Cryptocurrencies have faced the prospect of another wave of bankruptcies. The mounting problems of FTX, one of the largest cryptocurrency exchanges, caused massive perturbations throughout the market and led to the near collapse of Sam Bankman-Fried's fortune. First, the exchange was rushed to the rescue by its existing competitor, Binance. In the end, however, even Binance would not rescue FTX. We can guess that the reason for this is the scale of the financial hole currently valued at around $8 billion and the impending Justice Department investigation. Security vulnerabilities at Alameda Research, a major FTX-related investment fund, prompted Binance to start selling FTX exchange tokens. The domino effect has triggered massive declines in major cryptocurrency projects, and there are many indications that this may not be the end. Will the industry stand the test of time?
The beginning of the end and a tragic bluff
Only now is the truth coming to light related to the liquidity problems and mismanagement of FTX customers' funds. The whole story of the collapse can trace its origins to the collapse of Luna. Alameda and FTX are connected vessels, owned by Sam Bankman-Fried. According to data gathered by independent sources and CoinMetrics, the Alameda Research fund may have already gone bankrupt in the wave of the collapse of Luna and other cryptocurrency entities. The entity allegedly bailed itself out using 172 million hedging tokens from the FTX exchange, which automatically contracted to enter the market on September 28. Bankman-Fried's own attitude was also not insignificant, as over the past months he appeared as the savior of the cryptocurrency industry, pointed to the exchange's strong financial position and inspired confidence. He was probably bluffing.
The Binance exchange, owned by Chanpeng Zhao, had already published information on Alameda Research's reserves revealed by Coindesk on November 3. According to the exchange, the biggest risk was that Alameda Research holds most of its reserves in poorly liquid altcoins, with the largest share of Alameda's assets held by the FTT exchange token itself, created by FTX. The collateral structure thus appeared fragile and prone to spikes in volatility. It did not include hard collateral in the form of a significant % of cash or US Treasury bills.
Regulators are already rolling up their sleeves
The collapse of FTX is another event that is drawing the attention of regulators to cryptocurrencies and will likely prompt them to intervene more aggressively. Today, Bloomberg reported that the US Department of Justice and the Securities and Exchange Commission (SEC) have launched an investigation into FTX. WSJ reports that the two institutions are expected to work together for a faster resolution of the case. The SEC, which has a grim reputation in the crypto world, is still conducting a separate investigation, which was tasked with determining whether the assets traded by FTX are securities. A separate investigation has also been launched by the Federal Trade Commission (CFTC). The FTX bankruptcy has already managed to become a topic of discussion in the US Senate. Elizabeth Warren of the Democratic Party has pointed to the 'alarming need' for strict regulations on the cryptocurrency market. SEC chief Gary Gensler said that the FTX and Alameda Research bankruptcies are events that can basically be considered an 'extension' of the previous wave of bankruptcies from May and June this year. Gensler also pointed out, a 'recurring pattern' of ws
What's next?
We can expect a lengthy FTX investigation, testimony from Sam Bankman-Fried, and a domino effect that probably won't bypass the industry, although it's still unclear how deep it will go. There is a shadow of a chance that it will not be as fateful as the Luna crash of May this year. According to JP Morgan analysts, the current scale of bankruptcies will not be greater than the previous one, as the vast majority of mismanaged entities have already managed to 'spill over' during the induced liquidity crisis. We can also expect that other cryptocurrency exchanges like Kraken, OKX or even Binance will also be 'put against the wall' by regulators and forced to report their collateral and financial situation.
How will this translate to the crypto market as a whole?
The almost foregone collapse of FTX and the Alameda Research fund, as well as the growing interest in the case from the Department of Justice, may herald further problems for altcoins and various types of investment funds that operated in the cryptocurrency market. The deleveraging process could take days, and some of the fraudulent or mismanaged projects are likely to find themselves 'on the eve' of collapse. For example, giants like BlackRock and Temasek have invested in the FTX business, as well as smaller funds like Sequoia Capital ($400 million in funding) and Paradigm ($420 million in funding). Already today, Sequoia has indicated that their investment has already become worthless. There is also the possibility that regulators will once again want to screen stablecoins - most notably Tether, whose USDT token is still the largest 'digital equivalent' of the U.S. dollar in the cryptocurrency market, although as is well known it does not have 1:1 hard currency coverage.
While for the stock market FTX would not be a very significant entity, looking at its capitalization and number of liabilities, for the cryptocurrency industry worth nearly $800 billion in total, it is indeed a giant. The scale of the collapse as translated into the industry is comparable to the Lehman Brothers bankruptcy in 2008. The collapse of the exchange highlights a significant problem for the industry, which is the operation of unregulated, fiduciary exchanges in the cryptocurrency market. The trust the cryptocurrency community originally had in decentralized institutions that were supposed to be a beacon of financial freedom has once again been severely damaged.
FTX's problems have spilled over into the cryptocurrency market. Bitcoin at the apogee of declines was trading below the $16,000 barrier, the lowest indication since November 2020. Today, i.e. November 10, the major projects and FTT (FTX) are trying to make up for their losses. Token FTT are gaining more than 100%, no less in vain to find a fundamental change in the situation here. Source: xStation 5
