Prominent crypto leaders worried about the aftermath of FTX collapse
Cardano founder Charles Hoskinson says that if FTX fails Binance’s due diligence process, the effects on the crypto market could be catastrophic.
Hoskinson so in a vlog post that there is a non-zero chance that FTX could fail due diligence and undergo liquidation because due diligence often reveals the actual depth of a company’s financial distress. Hoskinson’s worst-case scenario could become a reality after unconfirmed reports emerged that Binance is unlikely to proceed with the FTX deal. This bomb comes after less than 24 hours of due diligence from the stock exchange.
The FTX CEO’s political ties are a concern
If the recent rumors of Binance’s reluctance turn out to be true, FTX’s failure could ripple through the industry in the same way that Lehman Brothers’ failure rippled through the global economy in 2008. Subsequent collapses could then lead to negative scrutiny from the political allies of FTX- bosses Sam Bankman-Fried had recently tried to woo.
Bankman-Fried contributed at least $27 million to a Protect Our Future Political Action Committee in the run-up to the 2022 U.S. midterm elections. The PAC, in turn, splashed more than $11 million on Democratic candidate Carrick Flynn, who lost the Oregon primary .
Bankman-Fried also tried to shore up Republican alliances, contributing thousands to John Boozman of Arkansas and John Hoeven of North Dakota.
In an ironic twist, these and other politicians could impose draconian laws on the industry if the Binance deal fails, Hoskinson said.
Binance CEO Changpeng ‘CZ’ Zhao echoed this sentiment in a memo to Binance staff. He emphasized that the failure of FTX was not a victory for Binance.
“Regulators will scrutinize the exchanges even more. Licenses around the world will be harder to get,” he said.
Already former SEC Commissioner Jay Clayton said that “we need coordinated action across the federal government. People are going to test whether the capital problems surrounding this exchange have been resolved.”
Ultimately, he said, creditors of Lehman Brothers were paid off, even though the institution did not have enough liquidity at the time. With FTX standing proxy for Lehman Brothers, such a scenario is not guaranteed in the less regulated crypto industry.
Speaking of regulation, a recent Bloomberg report reveals that the Securities and Exchange Commission and the Commodities and Futures Trading Commission are investigating FTX’s handling of client funds. They are also investigating links between FTX, its US sister company FTX.US and Bankman-Fried’s quant trading firm Alameda Research.
CZ promises greater transparency
In preparation for scrutiny, CZ also tweeted today that Binance would begin doing Merkle-tree Proof-of-Reserves.
In tandem with Binance, several other exchanges, including KuCoin, OKX, Poloniex and Huobi, announced they would adopt the measure.
A Merkle tree is a computer science construct that summarizes all transactions in a blockchain transaction block. It produces a fingerprint of transactions in a block that makes it easy to identify whether a particular transaction has occurred. So Merkle-tree proof-of-reserves can point to a method of verifying reserves using blockchain transaction data.
FTX investors are looking to cut their losses
At the moment, however, several high-profile firms are likely to have to write off their FTX investments, worth a combined $32 billion. Companies likely to lose their investments include Softbank, Sequoia Capital and Tiger Global. According to CNBC, Binance will probably buy FTX for “pennies on the dollar”. The contested exchange also made something high-profile their own investments. Invest in the likes of Yuga Labs, Circle and SkyBridge.
Circle Chief Jeremy Allaire pointed out in a CNBC interview with Andrew Ross Sorkin that the sharp decline in the price of FTX’s native token, FTT, could cause problems for lenders who accepted it as collateral for loans.
At press time, FTT had recovered to around $3.93 after previously falling to $3.12 in the last 24 hours.
In a parting shot, Zhao warned Binance employees not to sell or buy FTT.
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