[Discussion] Cryptocurrency

To hear Sam Bankman-Fried tell it, he didn't have much of an idea of how his now-bankrupt companies—exchange FTX and trading firm Alameda Research—were being run. The internal dashboards displayed wrong information. He wasn't consulted on trading decisions. He didn't, and doesn't, have the details, though he also believes that he didn’t do anything criminal. “I didn’t ever try to commit fraud on anyone,” he said Wednesday.

On a humid December evening in Puerto Rico, more than 100 cryptocurrency and blockchain aficionados gathered at a mansion within a gated, jungle-like enclave of San Juan. A local band played softly while waiters served hors d’oeuvres to attendees who paid as much as $3,000 to attend CoinAgenda Caribbean, a three-day conference promising a VIP experience of networking opportunities and fireside chats about the future of the industry.

The crypto crowd arrived in chartered buses to the party, where they sipped on cocktails from an open bar around a pristine white pool, frogs singing in the trees surrounding the property owned by Michael Terpin, founder of CoinAgenda. A private chef from Lyon, France, provided a five-course meal – a fusion of French dishes and Puerto Rican staples like a pig roast and rice and beans.

Conversation meandered through typical talking points – new token launches, an app for ordering private jets, and musings on what it’s like to relocate to Puerto Rico, home to one of the world’s most active crypto communities thanks to tax-friendly incentives. But one topic seemed far from everyone’s mind: FTX, the crypto exchange that spectacularly collapsed in November, and its now jailed founder Sam Bankman-Fried, who in the last few weeks alone lost his company, was arrested in the Bahamas on charges of fraud and money laundering, and sparked perhaps the greatest reckoning yet over the industry’s survival.

From the beaches of Puerto Rico, the “crypto winter” is looking balmy. While lawmakers and industry analysts say the FTX debacle has exposed serious flaws at the heart of crypto’s promise, many here aren’t giving up.

In fact, they’re doubling down.

“People who have been around awhile realize that there are cycles,” said Terpin. “We have more volatility than the stock market because we are a younger space – but if you’re an experienced investor, you’re not worried.”

The CoinAgenda Caribbean conference took place as part of the second annual Puerto Rico Blockchain Week, a five-day series of events exploring blockchain technology, crypto, and its impact on the island. Throughout the week, FTX seemed to be an afterthought – mentioned only sparingly in the hours of panels and discussions.

One crypto entrepreneur sheepishly admitted he had lost $70,000 in the FTX collapse, but said he planned to continue with business as usual. Another said she worked in real estate on the island and had several clients seeking to sell their homes to finance more crypto purchases while prices are low. Others argued that the FTX scandal would ultimately be positive for the industry, weeding out fraud and creating more legitimacy.

Terpin acknowledged that attendance at CoinAgenda was slightly down this year, as is common when bitcoin’s price falls – but said that at times like these, there was “higher quality attendance”. Terpin says he came to the island in 2016 on the precipice of a continuing influx of crypto entrepreneurs fueled by generous tax breaks on capital gains. In the years since, the community has grown exponentially, with hundreds of newcomers taking advantage of the laws.

As the dinner party drew to a close, he raised a toast to the growing blockchain community, citing the success of Pantera, a crypto firm founded by the former Goldman Sachs bond trader Dan Morehead that has operations on the island and raised $1.6bn this year.

“They say we aren’t bringing money to Puerto Rico – how about $1.6bn?” Terpin said, alluding to a longstanding criticism: that wealthy outsiders are having a negative effect on Puerto Ricans by driving up living costs, and that local entrepreneurs have not benefited equally from the crypto boom.

“The best thing that could happen is that the crash makes them leave,” said Marina Reyes Franco, an art curator whose recent projects center on the cultural impact of the “visitor economy” on the island. She said that, although she had grown up in San Juan, she had struggled to find affordable housing in recent years. “At the end of the day, this is about a new era of colonialism and laws that only benefit the elite.”

Just a year ago, Washington DC’s Hirshhorn art museum – the capital’s preeminent contemporary art museum – was asking whether non-fungible tokens (NFTs) were “fad or the future of art”. Twelve months on, it looks like “tax write-off” might have been the right answer.

This year was not just the year that cryptocurrency values were burned by investor fears, rising interest rates, inflation and scandals, it was the year that crypto’s cartoonish art cousin the NFT – an electronic identifier confirming a digital collectible is real – collided with reality.

In March 2021, Christie’s sold a digital collage NFT by the artist Beeple for nearly $70m (£58m). In January pop star Justin Bieber paid $1.29m (£1m) for a “Bored Ape” NFT, a graphic of a, well, bored ape. Everyone from Michael Jordan to former first lady Melania Trump was in on the game.

Now – alongside the broader crypto market – the appetite for NFTs is so diminished that a specialized market has sprung up for collectors looking to sell off their once-valuable “digital collectibles” as tax losses to offset their income tax bills.

A recently launched service, Unsellable, aims to help collectors do exactly that. Think of it as a distressed asset fire sale.

“While every investment class has its losers, many of the NFTs we invested in were not only down big; they were now totally worthless … illiquid … unsellable,” the service says on its website.

Unsellable – which says it is “building the world’s largest collection of worthless NFTs” – buys the underlying tokens for a fraction of their original price and provides an official receipt for tax purposes.

Launched a month ago, Unsellable now has 5,000 NFTs, and founder Skyler Hallgren expects that to grow to 15,000 by the end of the month. “They are an interesting artefact of a period of time in the market,” he said. But he expects the NFTs are “likely to continue to be worthless”.

“We realized there was a practical problem that was locking up a lot of resources and we could create a lot of value for people by offering to buy up their worthless NFTs and allow them to harvest the losses,” said Hallgren.

The cryptocurrency exchange platform Coinbase is laying off 950 employees — around 20% of its workforce — due to the continued downturn in the crypto market and the broader economy, the company announced. This latest round of job cuts comes after the company laid off about 1,100 people back in June.

Coinbase said it had around 4,700 employees in September following the cuts made earlier last year. But the first round of layoffs wasn't enough to keep the company in a good financial position during an ongoing crypto winter, Brian Armstrong, the CEO and co-founder of Coinbase, said in a blog post.

Last year was an extremely volatile one for the crypto space. Bitcoin is currently down more than 70% from its all-time high reached in November 2021. And several crypto companies, including BlockFi, Celsius and the scandal-ridden cryptocurrency exchange FTX, collapsed in 2022. Its founder Sam Bankman-Fried is now facing several criminal charges.

"As we examined our 2023 scenarios, it became clear that we would need to reduce expenses to increase our chances of doing well in every scenario. While it is always painful to part ways with our fellow colleagues, there was no way to reduce our expenses significantly enough, without considering changes to headcount," Armstrong wrote.

As part of the reduction in force, Coinbase is also "shutting down several projects where we have a lower probability of success," Armstrong added.

Armstrong also blamed " unscrupulous actors in the industry" for the volatility and "contagion" in the market— a veiled swipe at FTX, formerly one of the biggest players in the crypto space.