London
CNN Business
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The stunning downfall of the FTX exchange, one of the largest and most recognized players in the digital asset market, raises alarm among people who own cryptocurrencies as investors run for cover.
There are still many unanswered questions. But two big looms: How far will the damage spread? And can the defunct crypto industry bounce back?
Industry insiders are debating whether to call the implosion of FTX, which filed for bankruptcy on Friday, a “Lehman moment,” referring to the investment bank’s 2008 collapse that sent shockwaves around the world. Many find it an apt comparison.
What is clear is that the fallout from the FTX crisis is injecting significant volatility into the crypto ecosystem. The episode has destroyed confidence and strengthened regulators, who are now on high alert.
“This was one of the most trusted entities in the crypto space, so it will take some time to recover,” said Jay Jog, co-founder of California-based blockchain startup Sei Labs.
“Sh*tstorm.” “Insane.” “Chaos.”
These are terms that crypto investors and pundits have used to describe the failure of FTX, which was launched in 2019 by Sam Bankman-Fried, a 30-year-old prodigy once hailed as a modern-day JP Morgan.
The company was valued at $32 billion in its latest funding round, and had recruited high-profile backers including SoftBank, Tiger Global, Singapore’s Temasek, as well as celebrities such as Tom Brady, Gisele Bündchen and Naomi Osaka. The name is of the arena where the Miami Heat play.
This week, investor Sequoia Capital so it had marked the value of its FTX stake down to $0. The exchange – which is said to be short between $8 billion and $10 billion – was unable to meet customers’ demands for withdrawals. Bankman-Fried pulled out on Friday and FTX filed for bankruptcy protection in the US after a bailout by rival Binance fell through.
“Everyone is a little bit in shock,” said Shan Jun Fok, co-founder of Moonvault Partners, a crypto investment firm based in Hong Kong. “Many relied on FTX as the gold standard.”
He compared the collapse of FTX to Enron, the 2001 corporate fraud scandal that resulted in the US energy company’s surprise bankruptcy.
The situation is still developing rapidly. But one concern is how that could ripple through the entire crypto sector, which was worth more than $1 trillion in August.
During the summer, when digital assets fell in value, Bankman-Fried put in about $1 billion to bail out firms and acquire assets to try to keep the entire industry afloat. Now there are few white knights left to save FTX and others in need.
“The number of entities with stronger balance sheets capable of rescuing those with low capital and high leverage is shrinking within the crypto ecosystem,” strategists at JPMorgan said in a note to clients this week.
The loss of FTX can lead to other injuries. It is difficult to know at this point who is at risk, although there are clear ripple effects.
The prices of bitcoin and ether, the two most widely held cryptocurrencies, are down more than 20% in the past week. The price of the Solana digital coin has also been hit thanks to reports that Bankman-Fried’s trading firm, Alameda Research, had significant stakes. The Tether stablecoin, which is supposed to be a safe place to park cash, recently broke its one-to-one link with the US dollar. And crypto lending platform BlockFi said on Thursday that it was stop customer withdrawal.
Traditional investors have also been burned, even as they assure clients they can handle the fallout. The Ontario Teachers’ Pension Plan said that despite uncertainty, losses associated with the $95 million investment would have a “limited impact,” given that the stake represents less than 0.05% of total assets.
Changpeng Zhao, CEO of Binance, tweeted that he had been texting with Nayib Bukele, the president of El Salvador, who has gone all in on bitcoin. “We have no Bitcoin in FTX and we have never had any business with them,” said Zhao of Bukele. “Thank God!”
Analysts note that much risky activity has already been flushed out of the system after a tumultuous few months.
But when spooked investors pull funds from crypto, more pain could be coming. JPMorgan think bitcoin could fall to $13,000, down almost 22% from where it is now. Fok said the digital coin could fall below $10,000, a low it hasn’t fallen to since 2020.
In that climate, the “crypto winter” is poised to get even worse, especially as fears about the broader economic backdrop continue to erode appetite for risky assets.
“In the short term, this is going to be very, very bad for the crypto industry,” Sei Labs’ Jog said. But he doesn’t think it will “end things” completely, and hopes that it could boost interest in his business, which focuses on building more transparent, decentralized crypto exchanges.
Fok said he expects the FTX collapse to push institutional investors away from the crypto space just as they had warmed to it. While some people will continue to work on interesting projects, it may take years to restore faith in the sector’s promise.
It’s also far from certain to encourage regulators to tighten the screws, raising costs for crypto firms that survive the purge.
“It reinforces the view that any kind of financial business needs extensive regulation,” said James Malcolm, head of currency strategy and crypto research at UBS. “Probably by 2024, the whole world will look much more connected and watertight.”
Gary Gensler, head of the US Securities and Exchange Commission, said on CNBC Thursday that while the crypto space is regulated, investors need “better protection.” The Wall Street Journal has reported that the SEC and the US Department of Justice are investigating FTX. (The Ministry of Justice declined to comment.)
Speaking at a conference in Indonesia on Friday, Binance’s Zhao said the 2008 financial crisis is “probably an accurate analogy” for what’s unfolding.
“We’ve been set back a few years,” he said. “Regulators will rightfully scrutinize this industry much, much harder, which is probably a good thing, to be honest.”
— Allison Morrow contributed reporting.
