Despite FTX’s downfall, Texas’ crypto industry remains optimistic about the future

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The crypto community in Austin was buzzing.

Hundreds of investors, legislators, professionals and enthusiasts filled the halls of the AT&T Hotel and Conference Center at the University of Texas on 17-18. November for the Texas Blockchain Summit. For two days, there were discussions on everything from bitcoin mining to cryptocurrency regulations to blockchain innovations. But one thing was on everyone’s mind: the spectacular collapse earlier this month of major crypto exchange FTX and its billionaire CEO Sam Bankman-Fried, once the face of the industry in Washington and a Democratic megadonor who gave $1 million to Beto O’Rourke.

So when Lee Bratcher, president of the nonprofit trade organization Texas Blockchain Council, took the stage to open the summit on Thursday, he was quick to acknowledge the elephant in the room.

“The obstacles we face as an industry have just expanded significantly as a result of FTX’s incompetence and potentially fraudulent activity,” he said. “It’s time to roll up your sleeves and get to work.”

Other community members who spoke to The Texas Tribune echoed the sentiment. For them, FTX’s implosion has been a major setback for the industry, especially one that just experienced a market meltdown following the fall of another high-profile crypto venture in May. But while these events have burned and likely turned away many retail investors, members say they will continue to invest in the space because of their belief in the technology and philosophy behind crypto and blockchain. And Texas politicians attending the conference are also positive about an industry the state has courted heavily.

On November 6, rival exchange Binance CEO Changpeng Zhao tweeted that his company would liquidate its holdings of FTX’s original token, which is a cryptocurrency integrated into the exchange’s operations. The news caused many others to withdraw their investments, which FTX could not handle. There was a glimmer of hope when Zhao announced a non-binding agreement to buy the company on Nov. 8, but he walked away from that deal a day later after reviewing the competitor’s financial records.

By 11 November, FTX had filed for bankruptcy. Same day, Bankman-Fried resigned as CEO and was replaced by John J. Ray III, who has led several companies through major bankruptcy processes including Enron after the Houston-based energy giant’s accounting and corporate fraud was exposed two decades ago. The crash also wiped out Bankman-Fried’s fortune of nearly $16 billion, according to Bloomberg News.

In the aftermath, consumers and investors have lost billions of dollars.

“Honestly, this sucks,” Sam Padilla said at a Nov. 15 pre-summit gala. Padilla was a speaker at the summit and is a member of ATX DAO, a volunteer group working to “make Austin the crypto capital of the world.”

But he and other ATX DAO members remain believers in crypto and blockchain.

“The actions of a few at FTX do not speak for and do not represent the values ​​of what crypto is actually about,” Padilla said. “There is something very special about this technology, there is something very special about this community. We are really working to do something good.”

Several Texas politicians have expressed similar sentiments.

In recent years, Texas Republicans including Gov. Greg Abbott have been vocal about creating the state the top destination for crypto and blockchain, including the approval of pro-industry legislation last year. After FTX’s crash, Abbott staked out Bankman-Fried’s massive donation to his challenger O’Rourke and wanted candidates who received their money to return the funds, but the governor saw no doubt about the crypto itself. However, FTX donors didn’t just support Democratic candidates — Republicans around the country also received millions.

Republican US Senator Ted Cruz, who is a Bitcoin investor and a leading proponent of crypto, also reaffirmed his unwavering enthusiasm for the industry during his event at the summit on Friday. “I want Texas to be an oasis for Bitcoin and crypto,” he said.

Later that day, a bipartisan panel of state lawmakers — including Sens. Angela Paxton, R-McKinney, and Royce West, D-Dallas, as well as Reps. Giovanni Capriglione, R-Southlake, and John H. Bucy III, D-Austin — similarly expressed their support for strengthening crypto’s presence in Texas. FTX’s bankruptcy, they said, should be seen more as a lesson rather than a reason to do away with the industry.

“Every conversation I’ve had in response to FTX, it’s been what we’re doing to make sure we’re not like them,” Bucy said. “That’s how we have common sense policies to protect people without stopping progress.” Bucy is Vice Chair of the Executive Committee of the Texas House’s Innovation & Technology Caucus. Capriglione is the committee’s chairman.

“This is the oil boom of this generation,” Bucy added.

“There will be a lot to unpack”

FTX and Bankman-Fried are currently facing a class action lawsuit as well as numerous state, federal and international investigations, including a bipartisan hearing by the US House Financial Services Committee. Some are also looking into FTX’s alleged misuse of client funds, including whether the company had used them to prop up Alameda Research, a trading firm also started by Bankman-Fried.

Joe Rotunda, the Texas State Securities Board’s director of enforcement, said his stomach dropped when he first heard about FTX’s bankruptcy. But after scrutinizing its operations since October, particularly whether the exchange’s yield-bearing crypto accounts offered unregistered securities to residents, he was not caught off guard.

“We knew the bankruptcy was coming based on events during that week and interactions with various witnesses in various aspects of our investigation,” Rotunda said. “But it’s one of those things where you see it and it becomes so very real.”

Rotunda told the Tribune that the state Securities and Exchange Commission has since expanded its investigation to also examine the impact of the dissolution of FTX and about 130 of its subsidiaries on other companies and investors. Within days, the explosion forced several crypto companies to suspend withdrawals and at least one, crypto lender BlockFi, is reportedly considering declaring bankruptcy. In addition, FTX’s court records note that there are more than 100,000 creditors based on the debtor’s petitions, although there may be over one million affected creditors. And the top 50 unsecured creditors alone owe over $3 billion.

“Holy smokes, it’s a big bust. There is going to be a lot to unpack, he said.

Rotunda’s team is now working to find out who these creditors are, how much they owe and whether there are assets that can be used to pay them back. All the while, the concern about how far the ripple effect will reach looms large in the background.

According to Bratcher, who heads an association of over 100 corporate members in the crypto industry, Texas companies likely won’t be hit hard by the crash — but it could be a different story for consumers in the state.

FTX, Bankman-Fried and his recent former attorneys did not respond to the Tribune’s requests for comment. But the 30-year-old former crypto-billionaire has tweeted constantly and at times cryptically since the company’s collapse, including sorry on various threads. He also told Vox that he regretted filing for bankruptcy.

In a November 12 tweet, FTX’s new CEO Ray said the company will “continue to make every effort to secure all assets, wherever they may be.” He also blasted the previous leadership in a recent case.

“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of reliable financial information as occurred here,” the Nov. 17 filing said. “From compromised system integrity and faulty regulatory oversight overseas, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented.”

“We have work to do”

Meanwhile, Bratcher has stressed the need for crypto companies to follow a set of best practices, including stopping the improper commingling of customer money with other funds and enabling real-time proof of cash and other reserves. And like Rotunda, he stressed the importance of holding assets in more secure ways, such as through a digital wallet that is not connected to the internet, to increase protection against hacks.

“[FTX’s collapse] doesn’t really reflect the promise of decentralization and Bitcoin,” he said. “It’s really just a reflection of poor risk management.”

In addition, Bratcher and ATX DAO members who spoke to the Tribune shared the sentiment that the industry needs to move away from having prominent CEOs and toward nonprofits and grassroots groups championing crypto and blockchain policy. In his conversation with Vox, Bankman-Fried said his political lobbying was “just PR.”

“We feel disheartened but also renewed because the most important change that needs to happen is that in the past CEOs of large centralized exchanges have had the most capital, the most influence and the most reach — but they have conflicts of interest,” Bratcher said. “It can’t just be CEOs walking around DC”

“The loudest voice in the room doesn’t always speak for all, and those of us who aren’t that loud aren’t that loud for a reason,” added Jesse Patterson, an ATX DAO member. “We build things.”

In Texas’ upcoming legislative session, Bratcher said the Texas Blockchain Council will talk to its legislative partners to see if they want to enact stronger consumer protections. Meanwhile, ATX DAO members soldier on with their current work by looking to state legislators to champion a bill that would legalize decentralized autonomous organizations — entities without a central authority that rely on blockchain-based contracts that self-execute when pre-set conditions are met.

Ultimately, Bratcher told the Tribune, it could take a few years for the industry to heal from this reputational blemish. But he and others remain optimistic about the future.

“We have work to do to regain the trust of consumers,” he said. “[The industry] will be slowed, but it is not going to be stopped by these obstacles.”

Disclosure: The Texas Blockchain Council has been a financial supporter of The Texas Tribune, a nonprofit, nonpartisan news organization funded in part by donations from members, foundations and corporate sponsors. Financial backers play no role in the Tribune’s journalism. Find a complete list of them here.