FTX, one of the world’s largest cryptocurrency exchanges, filed for Chapter 11 bankruptcy last week, and investigators are now looking into what went wrong. The exchange has been accused of using customers’ funds for investments without permission, according to The Wall Street Journal. 

“Marketplace” host Kai Ryssdal speaks with Liz Hoffman, business and finance editor at Semafor, about the role of FTX and regulation of the crypto market. The following is an edited transcript of their conversation. 

Kai Ryssdal: I want to start really nuts and bolts here because this is a tremendously complicated story. What exactly is a cryptocurrency exchange?

Liz Hoffman: You can think of it like the New York Stock Exchange, but instead of trading shares of Apple or Microsoft, you trade cryptocurrencies — this sort of funny-money coins that have, you know, become all the rage in the last five or 10 years.

Ryssdal: They have indeed. OK, so what is our — I guess, what was — right, because we have to ask in the past tense now — what was FTX’s place in that exchange ecosystem?

Hoffman: It was one of the largest. I mean, plainly put, it was a major player. It’s where a lot of people traded their crypto, bought and sold it and, importantly, kept it.

Ryssdal: And it has seemingly vaporized in something less than, like, 10 days. What happened?

Hoffman: At a very fundamental level, they were supposed to hold on to people’s money and give it back to them when they asked for it. And they failed to do that. So you can think of it as just a classic run on the bank — like, setting aside all of the weirdness around cryptocurrencies and it was just a run on the bank. They didn’t have the money when people wanted it back, and they filed for bankruptcy on Friday.

Ryssdal: And the company and its very high-profile founder, Sam Bankman-Fried, is under investigation.

Hoffman: Yes. You know, regulators and, and prosecutors want to know exactly what happened here. In the same way that you’ll remember when Lehman Brothers went under and AIG nearly failed. I mean, it was a real reckoning for the financial system and raised some very fair questions about who was asleep at the switch.

Ryssdal: So do you think this is the Lehman moment? Do you think this is the reckoning for crypto now?

Hoffman: I do, Kai. You know, for all we’ve been talking about crypto for the last five or 10 years, it’s still really in its early days, maybe it’s sort of like rebellious adolescence. And, you know, when in every sort of market, every new market that pops up goes through this period. And there’s a lot of knucklehead stuff that gets sort of washed out. And there’s someone who comes along and professionalizes it. And that was supposed to be Sam Bankman-Fried, who, I should note, is an investor in Semafor. And without him, there is not an obvious contender for that role. And then the other thing is that all financial systems are just confidence games. Right? The reason that banks don’t fail is because people think their money will be there when they go get it. And this is a real confidence reset for crypto.

Ryssdal: There will be many people out there screaming, “Where were the regulators? Why isn’t somebody keeping an eye on crypto?” Because for all the knucklehead stuff that’s happening, there are millions and billions of dollars that have just disappeared.

Hoffman: Yes. This was a little bit of a regulatory jump ball. Because it’s not quite a security, like the Securities and Exchange Commission. It’s not a bank like the [Federal Reserve] oversees. The other thing is, there’s a real knowledge gap between the people in charge in Washington and the, like, “Move fast and break things” technology people. And that gap was especially wide in crypto, and they did not get there in time.

Ryssdal: Do you think this hastens the push for some kind of substantive regulation?

Hoffman: Absolutely, absolutely. You don’t really have to worry too much about the weirdness of cryptocurrencies. It was an exchange, and the New York Stock Exchange has to keep a certain amount of capital and they’re not allowed to take the other side of trades. I mean, just very basic nuts and bolts Wall Street regulation would have gone very far here.

Ryssdal: All right. So look, if I’m just a person in this economy, trying to grind it out, and I’m, you know, reading the headlines and I see this story, why does this event matter to me?

Hoffman: I should say, at the high level, I’m not totally sure that it does. If you’ve just been living your life at your bank, you’re probably fine. You know, crypto — by definition — had this, like, real disdain for the establishment. And so they largely lived outside of it. FTX is not all that plugged in to most of the traditional financial system. That said, these things can have really weird knock-on effects, and you just take a long time to figure out where they are. And then look, if you found some value in cryptocurrency, I think there’s some interesting stuff. There are ways to save people money to reduce costs, for example, transferring money. And, you know, if you’ve tried to get a mortgage, I mean, God, it’s a mess. This really sets that back probably by a decade.

Ryssdal: Last thing and then I’ll let you go. There is no bailout a-comin’ right? There’s no Federal Reserve that backstops banks, right, in the land of crypto?

Hoffman: Absolutely not. And you know, that’s something that people who are customers of FTX and a lot of these crypto companies that have gone bankrupt are realizing — that they are the creditors, right? They are. No one is coming to their rescue here, like you said. Your bank deposits are insured by the FDIC, your brokerage account is insured by a similar kind of mutualized backstop there. There is nothing here. And I think FTX’s customers are unlikely to recover much, if anything.