November 2022 is a month that investors will not forget, especially in the field of cryptocurrencies. The worst may be yet to come.
Over the past two weeks, the digital asset industry has watched in horror as the collapse of FTX, the multi-billion dollar crypto exchange created by one of its biggest and brightest stars Sam Bankman-Fried.
The FTX failure shook the foundations of the entire ecosystem. Cryptocurrency prices all fell as investors rushed out of risky positions. As a result, in a panic, depositors rushed to withdraw their funds from several crypto platforms, forcing lenders to halt withdrawals.
How did we get here? Can cryptocurrency survive? The saga isn’t over yet, but if you’re just getting started, here’s what you need to know.
On November 2, an article from a Coindesk-affiliated post cited a leaked financial document that raised questions about the relationship between FTX and Bankman-Fried hedge fund Alameda. On paper, they were two separate companies that happened to be owned by the same man. But the Coindesk article said that Alameda is “based largely on a sister company-invented coin.”
competitor, Binance, said that the company would liquidate $580 million worth of FTX, the FTX token. This set off a firestorm of decline that FTX didn’t have the money to help.
The panic spread, leading to a drop in the value of not only FTT but also more mainstream cryptocurrencies including Bitcoin, Ethereum, and Solana.
FTX faced a massive liquidity crunch. It needed a bailout and, for a while, it looked like it might be bailed out by Binance, its rival whose withdrawal then escalated the crisis.
On November 11, FTX and Alameda filed for bankruptcy, and Bankman-Fried resigned as CEO of the exchange. “I’m done,” he wrote in a lengthy Twitter apology.
FTX has appointed restructuring expert John J. Ray III as CEO to shepherd what’s left of the company through bankruptcy. This includes taking a good look at the company’s financial statements and knowing exactly how much assets and liabilities it holds.
It’s only been about a week, and Ray has declared it the biggest mess he’s ever encountered. It comes from an executive who made his name overseeing the liquidation of Enron, the largest bankruptcy reorganization in US history.
“Never in my professional life have I seen such a complete failure of corporate controls and such complete absence of trustworthy financial information as happened here,” Ray wrote in a court filing on Thursday.
The file contains evidence of massive mismanagement and possible fraud under Bankman-Fried’s leadership.
Bankman-Fried has not been charged with any crimes. His lawyer did not respond to CNN’s request for comment.
The cryptocurrency industry is on edge, waiting for the next dominoes to fall. Shortly after the FTX crash, crypto companies received requests from customers seeking refunds. Many companies have had to put withdrawals on hold until their liquidity problems are resolved.
“In the crypto world, the moment you see a company announcing ‘we’re pausing withdrawals’ puts them on death watch… it’s very unusual for someone to say we are We stop the withdrawals and then they say ok, ok the withdrawals are back, we’re fine.”
Among the companies at risk is lender BlockFi, which said it has “significant exposure” to FTX. BlockFi has suspended most operations. According to the Wall Street Journal, the company is preparing to file for potential bankruptcy.
The pain isn’t limited to crypto companies. Venture capital firm Sequoia has reduced its $210 million investment in FTX to zero. Similarly, the Ontario Teachers’ Pension Plan, which invested $95m, said it now believes the investment is worthless. Almost 1 million people may have lost all the money they put into FTX.
Meanwhile, Binance is stepping in as a potential lifeline for companies affected by the FTX crash. Its chief executive said on Monday that his team would establish an “industry recovery fund” for projects facing a liquidity crisis. Binance and others have scrambled to try to differentiate themselves from FTX, reassuring customers and investors that their financials are on solid foundations.
A strange genius becomes an outcast
At the center of the whole story is a mysterious 30-year-old who has managed to carve his way into powerful circles dominated by celebrities, legislators and wealthy investors.
In recent years, SBF (as he is known online) has appeared on the covers of Forbes and Fortune magazines, and has been hailed as the Warren Buffett of cryptocurrency. He amassed a whopping personal fortune of $26 billion at its peak earlier this year.
All of that disappeared with the breakup of FTX. His fortune was completely wiped out, and now his businesses are under investigation by New York federal prosecutors, according to a person familiar with the matter.
It comes after the SBF had become a staple in Washington as well, traveling regularly to lobby lawmakers for more regulatory clarity for the cryptocurrency industry.
Regulatory investigations and audits
FTX said this week that its representatives are in contact with “dozens” of federal and international regulatory agencies. In addition to the investigation in the Southern District of New York, FTX is said to be under investigation by the Securities and Exchange Commission and the Commodities and Futures Trading Commission, according to multiple news sites.
Authorities in the Bahamas, where FTX is headquartered, opened a criminal investigation shortly after the company filed for bankruptcy.
On Friday, a House subcommittee said it was seeking internal documents and communications from Bankman-Fried and FTX to understand how the cryptocurrency exchange suddenly collapsed and what was being done to get customers’ money back.
Can the crypto world survive?
In short, yes. But there will be a lot of pain. “In the short term, the collapse of FTX has destroyed confidence,” said Matt Hogan, CIO of crypto asset manager Bitwise. See what happens.”
Many observers have compared cryptocurrency to the dotcom bubble of the late 1990s — many companies went bankrupt, but the ones that survived, like Amazon, emerged to become cornerstones of the tech industry.
Another historical comparison that has been circulated is the fall of Lehman Brothers in 2008, which precipitated a global financial crisis. Crypto optimists may be quick to point out that Lehman hasn’t completely wiped out Wall Street. Skeptics might counter that it was only because the US government interfered – a highly unlikely outcome in the highly unregulated world of crypto.