Source Alert: FTX, BlockFi crash sends shockwaves through crypto-verse, raising questions for regulators and consumers alike

November 30, 2022

 

Members of Congress will convene on Dec. 1 in what will be the first of several probes into the recent implosion of crypto giant FTX and the regulatory gaps exposed by its collapse. USC experts are available to discuss what the downfall of virtual currencies like FTX and BlockFi mean for the fate of digital assets in an already precarious exonomy, and what we can expect from the upcoming congressional hearings.

Contact: Nina Raffio at raffio@usc.edu or (213) 442-8464

Volatility threatens bankruptcies for companies linked to cryptocurrency

Michael Simkovic

“Cryptocurrencies are illiquid, volatile assets with high transactions costs and a lack of truly transparent pricing. Their valuations are speculative, and due to under-regulation, susceptible to manipulation and deception.

“Bankruptcies could entail the auctioning off of large volumes of cryptocurrency, as well as lines of business that revolve around the use of blockchain technologies. These auctions could reveal valuable information about the true value of cryptocurrencies and block-chain-based businesses. We may soon discover that many cryptocurrencies have little if any value, and many businesses funded through the issuing of tokens cannot generate sufficient profit and cash flows to justify their pre-bankruptcy speculative valuations.

“Cryptocurrency arguably resembles a commodity. But unlike gold or wheat or oil, crypto does not have any obvious use to businesses or consumers. It may be useful for tax or regulatory avoidance, but that value is likely to decline rapidly as tax and regulatory authorities clamp down on abuses. This is particularly likely given Russia’s current international isolation and ties between many cryptocurrencies and Russian businesses.”

Michael Simkovic is a professor of law and accounting at USC Gould School of Law. His research focuses on the intersection between law and finance, with a particular emphasis on credit markets, financial regulation, and taxation. His work has been published in leading journals including The University of Chicago Law Review, The Journal of Corporate Finance and the Journal of Legal Studies.

Contact: msimkovic@law.usc.edu

Is crypto here to stay?

Digital assets expert James Healy thinks so. Outside of his role as an adjunct professor of finance and business economics at USC Marshall, Healy also serves as president of Digital Disbursements, a digital payments provider, and founder of JFH Capital, an investment firm.

“From crypto specific news (e.g., FTX) to macro-economic considerations such as the potential of a looming recession and a rising interest rate environment, there are many factors impacting the digital assets market today. In the long-term, the digital assets market will reflect the value that the technology and people in the industry contribute to the economy and society. My underlying belief in the power of blockchain primitives like smart contracts, digital ownership, distributed consensus, and more remains as strong as ever.

“My hope is that thoughtful regulation will come to the blockchain industry to enhance stability and transparency. In the short-term, comprehensive regulation seems unlikely, but regardless of regulation, individuals can choose to conduct business with more transparency partners. For example: a publicly traded exchange with published audited financials (e.g., Coinbase) or a stablecoin with monthly attestation reports from a reputable independent auditor (e.g., USDC).”

Contact: jameshea@marshall.usc.edu

Aftermath of FTX demise results in uncertainty

Picking through the wreckage of FTX is going to be a Herculean task. Just sorting out what assets are actually available to customers is no easy matter for a company that did not keep detailed records of customers’ accounts. Moreover, it seems as if a substantial amount of assets left FTX over the years. Some of these assets went to customers; others went to politicians, and still others went to charitable organizations. All of those who received these assets should expect that the new management of FTX will attempt to claw back these assets. It will likely be years before all of this is straightened out.

Robert K. Rasmussen joined USC Gould School of Law in August 2007.  Rasmussen’s scholarly expertise is focused on the interaction of market forces and corporate reorganization law, and his most recent work addresses fundamental changes in corporate reorganization practice. He teaches Contracts and Realities of Commercial Lending. Rasmussen was named the J. Thomas McCarthy Trustee Chair in Law and Political Science in 2015.

Contact: rrasmussen@law.usc.edu

(Photo/AdobeStock)

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