposits from digital asset customers fell 68% in the last quarter of 2022, to just $3.5 billion from nearly 12 billion. As of December 31, roughly $150 million of Silvergate’s deposits were from customers that have filed for bankruptcy.
Silvergate shares fell more than 40% Thursday after bank said it would lay off 40% its staff, or about 200 people.
And we’re not done yet…
Also this week:
- Coinbase, a publicly traded US crypto platform, agreed to a $100 million settlement after a New York regulator found “significant failures” to comply with the state’s anti-money-laundering laws. Those compliance lapses, the regulator said, could have exposed the platform to criminal activity including suspected child sexual abuse-related activity and potential narcotics trafficking.
- The SEC charged six people in an investment scheme named CoinDeal that raised more than $45 million on false promises of access to blockchain technology. (To be clear, CoinDeal isn’t a crypto firm, just good old fashioned scam, but the tens of thousands of people who invested in it didn’t know that.)
- The former CEO of Celsius Networks was sued by the New York attorney general for allegedly defrauding hundreds of thousands of investors who deposited billions of dollars into the platform before it went bankrupt in July — one of the early implosions in the so-called crypto winter that eventually took down FTX.
- Crypto lender Genesis Global Trading laid off 30% of its staff and is considering filing for bankruptcy, the Wall Street Journal reported Thursday, citing people familiar with the matter. Genesis is dealing with steep losses from loans it made to Bankman-Fried’s now-bankrupt Alameda hedge fund as well as Three Arrows Capital, which — surprise! — is also bankrupt.
- Finally, a little late to the party, US regulators issued their first joint statement warning banks and other market participants about the risks of fraud, volatility, and shoddy risk management in the crypto world. “It is important that risks related to the crypto-asset sector that cannot be mitigated or controlled do not migrate to the banking system,” read the statement, issued jointly by the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency.
Bottom line: I’m not here to write crypto’s obit, and I am well aware that there are plenty of legitimate crypto enterprises out there. Trouble is, it’s difficult, if not impossible, for any of us to know which ones are selling snake oil. And it seems regulators are only just now realizing that crypto isn’t some fad they can just close their eyes to and hope fizzles out. Banks and exchanges need regulation. But no one within crypto agrees on what those regulations should look like, and some dispute the need for regulation in the first place.
So what’s an investor to do? First, do not, under any circumstances, consider anything in this dumb newsletter as investment advice. Find pros. They’ll tell you to diversify. And if you still have crypto FOMO, there are safe-ish ways to get a piece of it without putting your life savings in the hands of someone who, for all you know, is swimming naked, without a life vest, in shark-infested waters.
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