22 Jun 2022 · 4 min read

SEC’s Peirce Says Crypto’s Lack of ‘Bailout Mechanism’ Is a Strength; FTX CEO as a 'White Knight'

Source: a screenshot, CNBC Television / YouTube

 

One of the most crypto-friendly members of the American regulatory Securities and Exchange Commission (SEC) has claimed that the bear market could boost sustainability in the industry – stating that she wouldn’t bail out ailing crypto companies even if she could.

During an interview with Forbes, the SEC Commissioner Hester Peirce, stated that crypto “does not have a bailout mechanism” – and that this “has been perceived as one of the strengths of that marketplace.” 

She added:

“I don’t want to come in and say that we’re going to try to figure out a way to bail you out if we don’t have the authority to do it. But even if we did, I would, I would not want to use that authority. We really need to let these things play out.”

Peirce, who is affectionately known in the space as “Crypto Mom” for her relatively pro-industry stance on regulation, claimed that “when things are a bit harder in the market,” it would be easier to “discover who is actually building something that might last for the long longer term and what is going to pass away.”

Peirce added that both industry players and the SEC could learn a lot from the recent crash. She claimed that the downturn would be “helpful” to let observers “see the points of connection.” The Commissioner called the slump a moment to learn “not only for market participants” but also for regulators, “so that we can have a better sense of how the market operates.”

Meanwhile, Peirce also had some words of warning for those trying to navigate the bear market. She stated that some opportunist criminals would seek to target vulnerable investors, explaining:

“Scammers and fraudsters will figure out ways to take advantage of any set of market conditions to try to take advantage of other people. So I’m sure their tactics are changing and they sometimes prey on people at their lowest points…we’re maybe more likely to get tips from times like this.”

FTX to the rescue

While Peirce appears keen to let flagging projects fail if they cannot take the pressure of a market crunch, not everyone appears to think that a “sink or swim” policy is beneficial in all cases.

Following news that the crypto lender BlockFi could be suffering from issues surrounding the hedge fund Three Arrows Capital (3AC), the crypto exchange FTX has stepped in with a “USD 250 million revolving credit facility” package.

Typically, revolving credit facility arrangements involve an investor providing funds that can be drawn upon if and when they are needed.

On Twitter, FTX’s CEO Sam Bankman-Fried explained that the exchange had backed BlockFi so that the latter could “navigate the market from a position of strength.”

He also stated that BlockFi is “financially strong.” Bankman-Fried wrote that “all” of its “operations are normal, as they always have been, and assets are safe.”

He wrote that BlockFi had removed “troublesome counterparties” before “they become a problem” and had correctly “added cash” to its operations “before it was necessary.”

And, the FTX chief suggested, bigger fish should understand the risk of allowing strong players to go under. He wrote:

“We take our duty seriously to protect the digital asset ecosystem and its customers.”

And it's not just BlockFi: Alameda Research, FTX's parent company, gave USD 200m credit line (in cash and USDC coin (USDC)) and BTC 15,000 revolving facility to crypto exchange Voyager Digital, Bloomberg reported.

Anthony Scaramucci, the founder of SkyBridge Capital, is quoted as stating that,

"Sam Bankman-Fried is the new John Pierpont Morgan -- he is bailing out cryptocurrency markets the way the original JPMorgan did after the crisis of 1907."

Scaramucci is referring to the 1907 Bankers' Panic that led to the creation of the Federal Reserve System

Bankman-Fried providing financing for these companies is  “a respected industry player supporting a systemically important firm with capital at a time where they think the bottom could be in, or close,” according to Tom Dunleavy, senior research analyst at crypto-data firm Messari, noting that the move could also be compared to Warren Buffett providing support to Goldman Sachs in 2008. 

Similarly, Noel Hebert, director of credit research at Bloomberg Intelligence, argued that the situation is "not unlike private equity shops that will invest more capital into portfolio companies amid distress" -- and it may or may not be enough. 

Jeff Dorman, chief investment officer at asset-management firm Arca, was quoted as saying that the weekend behind us was "critical" for finding "white knights who could help develop a bid to stabilize this market," arguing that it "doesn’t take a lot of capital right now to support prices and failing lenders." That said, many players are incentivized to ensure that the industry does not fail, he added.

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Learn more: 
- ‘Well-Informed’ Commissioners Disagree on Crypto, But SEC’s Approach ‘Harmful’
- SEC’s Pierce Returns to the Warpath to Criticize Poloniex Settlement

- BlockFi Secures USD 250M Credit Line from Bankman-Fried's FTX
- US Fed to Blame for Downturn, Large Crypto Players Have Responsibility Toward Ecosystem - FTX CEO

- Crypto Exchanges Backing Away from Sports Spending as Crunch Continues
- BlockFi, Crypto.com, and Others Come Forward as Three Arrows Hires Advisers, Babel Finance Pauses Withdrawals

- Babel Finance to Repay ‘Some Debts’ and ‘Ease Its Short-term Liquidity Pressure’
- Bancor Pauses Protection Mechanism Due to ‘Hostile Market Conditions’