Daniel Kuhn is a features reporter and assistant opinion editor for CoinDesk's Layer 2. He owns BTC and ETH.

Does crypto need a backstop? Wednesday, in what in hindsight should be obvious, Binance pulled out of a tentative deal to buy out rival FTX, the crypto exchange founded by Sam Bankman-Fried that has lost just about everything following a bank run.

Binance CEO Changpeng Zhao said after a preliminary review of FTX’s books that the risks were too big, the holes in the exchange’s balance sheet too large and the loss of investors’ confidence “severe.” That has left Bankman-Fried to search elsewhere for capital – a monumental ask, considering other exchanges have already turned down appeals for investments or mergers.

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On Twitter, Bankman-Fried said he’d do what he can to shore up users’ losses before reimbursing investors, in part by “winding down” his hedge fund Alameda Research. FTX, now worth approximately $1, according to Bloomberg’s billionaire team, had raised $1.8 billion from the likes of BlackRock, SoftBank, Tiger Global and the Ontario (Canada) Teachers' Pension Plan.

The potential contagion here is severe. Firms like Sequoia and Galaxy Digital are writing off millions of dollars, Solana (aka “SamCoin”) is buckling and dozens of projects in which SBF invested, often using the FTT exchange token, could have massive treasury shortfalls.

As crypto learned with the collapse of hedge fund Three Arrows Capital, the industry is remarkably interconnected. In fact, emerging evidence suggests Alameda’s financial troubles began after losing half a billion dollars to Voyager Digital, which SBF later bought out, which had collapsed after Terra imploded.

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Instead of using trustless financial protocols, they put their faith in megalomaniac personalities with Wall Street credentials.
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The whole point of crypto was to enable people to “be their own bank” through self-custody and self-reliance. Instead, the industry has recreated the centralized financial system – “bank runs” and all. Instead of interacting directly with blockchains and peers, people park their funds on centralized exchanges. Instead of using trustless financial protocols, they put their faith in megalomaniac personalities with Wall Street credentials.

In the wake of the most recent crypto crisis, three U.S. regulators – the Commodity Futures Trading Commission (CFTC), Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) – are reportedly deepening investigations into FTX, some of which had begun months ago.

SEC Chairman Gary Gensler used this moment almost to gloat, noting the “toxic combination” at play at FTX, in an interview with CNBC. He reiterated familiar lines that cryptos are securities and should be under his agency’s supervision, that the industry has been “significantly non-compliant” and exchanges should “come in and talk to us.”

To some extent, Gensler is right in saying that rules already exist that would protect crypto investors. It’s notable that FTX.US, the independently operated wing of SBF’s trading empire, seems to be solvent. Of course, it could blow up tomorrow, but something tells me SBF wouldn’t have played the same shenanigans with FTX.US users’ funds as he seems to have done with the parent company – no matter how sleep-deprived he was.

And yet, any account of the situation has to note the role U.S. crypto regulation (or the lack of it) has played in the FTX fiasco. Coinbase CEO Brian Armstrong argued on Twitter that the simultaneously stringent-yet-unclear regulatory landscape pushed people like Terra’s Do Kwon and Bankman-Fried overseas, where oversight is lax and taxes go unpaid. Some 95% of crypto trading occurs outside the U.S., he said.

Armstrong is protecting his own interests here, now that figures like Sen. Elizabeth Warren (D-Mass.) and Gensler are calling for tighter regulation of U.S. exchanges. Clearer rules are clearly needed but have to be done right. Given the inherently borderless nature of crypto, if regulators get overly burdensome, they would only succeed in creating the next Singapore-based Terra or Bahamas-based FTX. “[P]unishing U.S. companies for this makes no sense,” Armstrong added.

What also makes no sense is the SEC’s history of enforcement actions. This year, as the industry burned, the SEC sued Kim Kardashian for promoting Ethereum Max (a coin few will remember) and something called Hydrogen Technology Corp. Given the agency’s notably small budget, even if these lawsuits are successful it still comes across as a waste of resources.

Another “win” for the SEC, this time against blockchain-based streaming service called LBRY, is likely a loss for all other projects looking to use tokens to reward users and fund development. According to legal experts, the judge overseeing the case may have set a precedent to punish any project that has a stock of its own assets – including Beanie Baby maker TY. LBRY CEO Jeremy Kauffman is a New Hampshire homesteader who intends to fight the decision, but how many other projects will just move elsewhere?

And so, if regulation is an insufficient backstop, and if the intermingling and increasing connections between crypto firms only serves to create contagion risks rather than fail-safes, where does that leave the industry? Could crypto benefit from a central bank, a buyer of last resort? Something tells me the answer is in returning to Satoshi’s original proposition.


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Daniel Kuhn is a features reporter and assistant opinion editor for CoinDesk's Layer 2. He owns BTC and ETH.

Daniel Kuhn is a features reporter and assistant opinion editor for CoinDesk's Layer 2. He owns BTC and ETH.