💱 BlockFi Becomes Just Another Domino
It seems FTX has gone viral—or, at least, has become a contagion. Just two weeks after the crypto titan imploded, BlockFi, the crypto lender once valued at $3 billion, has filed for Chapter 11 bankruptcy, reports NPR. And just like FTX's collapse revealed almost unfathomable incompetence and mismanagement, BlockFi's filing has raised alarm bells too.
"BlockFi's restructuring underscores 'significant' risks of contagion within the 'crypto ecosystem,' as well as potential deficiencies in how the companies manage risks," noted Monsur Husain, a senior director at Fitch Ratings, according to NPR.
BlockFi was also one of the companies FTX had bailed out earlier this year. Now, in a strange turn of events, BlockFi is suing its former savior for a $575 billion stake in the mobile trading app Robinhood, says the FT.
And more crypto firms are closing or at risk. BitFront, a crypto exchange, filed for bankruptcy on Monday, and Wired reports that Genesis Trading (one of the original crypto platforms) is on the verge of collapse. In fact, Genesis Trading has already brought on powerhouse law firms, Proskauer Rose and Kirkland Ellis to bankruptcy and to assist with restructuring , reports Reuters.
The Wider System
So far, despite investments by hedge funds and other large funds, the crisis in crypto has not spread to the economy at large. It appears that the crypto culture's us-against-the-establishment along with no real regulations has been both a blessing and a curse. A curse in that so many regular people are losing large sums of money as exchanges go belly-up overnight. A blessing in that Wall Street and the traditional banking system has, for the most part, kept itself out of crypto specifically for its lack of regulations and oversight. “Regulation can confer legitimacy,” Lee Reiners, policy director of the Financial Economics Center at Duke University law school, told Marketplace. “And not only that, but regulation then can make it possible for new connections to form between the crypto economy and the traditional financial system.”
We will keep repeating this for as long as we have to: regulate the crypto market. That being said, the paradox here is that wider economic contagion seems to be at bay (for now) because of the industry’s lack of regulations. Unfortunately, that won’t help the thousands/millions of people who lost precious savings.