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The collapse of the once popular hedge fund Three Arrows Capital and the collapse of the algorithmic stablecoin TerraUSD have led many to assess systemic risks in the crypto ecosystem.
Investors, both major LPs and retail, were misled in some way during both of the worst implosions.
Prior to reports of the risky trade, Three Arrows founders Kyle Davis and Su Zhu were hailed as high-profile investors with impressive track records. Although some see the writing on TerraUSD’s walls, this hasn’t stopped retail participants from parking their savings in the token, hoping for an annual percentage yield of around 20%. Meanwhile, Sam Bankman-Fried, CEO of crypto derivatives platform FTX, is working to prevent further contagion in the industry. In recent months, lender BlockFi and now-troubled brokerage Voyager Digital have received loans from mega-billionaire LLCs. (Bankman-Fried, however, now predicts a $70 million loss on Voyager’s digital bailout.)
In an interview on the Decrypt gm podcast, Bankman-Fried outlines how participants identify red flags in product launches and what the industry has learned this year to determine which projects are sustainable.
“I think people lost some confidence. It was mostly a bubble that went away. I think it was always overconfidence that got us there in the first place.” Failure of major companies. “Next time there will be more investigation. There will be more attempts to learn about the platforms and understand, if something looks like free money, where it really came from.”
SBF on production products, a 10-year vision of new technologies
Investors can spot bad actors by looking at project marketing. When a platform offers eye-popping rates with low risk, Bankman-Fried warns that they may have the same fate as the latest big names in the crypto borrowing and lending space.
Centralized lender Celsius, for example, has offered to deposit up to t0 17% of customers’ products through its platform. In July, the company filed for bankruptcy on bankruptcy concerns. Consumers flocked to these offerings in the first place because, unlike traditional savings accounts, the promised products have average interest rates of 0.04%, according to data from the FDIC.
“If you’re going to run this type of product responsibly, you have to know that if it’s made properly and safely, it’s probably going to have a low yield in a lot of environments, and your marketing has to be consistent with that,” he said. You don’t have to market it. It’s never a case of all these words coming together.”
FTX International has a book of peer-to-peer margin loans and borrowings at Bankman-Fried. The difference with this offer is that the loans are “Uber-linked”, the interest rates are very low and there is a 24/7 loan engine.
In general, “most of these methods work well in areas that are less volatile and bullish,” Vijay Ayyar, global vice president of corporate development at the crypto investment company Luno, previously told Centralized Credit Insider. “But when things get ugly and people want to get their money out, that basically becomes a banking job.”
During the interview, outside of crypto, Banman-Fried touched on his views on technology and regulation. In the next 10 to 20 years, the executive predicts that artificial intelligence, or AI, will be the “showcase” area of ​​growth.
At the moment, the most powerful AI seems to be “basically like polite chatbots”, but this will change and educated policy around it will be critical.
“You can start to get closer to situations where AI can reshape the world,” he said. “The policy on advanced computer systems is going to be very important, so that’s one area where I expect it to be important.”
Banman-Fried was the second-largest donor to Joe Biden’s presidential campaign, giving the current POTUS $5.2 million, according to a Wall Street Journal report. He’s also a member of Future Forward, an ultra-rich Democratic super PAC, with members like former Google CEO Eric Schmidt and Facebook founder Dustin Moskovitz.
“I think it’s really important to just develop a bipartisan, constructive and cooperative attitude in DC to get things done,” he added. “And to be able to reduce the high level of partisanship, the bigotry, and get back to working collaboratively.”
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