The cryptocurrency industry in recent months has been hit by numerous scandals, which have sharply raised skepticism and mistrust among the general public and encouraged more calls for regulators to step in.
One aspect common to all these crypto scandals is that the big names and players in the sector get spattered by the mess. No one is immune.
It all started last May when sister cryptocurrencies Luna and UST, or TerraUSD, collapsed.
The two tokens crashed after UST lost its peg to the dollar, the foundation qualifying it as a stablecoin. Such cryptocurrencies are tied to more stable assets, like the U.S. dollar or gold. But UST was an algorithmic stablecoin, which was backed not by dollar reserves but rather by its sister asset, Luna.
This disaster caused a credit crunch that proved catastrophic for many firms, including hedge fund Three Arrows Capital, or 3AC, which found itself unable to honor its payments to crypto lenders Celsius Network and Voyager Digital.
3AC was forced into liquidation. Celsius and Voyager filed for Chapter 11 bankruptcy.
The depegging of Terra’s UST coin and the collapse of Celsius and 3AC drove massive losses for investors: $20.5 billion in the case of UST and $33 billion in the case of Celsius and 3AC, according to blockchain security firm Chainalysis.
Factors: Cross-Exposure and Lack of Transparency
This crisis mainly revealed the links and exposure of crypto firms to each other, like the banks during the financial crisis of 2008. The other lesson was the lack of transparency of centralized crypto companies, which are mostly unregulated.
This opacity created another situation that would cause the overnight implosion of FTX a few months later.
The cryptocurrency exchange and its sister company, Alameda Research, a hedge fund that also serves as a trading platform, became the companies through which their founder, Sam Bankman-Fried, took advantage of the crisis of confidence in the crypto industry. He consolidated power and became the new strongman of the crypto space.
Bankman-Fried used the two companies to save other…