Risk Will Always Assert Itself

It has in recent days become apparent—as it has over and over again for centuries—that financial risk can only be managed and mitigated. Despite what breathless investors in the ill-fated FTX exchange may have thought, risk can neither be wished nor washed away.

Ironically, the epic FTX collapse in November was brought about, not so much by the riskiness of this or that cryptocurrency, but by what is perhaps the oldest risk to afflict humanity. Call it hubris, greed, or the ignorance of youth, but what matters is that an exchange that had scaled the commanding heights of crypto trading was suddenly and ignominiously brought low. Only recently, it had boasted a $32-billion valuation after just three years in business and ranked fifth among all crypto exchanges by trading volume.

But it was caught short on cash and filed for bankruptcy. Its founder, 30-year-old Sam Bankman-Fried, was jailed and faces trial for fraud. John J. Ray, a lawyer and veteran manager of distressed companies in bankruptcy, took the reins, telling the U.S. House Financial Services Committee that the total of misused funds at the company was “in excess of $7 billion.” Ray is best known for taking over a distressed Enron and leading once-giant energy company through its bankruptcy in the early 2000s.

Now, the unfortunate lesson some are drawing from all this is that crypto and blockchain are a fool’s errand, a sure way to lose your shirt to greed, incompetence, or wild swings in the daily valuations of digital currencies. Bitcoin and a host of other cryptos saw their values plunge in the wake of the FTX fiasco.

No doubt the industry is guilty of its share of all three of these faults. But set aside emotion for a moment and take another look at crypto—more particularly, at the underlying technology, blockchain. No less a figure than David Solomon, chairman and chief executive of Goldman Sachs, advises it would be a mistake to blacken blockchain. The key, Solomon says, is proper oversight, which should come, he argues, from banks. “Under the guidance of a regulated financial institution like ours, blockchain innovations can flourish,” he wrote in a piece for The Wall Street Journal early last month.

We’re inclined to agree with Goldman Sachs’s boss. As much as banks are blamed for being slow to adopt innovative technology, they are the right institutions to manage the distributed ledgers that now drive leading-edge technologies in payments. Risk will always be with us. It’s time to get past the panic induced by the FTX fiasco, and get on with putting this powerful tech in the right hands.

—John Stewart, Editor john@digitaltransactions.net