DAVOS, Switzerland — The crypto community at Davos sought to distance themselves from the dramatic collapse of FTX and its co-founder Sam Bankman-Fried who is now facing federal criminal charges in the U.S.
Bankman-Fried, FTX’s former CEO, was charged by U.S. federal prosecutors on eight criminal counts, including securities and wire fraud. He was extradited from the Bahamas to the U.S., and has so far pled not guilty. Two of his former business associates, FTX co-founder Gary Wang and ex-Alameda Research CEO Caroline Ellison, pled guilty to federal fraud charges and agreed to cooperate with U.S. prosecutors.
“FTX in my view now gets painted as a crypto problem. I think if you really peel enough onion layers, it’s not really a crypto … problem to happen here, it’s fraud. And I think we should not pretend it’s something else,” Brad Garlinghouse, CEO, Ripple, told CNBC.
Garlinghouse also spelled out Ripple’s own exposure to the collapsed crypto exchange. In an interview Wednesday, he said that Ripple had leased some $10 million of XRP to FTX, which “they used on various things related to FTX.” XRP is the native cryptocurrency of Ripple.
NEW YORK, US – JANUARY 03: Sam Bankman-Fried leaves the court in New York, on January 03, 2023.
Fatih Aktas | Anadolu Agency | Getty Images
The company hopes to recoup those funds from bankruptcy proceedings in the U.S., Garlinghouse said. However, he added the firm’s FTX exposure wasn’t “too consequential” to its business, representing only 1% of “liquid assets.”
Other crypto executives also had a similar view to Garlinghouse.
“It’s important to distinguish this [FTX collapse], it’s a failure of institutions, it’s a failure of individuals … this is very different from the technology,” Rene Reinsberg, co-founder of Celo, said during a CNBC-hosted panel on Thursday.
Crypto executives acknowledged the reputational impact on the industry from the FTX fallout but said it will focus more attention on the well-run businesses.
“I think, especially when you had … so many significant people backing … FTX, and there’s a lot of egg on people’s face,” Jeremy Allaire, CEO of Circle, told CNBC in an interview Tuesday.
“I do think at the same time, right, that’s going to put a lot more scrutiny on … who are the companies that are well run, well capitalized … well regulated, have strong auditing, have strong controls, all the things that matter if you’re running a global financial institution. People are going to really start to pay attention to that versus just kind of believing, you know, kind of fairy tales,” Allaire said.
Ripple’s Garlinghouse compared Bankman-Fried’s action to Bernie Madoff who ran the biggest Ponzi scheme in history and defrauded thousands of investors.
“We talk about this as a crypto problem. But really, this is just fraud, and I think in some ways, not that dissimilar than Bernie Madoff,” said Garlinghouse. “When Bernie Madoff occurred, we didn’t totally restructure how we thought about oversight and regulation of hedge funds.”
“We realized that, clearly in that case also, the SEC had overlooked [Madoff], and that if people had reported to the SEC, they should be looking into Bernie Madoff,” he said.
Not just crypto that took a hit
The crypto industry has seen roughly $2 billion erased from its overall market capitalization since the market peaked at a combined value of $3 billion in November 2021.
Garlinghouse said Wednesday that it was unfair to single out crypto in assessments of investor losses to risky assets in 2022, as other asset classes have seen considerable losses too. Top U.S. technology stocks also got clobbered, for example.
“Between Facebook, [Amazon] and Tesla, $2 trillion evaporated last year … add Tesla, Facebook and Amazon, you for sure get $2 trillion. No one’s claiming we shouldn’t continue to invest in those companies,” he said.
“I think it’s clear that low interest rates had driven a lot of froth in macro markets, and as … the direction of travel on interest rates changed in the spring of 2022, lots of asset classes hit reset, we obviously saw some bad actors in crypto, and that added to the contagion.