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Nov 14, 2022

Fall of FTX shakes institutional trust in crypto industry

Following the collapse of a crypto empire, what’s next for crypto assets?

The crypto world just had the most precedent-setting week of its 15-year history, which was also a precedent in the annals of financial history. FTX, a top global crypto exchange and trading conglomerate, in a stunningly swift series of events over a little more than a week, filed for US bankruptcy protection on Friday, November 11, 2022.

The Bahamas-based company’s filing – including Alameda Research, its quant and trading arm – estimates $10 bn to $50 bn in liabilities and includes 130 associated entities and more than 100,000 creditors. Adding to misery, reports of a $600 mn hack and missing funds surfaced in the evening after Friday’s announcement.

FTX Arena
The FTX Arena in Miami

Was this caused by poor risk management and accounting, or excessive use of leverage? Was Sam Bankman-Fried, FTX’s 30-year-old MIT graduate founder and CEO, just too inexperienced to be running a $32 bn company and was he co-mingling his investors’ funds with other areas of the business?

These answers will come out in what is sure to be a multi-year investigative process but will offer no comfort to the carnage of victims, from ordinary retail crypto investors and start-up crypto companies that held their treasury with FTX to a surprising bevy of sophisticated institutions and funds that will be marking their FTX investments down to zero. These include Sequoia Capital, the Ontario Teachers Pension Fund, SoftBank, Singapore’s sovereign wealth fund Temasek, BlackRock, Galaxy Digital and others.

Played out on Twitter

This fiasco started on November 2 with a leaked Alameda balance sheet showing it was heavily invested in FTX’s $FTT exchange token. It accelerated when the company faced a shortfall of $8 bn and a failed takeover by competitor and previous investor Binance, followed by news of investigations by law enforcement and multiple regulators and frozen assets on November 10.

This could be followed in real time in a series of tweets showing a ‘bromance’ turned to sparring between Bankman-Fried and Changpeng Zhao, CEO of Binance. Zhao indicated his intent to sell his $FTT token holdings after reviewing FTX’s books, which spooked the market – as did some Bankman-Fried tweets, who then posted a long apology admitting he messed up.   

Sam Bankman-Fried
Sam Bankman-Fried

Bankman-Fried was known as a golden boy with a big checkbook, putting his company’s name on a Miami stadium and courting star athletes and Hollywood types to pitch the exchange. He is known for philanthropic endeavors and huge political donations, and was actively contributing to US crypto regulation development. He rescued Voyager Digital and other companies that fell during hard crypto winter times this past summer, which could have been contributory factors.

The fall of FTX is a contagion that will be far-reaching and erode trust that took years to build in the crypto industry. Bitcoin, which some argue is part of a different ecosystem from FTX, fell to a new bear market low of $15,500 last week with other coins. ‘The crypto industry needs to grow up and needs progressive regulation in the move from the Wild West to the institutional asset space,’ says Michael Saylor, CEO of Micro Strategy, one of the top 10 holders of Bitcoin, in an interview with CNBC.

Regulation call

A cry for more regulation has now been heard from every corner of crypto and traditional finance, as well as from regulators and policymakers. This is good news that will end ambiguity for well-meaning industry actors with the thoughtful, clear guidance they want that considers the uniqueness of decentralized networks over centralized finance. This may speed up advocacy initiatives and various US bills already in progress, such as the Lummis-Gillibrand Bill and the Digital Commodities Consumer Protection Act. In turn, this should improve the confidence of all investors.

Liquidity and money flowing into the industry, which peaked at $3 tn in November of last year, just took a huge blow. This impacts the industry’s health and the growth of many emerging crypto companies in the short term that need to make it through crypto winter. In the longer term, some of these companies will form the next generation of public companies, if going the centralized route, requiring investor relations.

‘With a new industry, you always face human behavior and risk issues – these are bound to happen till it reaches maturity. Faith has been shaken, but blockchain is a very compelling tech and we are still figuring out where the center of gravity is,’ Callie Cox, an investment analyst at crypto trading firm eToro, told CNBC. She thinks the industry got ahead of itself, and the issues experienced by FTX had nothing to do with decentralized networks or the tech they’re based on.

Regulatory clarity will mean more institutional adoption, more retail investors and acceleration of the digitization and tokenization of securities. IROs will need to explain their company’s crypto investment holdings or blockchain tech implementation to investors in the future.

They will take a leading role in marketing their company’s tokenized securities to investor audiences, particularly to the next generation of crypto-native Gen Zs and Gen Alphas. IR professionals will also be working for decentralized autonomous organizations as leaders pioneering excellence in shareholder communications and community management, voting and healthy governance operations, and contributing to maintaining the fair valuation of their digitized assets.

The FTX debacle is a setback but might have a hidden silver lining to accelerate the industry’s maturity and significance for IROs.

Linda Montgomery is a Toronto-based fintech and digital assets marketing executive and an IR professional

Linda Montgomery

Linda Montgomery is a Toronto-based tech industry marketing executive and IR professional. She holds two business degrees and a CPIR (Certified Professional in Investor Relations) designation from the Canadian Investor Relations Institute.