It's hugely disappointing for investors or more so devastating for investors.
It was definitely a surprise and a shock.
It signals a terrible thing about the industry.
The collapse of FTX shook crypto to its core. The once $32 billion exchange,
established in 2019, filed for bankruptcy in November 2022.
I'm in contact at the moment with about 60 different investors who
have come to me seeking legal advice.
Louise Abbott is a partner at U.K. law firm Keystone Law. She specializes
in recovering crypto assets on behalf of victims of fraud.
It covers people that have invested £2,000 right through to a lady who
invested £5 million. It's a very broad range of people who have invested.
FTX had the semblance of a blue-chip crypto company,
rivaling exchanges like Binance and Coinbase. It even brought on board
some of the wealthiest names in Silicon Valley and Wall Street as investors.
Ultimately though, reality hit home for FTX and its millions of users,
who saw billions of dollars vanish overnight.
So, what went wrong with FTX, and does it spell trouble for crypto's other trading platforms?
Like a typical stock exchange, FTX was a venue connecting buyers and sellers of an asset –
in this case, digital currencies like bitcoin, plus a type of financial contract known as derivatives.
However, as we’ve come to learn, FTX did a little more than that. Reports suggest the
company dipped into client accounts to make risky trades through its sister firm Alameda Research.
Some customers wired their funds directly to Alameda to transfer it to their
FTX trading account, sparking concerns over a potential muddling of funds by FTX and Alameda.
FTX also had its own token called FTT. It acted a lot like a loyalty scheme,
granting traders perks such as discounts off their trading fees. Alameda held a lot of FTT,
according to one report, and even used the token as collateral for loans from other crypto
companies. This sparked fears over FTX’s financial health. A tweet on Nov 6 from the CEO of rival
firm Binance, that it was selling most of its FTT holdings, sent the token’s value spiraling.
That in turn caused customers to flee FTX in large numbers. In a surprise twist,
Binance offered to acquire FTX on November 9, only to back out a day later
after getting a look inside the company's books. On November 11,
FTX filed for bankruptcy protection, and its chief Sam Bankman-Fried stepped down.
Bankman-Fried was arrested on December 13 by the Bahamas authorities after the
U.S. government filed criminal charges to hold him to account.
For Oleg Fomenko, co-founder of fitness-focused crypto network
Sweat Economy, FTX’s insolvency meant the likely loss of over
$400,000 worth of cryptocurrencies including USDC, tether and his company’s own token, sweat.
Of course, the panic for our liquidity, and how we were affected. We knew that it would
be just sort of in low hundreds of 1,000s. It's an amount that makes me swear probably
every day, but it's not an amount that is going to make our project suffer.
Sweat Economy held these funds on FTX through two of its market makers. Market makers act
as the middlemen in trades between buyers and sellers. So, if someone wants to buy or sell a
token for instance, they aren’t left waiting for the person on the other side of the trade.
This $400,000 that we had on FTX was liquidity that we had with two
market makers at the time when they cut their withdrawals. We tried to withdraw,
but there was a sort of long, long, long queue, and then they completely cut them.
2022 exposed a deep interconnectedness in the crypto ecosystem not seen in previous
market cycles. Companies engaged in risky lending practices, taking customer funds, and investing
them elsewhere in search of sky-high yields. They posted illiquid, volatile tokens as collateral.
The result? Several high-profile collapses and a resulting contagion impacting a vast
set of companies with exposure to those failed firms. FTX is the most notable case so far.
FTX is a falldown from Terra Luna. And there has been contagion from that moment
onwards. There might be actually exposures that are in more traditional finance.
Marieke Flament is CEO of the Near Foundation, which is behind a blockchain network called Near.
Her company was among the firms caught up in the fallout from FTX.
The impact for Near and Near foundation is actually extremely limited.
The amount of money that we raised, which is $500 million between January and April of this year,
all of that is actually in fiat and held in bank accounts.
Still, she was shocked when she found out about FTX’s troubles.
As an industry, we already had a first shock with Terra Luna, which is, oh my god, you know,
this is systemic. It felt quite contained. But it was still a first
warning in the industry. And therefore, what are the repercussions of that?
Bosses of other exchanges have since sought to reassure investors that
their platforms aren’t at risk of facing the same problems as FTX.
We are very concerned about anyone using the token they create for leverage,
as a collateral. At Binance we don’t do that.
How should customers think about CRON and your business? This is your own currency.
We’ve never utilized it in a way that FTX did. We never used this as collateral
for any loans or anything. We run a very simple business.
Captains of the industry are really not there to move the industry forward,
they’re there to nefariously enrich themselves.
After FTX’s insolvency, investors were left wondering which domino will fall next.
One example was crypto lender BlockFi,
which entered bankruptcy after revealing exposure to Bankman-Fried’s empire.
Now, attention is turning to other trading and lending firms, including Gemini and Genesis.
I don't think all the dominoes have fallen out from the contagion of what’s been
happening. The impact that this will have is that a lot of projects actually are not
going to have the funds, and therefore the resources for them to continue.
To counter the risk of contagion, investors began moving their assets away from exchanges.
The number of bitcoins on exchanges fell from its peak of 3.1 million
in 2020 to around 2.2 million at the end of 2022.
The amount of ether on exchanges sank from 34 million to 18 million in the same period.
Some investors are seeking safety in “cold” hardware wallets rather than
centralized exchanges. This one, from Paris-based company Ledger,
is designed to make that process more intuitive than it is currently.
There is a saying, which is: 'not your keys,
not your coins.' And the magic of crypto, is that you can hold it in your hand.
For seven years, our company has had the same premise, which is security and self-custody of
crypto assets. A year ago, when I was telling people that they shouldn't keep their crypto
with centralized exchanges, they would treat me as if I was trying to convert them to veganism.
Nothing's too big to fail. And that's actually the point of crypto, right?
If not self-custody, why crypto?
For their part, exchanges are taking steps to increase transparency through “proof of reserves,”
mechanisms that show they have enough assets available to backstop customer withdrawals.
This involves taking a cryptographic snapshot of the coins and tokens held by a crypto exchange.
But proof of reserves only offers a snapshot of an exchange’s assets at a single point
in time. Critics say this provides an incomplete picture of these businesses' financial health.
There's also a lot of talk around being audited, and then it comes as like,
what's the right timeframe and timing to actually do these things?
On most crypto exchanges - even Coinbase, the only publicly traded crypto exchange - customers
are treated as “unsecured creditors,” a categorization that puts them in the same
bucket as business suppliers and contractors. If an exchange fails, customers aren’t entitled to
any government-guaranteed compensation, unlike with regulated brokers or banks.
But that could be about to change. Governments in the U.S.,
European Union and the U.K. are introducing frameworks to clean up these markets.
The demise of FTX - and other cryptoplatforms - has added urgency to those efforts.
I think we are already seeing a lack of confidence. People need
to see that there’s steps being taken to regulate it. If we are
able to offer some regulation, we will build confidence.
So, is it curtains for crypto exchanges? Most experts believe they’ll continue
to play a role — but their survival will be determined by how seriously
they take risk management, governance and regulation.
I think crypto is here to stay. Crypto is still going to be popular eventually.
It is part of our future. And it can be a good thing.
Long term, it's good for the industry, because it exposes bad actors, fraud, and, you know,
this kind of fake value proposition of get rich quick with centralised value propositions.
2023 may be the year that crypto winter ends - however,
there's no crystal ball to tell when the ice will finally thaw.
I feel that we probably have six to nine months before things will start kind of going on the up.
We believe that every business needs to be ready for this market to continue up to 24 months.