crypto strategy

FTX’s Fall Shakes Institutional Confidence in the Crypto Industry

After the collapse of a crypto empire, what is the future of crypto assets in capital markets?

The crypto world just had the most significant week in its 15-year history, which also set a precedent in the annals of financial history. FTX, one of the world’s leading crypto exchange and trading conglomerates, in an incredibly quick series of events over just over a week, filed for bankruptcy protection in the United States on Friday 11 November 2022.

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

Was it caused by poor risk management and poor accounting, or by excessive use of leverage? Was 30-year-old MIT graduate FTX founder and CEO Sam Bankman-Fried too inexperienced to run a $32 billion company and was he mixing his investors’ funds with other sectors of the industry? ‘company ?

These answers will come out in what is sure to be a multi-year investigative process, but will offer no solace to the carnage of victims, ordinary retail crypto investors and crypto start-ups who held their cash with FTX to a startling multitude. from sophisticated institutions and funds that will reduce their FTX investments to zero. These include Sequoia Capital, Ontario Teachers’ Pension Fund, SoftBank, Singapore sovereign wealth fund Temasek, BlackRock, Galaxy Digital and others.

Played on Twitter

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

This could be followed in real time in a series of tweets showing a ‘bromance’ turned sparring between Bankman-Fried and Binance CEO Changpeng Zhao. Zhao signaled his intention to sell his $FTT token holdings after reviewing FTX’s books, which spooked the market – as did some tweets from Bankman-Fried, who later issued a lengthy apology admitting he had fair.

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 get the trade started. He is known for his philanthropic efforts and huge political donations, and was an active contributor to the development of US crypto regulation. He saved Voyager Digital and other companies that fell during the harsh crypto winters last summer, which could have been contributing factors.

The fall of FTX is a contagion that will have far reaching effects and erode the trust that has taken years to build in the crypto industry. Bitcoin, which some say is part of a different ecosystem than FTX, fell to a new bear market low of $15,500 last week along with other coins. “The crypto industry needs to grow and needs progressive regulation to move from the Wild West to the institutional asset space,” says Michael Saylor, CEO of Micro Strategy, a top 10 bitcoin holder .

Regulation call

A call for more regulation has now been heard from all corners of crypto and traditional finance, as well as regulators and policymakers. This is good news that will end the ambiguity for well-meaning industry players with the thoughtful and clear guidance they want, which takes into account the uniqueness of decentralized networks versus centralized finance. This could accelerate advocacy initiatives and various US bills already underway, such as the Lummis-Gillibrand bill and the Digital Commodities Consumer Protection Act. This in turn should improve the confidence of all investors.

Liquidity and cash flow in the industry, which peaked at $3 billion in November last year, has just taken a hit. This is impacting the health of the industry and the growth of many near-term emerging crypto companies that have to weather the crypto winter. In the longer term, some of these companies will form the next generation of public companies, if they take the centralized route, requiring investor relations.

“With a new industry, you always face issues of human behavior and risk – those will inevitably occur until it reaches maturity.” Faith has been shaken, but blockchain is a very compelling technology and we are still figuring out where the center of gravity is,’ Callie Cox, investment analyst at crypto trading firm eToro, told CNBC. She thinks the industry has forged ahead and that the problems FTX faced had nothing to do with decentralized networks or the technology they are based on.

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

They will take a lead role in marketing their company’s tokenized securities to the investing public, especially to the next generation of crypto-native Gen Zs and Gen Alphas, who will work for decentralized autonomous organizations as Pioneering leaders of excellence in shareholder communications and community management, voting operations and sound governance, and helping to maintain the fair value of their digitized assets.

The FTX debacle is a setback, but could have a hidden silver lining to accelerate the industry’s maturity and importance to IROs.

Linda Montgomery is a Toronto-based fintech and digital asset marketing executive and IR professional.

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