What a difference a week can make. From a position as one of the world’s largest cryptocurrency exchanges to bankruptcy court, the implosion of FTX has sparked fears more exchanges and firms are on the brink of collapse.
FTX and its related entities filed for Chapter 11 bankruptcy protection in Delaware federal court on Friday. This means the company can continue operating, while restructuring its debts under court supervision.
According to the company – valued at $32billion by private investors earlier this year – the aim is to “begin an orderly process to review and monetise assets for the benefit of all global stakeholders”.
The bankruptcy filing follows a chaotic week in the crypto market. Negative talk about the financial health of FTX led to a bank-run-style exodus with customers withdrawing around $5billion in just two days.
After appeals to its investors and rival exchanges, FTX agreed a rescue by rival Binance but just a day later this deal fell through after due diligence revealed “insurmountable” financial problems at FTX.
The Financial Times reported that a FTX balance sheet showed the bankrupt crypto exchange had only $900million of assets it could easily sell, despite having $9billion of liabilities.
Even Sam Bankman-Fried, co-founder at crypto exchange FTX, admitted that he was “shocked to see things unravel the way they did” as he quit as chief executive. In a lengthy thread on Twitter, he proffered a frank explanation of what went wrong.
“I fucked up, and should have done better,” Bankman-Fried said. “I also should have been communicating more very recently.
Bankman-Fried has been replaced by new chief executive John J Ray III, a lawyer who previously worked at a venture capital firm and also oversaw the liquidation of Enron after that company’s collapse in 2001.
So, what does this all mean for the digital assets market? Let’s share a few viewpoints from our community.
For Daniele Servadei, CEO and co-founder of e-commerce platform Sellix, the collapse of FTX is likely to have repercussions on the market.
He says: “We’ll see more exchanges and firms collapsing in a domino effect in the next few days. This will most likely be due to FTX being the second largest exchange and having funded projects on multiple other platforms.
“That’s what happens when an inexperienced team handles billions of dollars. Sam Bankman-Fried literally went around saying it was a ponzi scheme. It’s crazy.”
Marcus Sotiriou, analyst at the publicly listed digital asset broker GlobalBlock, also sees the ‘havoc’ caused by the downfall of FTX but just how it will impact the market is unclear.
“The knock-on effects for the rest of the industry remains to be seen. Yet so far, we have seen BlockFi on the brink of bankruptcy. According to FTX, about 130 additional companies affiliated with FTX, including FTX US and Alameda Research, have also begun the bankruptcy process.
So far, Bitcoin has not reacted too negatively to this news and the market could enjoy the fact it now has more clarity than a week ago. However, the severity of the contagion to come could have damaging effects for the crypto ecosystem. The potential reversal of the direction of inflation in the coming months could save crypto prices from spiralling down further, though, meaning inflation data is still critical to watch out for.”
“FTX is crypto’s Lehman Brothers moment,” says Nick Saponaro, the co-founder and CEO of Divi Labs, a decentralised payment ecosystem that’s on a mission to improve people’s lives by making crypto easy and accelerating its mainstream adoption.
“In fact it’s worse” he continues. “In 2008, investors would have had some protection. FTX’s investors will not and if history teaches us anything, they will lose everything. Inevitably, global regulators will see this as their cue to step in and crack down hard on the industry, making it very difficult for DeFi providers to operate without the oversight of a third party. The polar opposite of why crypto was created.”
“DeFi now has a very small window of opportunity to stand out and demonstrate its value before the regulator gets its claws in. It is imperative we find ways to make DeFi less complex, more accessible, and raise software standards to limit malicious behaviour. Until then, we will be at the mercy of the regulator and centralised propositions will continue to persuade people to use their services.”
Erosion of trust
For Torsten Dueing, head of ETC platforms at investment platform HANetf, says that although the story involves major players in the cryptocurrency world, it is more to do with fragile and/or self-referencing balance sheets, sustained by reputation instead of a sound capital structure.
“In our view, this has much more to do with the age-old game of fragile and/or self-referencing balance sheets, sustained by reputation instead of a sound capital structure,” says Dueing. “This feels like a Frankenstein of Enron and Lehman, only in part aided by the unregulated nature of crypto markets, the decentralised structure of its players and the lack of safety that comes with the sort of laws and regulations to which most of finance is subject.”
“Unfortunately, this episode has led to further erosion of trust in crypto. As we know, trust takes years to build and seconds to lose. And when you are actively looking for flaws, you will find them. There will be more questions around the balance sheets of stablecoins and other lending counterparties. We suspect this will make the market less liquid and lending terms less favourable. These seems like another case of the ‘smartest guys in the room’ blinded by the light.”
The US Securities and Exchange Commission is now said to be investigating as FTX also says it looking into “abnormal transactions of customer funds after a potential hack”.
Ryne Miller, FTX general counsel, said in tweets retweeted by the company’s Twitter account this weekend: “Investigating abnormalities with wallet movements related to consolidation of FTX balances across exchanges – unclear facts as other movements not clear.”