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Cryptocurrency trading platform FTX's collapse spotlights doubt about the industry

LEILA FADEL, HOST:

There was a spectacular meltdown in the world of cryptocurrencies last week. One of the world's largest crypto exchanges, FTX, filed for bankruptcy on Friday. That sparked fears of contagion throughout the wider industry, which was recently trading at around $1 trillion. Darian Woods from NPR's podcast the Indicator is here with us to explain how the crash of the industry that calls itself decentralized finance has led some influential players to reconsider. Hi, Darian.

DARIAN WOODS, BYLINE: Good morning.

FADEL: Good morning. So explain - what led to the bankruptcy of FTX?

WOODS: FTX is an exchange. So it's like a stock exchange but for crypto. And it matches buyers and sellers. And it takes a clip of the ticket along the way. And there is a separate sister company here. It's called Alameda Research. So this one borrows and invests. And it does more speculative deals. It's a bit more of a risky company. And in the normal financial world, these two companies should be separate. And this is where FTX got into trouble.

It used assets from its exchange company, including from everyday customer funds that it said it would not use to lend out like this, and it would fund bad bets for Alameda. So we're talking $10 billion here. That was reported by Reuters and Wall Street Journal. And when this got revealed, FTX suffered what was essentially like a huge bank run early last week, meaning they had to declare bankruptcy by Friday.

FADEL: So was FTX a bad company? Or was this more like a panicked bank run bringing an otherwise legitimate company under?

WOODS: FTX is now under investigations all over the world.

FADEL: OK.

WOODS: And it's clear if it was a regular exchange, like a stock exchange, it wouldn't have been allowed to put everyday users' money into such risky, speculative bets that Alameda Research was doing. And so we'll find out in coming months the exact extent to which the underlying business model was rotten. But what's clear is that other big crypto investors took a look at FTX's books early last week and said, no thanks. This suggests that there are real problems with FTX's business model.

FADEL: And what about the wider world of crypto? How is that responding?

WOODS: So Bitcoin, the biggest cryptocurrency, saw about a 25% drop from the start of last week to its lowest point in the middle of the week. And of course, everyday crypto investors who bought crypto using FTX are very angry. But the people at the top of the crypto industry are trying to work out ways to calm the markets. Changpeng Zhao, also known as CZ, he runs the biggest crypto exchange called Binance. And on Monday, he tweeted, to reduce further cascading negative effects of FTX, Binance is forming an industry recovery fund to help projects who are otherwise strong but in a liquidity crisis.

FADEL: Sounds like a central bank to me.

WOODS: Yeah. So that's almost like a central bank-ish type of thing. So it's kind of ironic because this whole industry prides itself on being decentralized finance. But this is some kind of centralized entity to keep the system afloat.

FADEL: Darian Woods from the NPR podcast the Indicator. Thanks.

(SOUNDBITE OF TOM KALANI'S "BULL'S EYE") Transcript provided by NPR, Copyright NPR.

Darian Woods is a reporter and producer for The Indicator from Planet Money. He blends economics, journalism, and an ear for audio to tell stories that explain the global economy. He's reported on the time the world got together and solved a climate crisis, vaccine intellectual property explained through cake baking, and how Kit Kat bars reveal hidden economic forces.