FTX Liquidity Crisis Shows Debt Is Toxic to Crypto: Tether Co-Founder

  • FTX’s liquidity crunch shows how toxic debt is for crypto, according to Tether co-founder William Quigley.
  • Quigley pointed out that companies have taken on massive debt in 2021, which has spurred more volatility in the industry.
  • “It just violates a basic principle of finance; you don’t leverage highly volatile assets,” Quigley told CNBC.

The liquidity crunch that toppled FTX shows that debt is toxic to cryptocurrency, and investors shouldn’t pile leverage on highly volatile assets, according to Tether co-founder William Quigley.

“Everyone thought major exchanges weren’t likely to suffer a serious meltdown. And again, we keep coming back to the question of whether it’s 3AC, or Voyager, or Celsius or Luna, and so on. “It’s about debt. Debt is toxic with crypto,” Quigley said in an interview with CNBC on Wednesday, commenting on the recent fall of the Sam Bankman-Fried crypto exchange.

Bankman-Fried, who himself had bailed out other struggling crypto companies this year, sent the markets tumbling after announcing that FTX would be acquired by Binance due to a “significant liquidity crunch.” This sent the price of FTX’s native token down 94% and sparked fears of greater contagion within the industry – similar to earlier this year when stablecoin Terra and the associated token fell. Luna led to a cascade of industry-wide bankruptcies.

Quigley believed that volatility was introduced to the crypto ecosystem in the middle of the 2021 bull run, when companies started taking on massive debt.

“And that just violates a basic principle of finance; you don’t leverage highly volatile assets,” Quigley said. “When Wall Street came into this market last year with great fanfare… I think one of the things they brought with them was their fascination with leverage,” he later added.

Bankman-Fried exposed itself to some of that debt by offering multi-million dollar lines of credit and credit injections to various crypto companies, like the now defunct Voyager. He told Reuters in July that FTX had “a few billion” more to help struggling companies in the industry.

Quigley added that FTX’s liquidity issues could stem from the “serious mistake” of using a self-issued token as collateral, which opens the door for market manipulation.

Questions about the balance sheet of Alameda Research, Bankman-Fried’s crypto trading firm, ultimately sparked the entire debate over FTX’s solvency, as the trading firm’s assets are heavily comprised of FTT tokens. “It was never really clear how the balance sheet worked between the two of them,” Quigley said.

He added that the contagion could spread depending on how much FTX is mined, although some damage has already been inflicted on other industry players. The crypto industry’s global market capitalization fell 12% shortly after the announcement of the acquisition on Tuesday, with Bitcoin slipping as much as 14% and Ether falling 17.5%.