“Hints Of Many Crises – Lehman, Enron, MF Global – But No Lender Of Last Resort… Like Banking In The Late-1800s”

By Eric Peters, CIO of One River Asset Management

“Keep me posted when anything material pops up,” I told our team, scanning Twitter feeds for developments in the unfolding FTX drama, everything moving fast. “This is unlike anything I’ve seen in my 33yrs of doing this,” I said. “It has hints of many crises – Lehman, Enron, Madoff, MF Global – but moving at light speed with no lender of last resort. It’s like banking in the late-1800s.” We had no exposure to FTX or its token FTT, avoiding each for different reasons, intuitive/qualitative/quantitative risk management at work.

“This smells like the kind of thing that happens toward the bottom. Near the end. This is the kind of catalyst that ushers in the capitulation, the flush, that then leads to the next stage we’ve been building for: the first regulated market cycle in digital assets.”

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“There was no way US policymakers were going to relax regulation to accommodate new technology,” said The Chairman, repeating advice he’s shared for a couple years, helping guide me through the innovation maze.

“If you want to introduce new technology into financial markets, you need to start with the premise that it performs the regulatory functions at least as well as the current technology,” he continued. FTX was imploding in the Bahamas, the crypto market’s third largest exchange collapsing in on itself, crypto markets in free fall.

“And only with that condition satisfied will you be able to capture the efficiencies these new technologies represent.” Creative destruction sounds great in a sentence, though less so when you live it, and this makes navigating change so interesting, worthy, profitable.

“With the FTX crisis following the Three Arrows collapse, Celsius, Luna and the others, this perspective will become a regulatory reality,” said The Chairman. “And the question for the industry and the regulators today is how do we transition from where we now are to a place where tokenization is consistent with the fundamental principles of sound financial regulation,” he said. “Those principles are:

1. liquidity transformation needs prudential regulation

2. customer assets need to be segregated and accessible, and

3. leverage of all forms needs to be limited and commensurate with liquidity in times of stress

“And it is fundamental that you can’t sell financial products to retail customers on a caveat emptor basis; transparency and a level informational playing field are necessary,” the Chairman added.

“The US has a choice now, and there is only one to make. Regulators must incrementally accommodate crypto products, making way for the products, actors, and services that comply with these fundamental principles while keeping out the others. Identifying what is in and what is out has been bogged down in semantics and in the search for regulatory gaps,” he said.

“The key financial regulators should collectively move forward with the identification of compliant and non-compliant products as well as paths to compliance for those that can get there. And wherever the US draws the line, people will be disappointed. That’s okay. That’s part of bringing discipline to activities that are out of step. What’s not okay is to do nothing and cede many of the opportunities that crypto represents to our competitors and adversaries, while subjecting our retail investors to the risk.”