Davos crypto crowd distanced itself from FTX and Sam Bankman-Fried

DAVOS, Switzerland – The crypto community in Davos sought to distance itself from the dramatic collapse of FTX and its co-founder Sam Bankman-Fried who now faces federal criminal charges in the US

Bankman-Fried, FTX’s former CEO, was charged by US federal prosecutors with eight criminal counts, including securities and fraud. He was extradited from the Bahamas to the United States, and has so far pleaded not guilty. Two of his former business associates, FTX co-founder Gary Wang and former Alameda Research CEO Caroline Ellison, pleaded guilty to federal fraud charges and agreed to cooperate with US prosecutors.

“FTX in my view is now being painted as a crypto problem. I think if you really peel back enough layers of the onion, it’s not really a crypto problem going on here, it’s a scam. And I think we shouldn’t pretend it’s something else, Brad Garlinghouse, CEO, Ripple, told CNBC.

Garlinghouse also detailed Ripple’s own exposure to the collapsed crypto exchange. In an interview on Wednesday, he said that Ripple had leased about $10 million of XRP to FTX, which “they spent on various things related to FTX.” XRP is closely related to Ripple and is used by the company as part of one of its key products. Chris Larsen, one of Ripple’s founders, was also involved in the early days of XRP and its underlying technology.

The company hopes to recoup those funds from bankruptcy proceedings in the United States, Garlinghouse said. However, he added that the firm’s FTX exposure was not “too important” to the business, representing just 1% of “liquid assets.”

Other crypto leaders also had a similar view to Garlinghouse.

“It is important to distinguish this [FTX collapse]it’s a failure of institutions, it’s a failure of individuals … this is very different from the technology,” Rene Reinsberg, co-founder of Celo, said during a CNBC-hosted panel Thursday.

Crypto executives acknowledged the reputational impact on the industry from the FTX fallout, but said it will focus more on the well-run businesses.

“I think, especially when you had … so many significant people supporting … FTX, and there’s a lot of egg on people’s faces,” Circle CEO Jeremy Allaire told CNBC in an interview Tuesday .

“I think at the same time, right, it’s going to put a lot more scrutiny on … who are the companies that are well run, well capitalized … well regulated, have strong audits, have strong controls, all those things that matters if you’re running a global financial institution. People are going to really start paying attention to that versus just kind of make believe, you know, kind of fairy tale,” Allaire said.

Ripple’s Garlinghouse compared Bankman-Fried’s actions to Bernie Madoff who ran the largest Ponzi scheme in history defrauding thousands of investors.

“We talk about this as a crypto problem. But really this is just a scam, and I think in some ways not so different than Bernie Madoff,” Garlinghouse said. “When Bernie Madoff happened, we didn’t completely restructure how we thought about the supervision and regulation of hedge funds.”

“We realized that the SEC, clearly also in that case, had overlooked [Madoff]and that if people had reported to the SEC, they should be looking at Bernie Madoff,” he said.

The crypto industry has seen roughly $2 trillion erased from its total market cap since the market peaked at a total value of $3 trillion in November 2021.

Garlinghouse said on Wednesday that it was unfair to single out crypto in assessments of investor losses to risky assets in 2022, as other asset classes have also suffered significant losses. Top US technology stocks, for example, were also lumped.

“Between Facebook, [Amazon] and Tesla, $2 trillion evaporated last year…add Tesla, Facebook and Amazon, you get $2 trillion for sure. Nobody is arguing that we shouldn’t continue to invest in these companies,” he said.

“I think it’s clear that low interest rates had created a lot of froth in the macro markets and as … the direction of interest rates changed in the spring of 2022, a lot of asset classes were reset, we obviously saw some bad actors in crypto and that contributed to the contagion.

Correction: This story has been updated with the correct figure for the crypto industry’s market capitalization.