TheCorporateCounsel.net

It has been a rough year for digital assets, and the last thing that the crypto market needed was a spectacular scandal of massive proportions. Well, perhaps not surprisingly, we just got one of those in the FTX debacle, which continues to unfold.

One of the more disturbing things I read about the situation over the weekend was this WSJ article, which raised the parallels of the failure of Long Term Capital Management in 1998 and the collapse of Lehman Brothers in 2008. In both of those situations, government intervention was necessary to try to mitigate broader financial and economic impacts. In the case of Lehman Brothers, I still do not think people generally understand how close we came to a “nuclear winter” economic scenario worse than the Great Depression.

While there is nothing to indicate so far that the FTX situation will be on par with those other major failures, it does not give one much comfort to realize that both LTCM and Lehman Brothers were operating within the regulated financial system (although LTCM was certainly on the fringes of that system at the time of its collapse as a hedge fund trading in derivatives), while crypto firms continue to operate in the still largely unregulated Wild West of the digital asset world. As a result, all of those post-Dodd Frank efforts to improve oversight, coordination and transparency in the financial markets for the purpose of preventing another Lehman Brothers collapse are completely ineffective in helping us avoid a more cataclysmic crypto failure that could impact the broader financial markets and the economy.

Be careful out there – winter is coming.

– Dave Lynn