Crypto: What’s next as the collapse of FTX triggers a ‘Lehman moment’?


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The stunning fall of the FTX exchange, one of the largest and most respected players in the market for digital assets, caused alarm. among those who own cryptocurrencies as investors run for cover.

There are still many unanswered questions. But two big ones: How far will the damage spread? And can the beaten-down 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 collapse of the 2008 investment bank that sent shockwaves around the world. Many consider that an apt comparison.

What is clear is that the fallout from the FTX crisis injected significant volatility into the crypto ecosystem. The episode has destroyed confidence and emboldened regulators, who are now on alert.

“This is 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.

“St*tribute.” “Crazy.” “Chaos.”

It is a term crypto investors and experts have used to describe it FTX failurewhich was launched in 2019 by Sam Bankman-Fried, a 30-year-old wunderkind once hailed as a modern-day JP Morgan.

That company worth $32 billion in its latest funding round, and has recruited high-profile backers including SoftBank, Tiger Global, Singapore’s Temasek, as well as celebrities like Tom Brady, Gisele Bündchen and Naomi Osaka. His name is in the arena where the Miami Heat play.

this week, investor Sequoia Capital said it has marked the value of FTX stake down to $0. The exchange – said to be short between $8 billion and $10 billion – could not meet the withdrawal demands of customers. Bankman-Fried resigned Friday and FTX filed for bankruptcy protection in the United States after a bailout from rival Binance fell through.

“Everyone was a bit surprised,” said Shan Jun Fok, founder of Moonvault Partners, a crypto investment firm based in Hong Kong. “Many people believe in FTX as the gold standard.”

He compared the collapse of FTX to Enron, the 2001 corporate fraud scandal that led to the surprise bankruptcy of the US energy company.

Sam Bankman-Fried, founder and CEO of FTX, spoke during the annual meeting of the Institute of International Finance in Washington, DC on October 13, 2022.

The situation is still developing rapidly. But one concern is how it can ripple across the entire crypto sector, which is this worth more than $1 trillion in August.

During the summer, as digital assets tumbled in value, Bankman-Goreng put about $ 1 billion to bail out firms and swear to raise assets to try to keep the entire industry afloat. Now, few white knights are left to save FTX and others in distress.

“The number of entities and a stronger balance sheet can save those with low capital and high leverage shrinking in the crypto ecosystem,” said a strategist at JPMorgan in a note to clients this week.

The death of FTX can produce other victims. It is difficult to know at this point who is exposed, although there is a clear ripple effect.

The price of bitcoin and ether, the two most widely held cryptocurrencies, are more than 20% lower than a week ago. Solana’s digital coin price has also taken a beating thanks to reports that Bankman-Fried’s trading firm, Alameda Research, has a large stake. The Tether stablecoin, which is supposed to be a safe place to park cash, recently broke its one-to-one stake to the US dollar. And crypto lending platform BlockFi said Thursday that it is pausing customer withdrawals.

Traditional investors have also been burned, even as they assured their clients that they could overcome their problems. Ontario teacher pension plan said that despite the uncertainty, losses tied to his $ 95 million investment will have a “limited impact,” given the stake represents less than 0.05% of total assets.

Changpeng Zhao, CEO of Binance, tweeted that he had a message with Nayib Bukele, the president of El Salvador, who had Gone all in bitcoin. “We don’t have Bitcoin in FTX and we have never had any business with them,” Zhao said from Bukele. “Thank God!”

Analysts say that many risky activities have been removed from the system after months of being on fire.

But as spooked investors withdraw funds from crypto, more pain can arrive. JPMorgan believe that bitcoin can fall to $13,000, a drop of almost 22% from where it is now. Fok stated that the digital coin could drop below $10,000, a level that has not been lowered since 2020.

In that climate, the “crypto winter” is poised to get worse, especially as fears about the broader economic backdrop continue to erode appetite for risky assets.

“In the short term, this will be really, really bad for the crypto industry,” said Jog of Sei Labs. But he doesn’t think it will “end things” entirely, and hopes that it can increase interest in his business, which focuses on building a more transparent and decentralized crypto exchange.

Fok said he expected the collapse of FTX to push institutional investors away from the crypto space just as they were warming up to it. Although some people will continue to work on exciting projects, it will take years to restore confidence in the promise of the sector.

It’s also all but certain to push regulators to tighten the screws, raising costs for crypto firms that survive the purge.

“It reinforces the view that all types of financial companies need extensive regulation,” said James Malcolm, head of foreign exchange strategy and crypto research at UBS. “Maybe in 2024, the whole world will look more coherent and watertight.”

Gary Gensler, head of the US Securities and Exchange Commission, said on CNBC Thursday that as the crypto space is regulated, investors “need better protection.” The Wall Street Journal has reported that the SEC and the US Department of Justice examine FTX. (The Justice Department declined to comment.)

At a conference in Indonesia on Friday, Binance’s Zhao said that the 2008 financial crisis “probably is an accurate analogy” for what is happening.

“We have been set back a few years,” he said. “Regulators will rightly scrutinize this industry much, much harder, which is probably a good thing, to be honest.”

– Allison Morrow contributed reporting.

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