The dramatic decline of the FTX crypto exchange has severely shaken investor confidence. For traditional financial institutions with crypto services, the debacle could represent an opportunity.
A year ago today, the crypto scene was in a party mood. This time last year, the market capitalization of cryptocurrencies was at an all-time high of around $3 trillion, bolstered by bitcoin at just over $65,000. The golden age for digital assets had arrived. But what a difference a year makes.
A year later, the jubilant mood has turned into caterwauling. Bitcoin has fallen by around 70 percent, and altcoins by even more in some cases. There is no longer any sign of enthusiasm and boundless optimism. Even the arrogance that some eccentric crypto celebrities displayed in the course of last year’s bull market evaporated. Evermore all-time records have been replaced by bankruptcies, scandals, losses, and layoffs now dominating the daily crypto news cycle. An ice age set in over the crypto landscape.
Fallen Crypto Angel
Investors who recently poured billions of dollars into promising and risky startups and protocols in hopes of historically high returns are in short supply these days. And one-time whiz kids like Sam Bankman-Fried aka «SBF,» the founder of crypto exchange FTX, are now fallen angels with tarnished halos. Representative of last year’s exuberance in the crypto industry is one of his statements to the «Financial Times,» even if it ultimately does not quite do justice to SBF’s inherently likable personality.
At the time, the 30-year-old American said that a takeover of Goldman Sachs and CME Group was not «out of the question» if FTX beats the competition from Binance and Coinbase. How things have changed.
His corporate empire collapsed at a staggering pace within the space of a few days after failing to find new backers. His tentative deal to sell his exchange to rival Binance and billionaire CEO Changpeng Zhao quickly fell through. In his hour of need, no savior appears to be on the horizon for the crypto icon. He and FTX rushed to the aid of industry neighbors such as Blockfi and Voyager Digital in this year’s crypto crash, albeit not entirely altruistically.
No Savior in Sight
It is not without a certain irony that SBF, of all people, has repeatedly spoken out in Washington in favor of stronger regulation of cryptocurrencies. Just a few months ago, he was warning some crypto exchanges were insolvent. One has to wonder if he had his own exchange in mind.
Instead, he gambled with his trading firm Alameda Research, or more aptly, leveraged himself by running a hedge fund business and an exchange at the same time, backed by FTX’s own token FTT, which made up a large part of Alameda’s balance sheet.
Classic Bank Run
It dawned on investors at the start of the week that if the FTT token fell, so would Alameda’s value. As investors lost confidence, the run on the exchange began. A classic bank run. FTX faced a major liquidity shortage since there was no way to pay all those trying to withdraw all their money at once.
The fly in the ointment for a crypto company like FTX is no lender of last resort is there to turn to when you desperately need money and have exhausted all other options.
A lender of last resort provides liquidity to financial institutions that are experiencing financial difficulties. This can be the case in times of financial turmoil, when banks have doubts about lending to other banks and many people suddenly want to withdraw their money from their accounts. In most developing and developed countries, the lender of last resort is the country’s central bank. The central bank’s job is to prevent a bank run or panic due to a lack of liquidity from spreading to other banks.
The Disservice of SBF
Whatever happens next on the crypto scene, one thing is certain: regulators around the globe will work even more urgently on regulatory standards for the crypto industry. And that’s a good thing. Whether it’s a centralized exchange, a hedge fund, FTX, Alameda, or some combination, the most important thing is to restore investor confidence in digital assets.
In retrospect, this is probably one of the biggest disservices SBF has done to its industry. Currently, many investors and market observers fear the start of a downward spiral in cryptocurrencies and more casualties, especially since FTX is at the center of the crypto world. Many large institutional investors have invested in the exchange. They now face big losses, which could jeopardize the future funding of the entire crypto ecosystem. At the same time, FTX and Alameda were major investors in the vast blockchain universe.
A Flight to Quality?
Unlike its main competitor Binance, FTX was primarily a crypto-derivative trading platform for institutions. But FTX’s precipitous and deep fall has now scared off banks, hedge funds, and asset managers who previously flirted with crypto firms due to counterparty risk.
Traditional financial institutions like Goldman Sachs, on the other hand, which offer crypto services to their clients, may now find the FTX debacle playing into their hands. They could benefit from a flight to safety, so to speak. Because with or without FTX and Sam Bankman-Fried, the interest in digital assets remains.