FTX CEO: We are considering intervening to prevent the crisis from spreading

Cryptocurrencies are experiencing a spectacular crash, and FTX CEO Sam Bankman-Fried said in an interview with NPR yesterday that "the core driver of this trend is the Federal Reserve." The Fed is actively raising interest rates to fight high inflation, which has led to a recalibration of risk expectations.

Sam Bankman-Fried said he understands what the Fed is trying to do is difficult, noting it's "caught between a rock and a hard place," but his outlook for his business now depends largely on what the Fed will decide in the coming months.

Last week, the Federal Reserve announced its largest rate hike since 1994. Cryptocurrencies have been on the rout as financial markets get extremely nervous. “The market is scared, and the rich are scared,” Bankman-Fried said.

Bitcoin fell about 20% last week and continued to sell off over the weekend, and is now worth less than half of what it was at the beginning of the year. Other digital currencies have fallen even more - Ethereum is down more than 70% over the same period.

The biggest concern is what effect this will have on amateur investors who have invested heavily in cryptocurrencies over the past few years. In 2021, the total value of cryptocurrencies soared to $3 trillion as the industry attracted a large number of amateur investors and increased its visibility.

FTX bought the naming rights to a Miami arena and created a Super Bowl commercial with comedian Larry David.

All this attention has attracted a lot of newcomers: A survey in December found that a quarter of investors own Bitcoin, and more than half of them (55%) started investing in the past 12 months.

Some even parked their money with cryptocurrency lenders. Just this past week, several lenders blocked their customers from withdrawing funds, and the ensuing chaos heightened concerns about the crisis spreading to the broader financial system.

Crypto crisis spreads

On Friday, crypto lender Babel Finance suspended cryptocurrency redemptions and withdrawals as it was “facing unusual liquidity pressures.”

Previously, another lender, Celsius Network, had frozen withdrawals and transfers. Its CEO called it "a difficult time." Celsius said it made the decision "to stabilize liquidity and operations while we take steps to preserve and protect assets." Now, some state regulators are investigating the company's practices.

A crypto-focused hedge fund called Three Arrow Capital is at the center of another unfolding crisis. It invested heavily in two digital currencies, TerraUSD and Luna, both of which have recently collapsed. The fund reportedly missed margin calls from lenders, meaning it could not repay debts owed to them.

Bankman-Fried said the fallout could affect cryptocurrency regulation, an issue being hotly debated in Washington. He said there could be increased scrutiny of how the industry uses leverage and how transparent companies are about potential dangers.

When there have been crises of confidence in the past, investors like Bankman-Fried, and big firms like FTX, which was recently valued at $32 billion, have helped limit the damage.

“I do feel that we have a responsibility to seriously consider stepping in, even if it means incurring losses ourselves, to stop the spread of this crisis,” he said.

Bankman-Fried noted that this has happened “many times in the past,” citing one incident in particular in which hackers attacked Japanese cryptocurrency exchange Liquid last year and stole nearly $100 million worth of cryptocurrency.

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

In recent days, some of the crypto industry’s largest companies — BlockFi , Crypto.com , and Gemini — have announced layoffs, and the CEO of Coinbase , one of FTX’s biggest competitors, said in a memo to employees that the company would cut nearly a fifth of its staff.

Brian Armstrong wrote, “We were moving too fast and a down market was difficult to navigate.”

Bankman-Fried hasn’t announced layoffs, but he said on Twitter that the company has slowed hiring.

Last week, Bankman-Fried met in Washington with lawmakers and regulators, many of whom are watching the ongoing cryptocurrency crash and are concerned about the risks to investors, the cryptocurrency industry and the broader financial system.

But he said he sees signs of progress, particularly on Capitol Hill, where Senators Cynthia Lummis (R-WY) and Kirsten Gillibrand (D-NY) just introduced the most sweeping crypto legislation to date, defining cryptocurrencies as commodities rather than securities. That means regulation would fall under the purview of the Commodity Futures Trading Commission rather than the Securities and Exchange Commission.