Crypto billionaire says Fed is driving current downturn

Cryptocurrencies are going through a spectacular crash and the head of one of the largest crypto exchanges says the Federal Reserve is responsible for this downturn.

"The core driver of this has been the Fed," said Sam Bankman-Fried, the CEO of FTX, whose app and sites are used by investors to buy and sell digital currencies.

The Fed is raising interest rates aggressively to fight high inflation, and that has led to a "recalibration" of expectations of risk, Bankman-Fried told NPR.

The billionaire said he appreciates the difficulty of what the central bank is trying to do, noting it is "caught between a rock and a hard place." But Bankman-Fried said a lot of his own outlook for his business is now dependent on decisions the Fed will make in the months ahead.

This week, the Fed announced the largest interest rate increase since 1994. With the era of cheap money fast becoming history, financial markets have already been extremely jittery and cryptocurrencies have been in meltdown mode.

"Literally, markets are scared," Bankman-Fried said. "People with money are scared."

The best known cryptocurrency, Bitcoin, sank about 20% last week and continued to sell off during the weekend. It is now worth less than half of what it was at the beginning of the year. Other digital currencies have had even more dramatic tumbles — Ether is down by more than 70% in the same period.

The biggest worry is what effect this will have on the large universe of amateur investors who have loaded up on cryptocurrencies just in the past couple of years. In 2021, the total value of cryptocurrency swelled to $3 trillion, as the crypto industry made an all-out push to attract amateur investors and increase brand recognition.

FTX bought naming rights to an arena in Miami, and made a Super Bowl ad with comedian Larry David.

All this attention brought in a lot of newbies. One survey from December found that a quarter of investors own Bitcoin and more than half, or 55%, of them began investing over the last 12 months.

Some even parked their money in crypto lenders. In just the past week, a couple of lenders stopped their customers from getting their money back and the ensuing chaos is fueling fears of contagion to the broader financial system.

On Friday, crypto lender Babel Finance temporarily suspended redemptions and withdrawals of cryptocurrency because it "is facing unusual liquidity pressures."

It was following another lender, Celsius Network, which had already frozen withdrawals and transfers. Its CEO called this "a difficult moment." Celsius said it made the decision "in order to stabilize liquidity and operations while we take steps to preserve and protect assets." Now, a handful of state regulators are investigating the company's practices.

A crypto-focused hedge fund called Three Arrows Capital is at the center of another unfolding crisis. It invested heavily in two digital currencies, TerraUSD and Luna, both of which collapsed recently. And this week, the fund reportedly missed lender margin calls, meaning it couldn't come up with what it owed to its lenders.

Bankman-Fried suggested the fallout could shape crypto regulation, which is being hotly debated in Washington. He said it is likely there will be increased scrutiny of how leverage is used in the crypto industry, and how transparent companies are about potential dangers.

In the meantime, crypto companies are looking for cover.

When there have been crises of confidence in the past, investors like Bankman-Fried, and larger companies like FTX, which was recently valued at $32 billion, have helped contain losses.

"I do feel like we have a responsibility to seriously consider stepping in, even if it is at a loss to ourselves, to stem contagion," he said. "Even if we weren't the ones who caused it, or weren't involved in it. I think that's what's healthy for the ecosystem, and I want to do what can help it grow and thrive."

Bankman-Fried noted this has happened "a number of times in the past," and he brought up one incident in particular. Last year, hackers attacked Japanese crypto exchange Liquid and stole nearly $100 million worth of cryptocurrency.

FTX provided Liquid with $120 million in financing. Shortly thereafter, FTX announced plans to acquire Liquid for an undisclosed sum.

"We, I think about 24 hours later, stepped in and gave them a pretty broad line of credit to be able to cover all of their demands, to make sure customers were made whole, while thinking about the longer-term solution."

In recent days, some of the biggest players in the crypto industry BlockFi, Crypto.com, and Gemini have announced layoffs, and in a memo to staff, the CEO of Coinbase, one of FTX's biggest rivals, said the company is reducing its headcount by almost a fifth.

"We grew too quickly," Brian Armstrong wrote. "Down markets are challenging to navigate and require a different mindset."

Bankman-Fried's company has not announced job cuts, but in a Twitter thread, he said the company has slowed down its hiring.

These days, Bankman-Fried is based in the Bahamas, where FTX recently broke ground on a global headquarters.

Bit this past week, Bankman-Fried was in Washington meeting with lawmakers and regulators, many of whom are watching the unfolding crypto crash, and are worried about risks to investors, the crypto industry, and the broader financial system.

But he said he sees signs of progress, especially on Capitol Hill, where Senators Cynthia Lummis (R-WY) and Kirsten Gillibrand (D-NY) just debuted the broadest legislation on crypto legislation yet, which, among other things, defines cryptocurrencies as commodities, not securities. That means regulation would fall under the purview of the Commodity Futures Trading Commission, not the Securities and Exchange Commission. [Copyright 2022 NPR]