The fall of FTX last week will have “cascading effects” on the broader cryptocurrency industry with more companies possibly going belly up in the coming weeks, Changpeng Zhao (CZ), CEO and co-founder of Binance, warned during a recent industry event in Bali.
Speaking at the 4th Indonesia Fintech Summit 2022 on November 11, 2022, CZ told the audience that the collapse of FTX, which was once among the world’s top five largest crypto exchanges, could create ripple effects throughout the entire industry, stating that the 2008 global financial crisis was “an accurate analogy” to the event.
“With FTX going down, we’ll see cascading effects,” he told the audience, citing companies including BlockFi and Voyager Digital as the latest casualties of the FTX collapse. “A few other projects will be in a similar situation, I think it will take a couple of weeks for them to come out.”
FTX won the bidding war to buy the assets of bankrupt crypto lender Voyager Digital for a reported US$1.4 billion in September, a deal that was subsequently called off.
BlockFi, a crypto lender bailout by FTX earlier this year, suspended withdrawals in the wake of FTX’s troubles, citing the “lack of clarity” on the status and FTX and its affiliates as a hindrance to its ability to operate suitably.
And Genesis Trading, a US crypto broker, said its derivatives business has about US$175 million in locked funds on the frozen exchange, stating however that the funds were “not material to our business” and would not impact its market making or trading functions.
FTX filed for Chapter 11 bankruptcy protection in the US on November 11 after a dramatic series of events led to a run on deposits and a selloff of FTT, its in-house crypto token. FTT, a utility token on the FTX crypto exchange that can be used to reduce trading fees, has plunged more than 90% this month.
Facing a cash crunch, FTX tried to organize a bailout but failed to sell itself to rival Binance which backed out abruptly citing “issues … beyond our control or ability to help.”
“The deal – which I can’t comment on the specifics – from our perspectives, didn’t make sense from a number front,” Zhao told the audience during the Bali conference.
“From a financial perspective, there’s a big hole. From the new users perspective, we have very high overlaps. [Binance] covers all the regions [FTX] covers, and they have much lesser users than us. And from a technology or product perspective, I think we have a superior product, they don’t have anything that we don’t have.”
“Having that setback, short-term, it’s really painful for a lot of retail investors that’s on FTX … it’s devastating for the industry,” Zhao said
“A lot of consumer confidence is shaken, and I think we’re being set back a few years back.”
Despite FTX’s failure, Zhao remains confident in the crypto industry’s long-term prospects and the sector’s ability to recover from the latest setback.
“The builders will continue to build… the technology is not going away. We will recover from this,” he said.
“In a decentralized industry, when one player goes down, it causes a lot of pain but a lot of players will come in very quickly, and those players that fill the gap will be stronger ones. The market will heal itself.”
FTX has more than 100,000 creditors, assets in the range of US$10 billion to US$50 billion, and liabilities in the range of US$10 billion to US$50 billion, according to its 23-page bankruptcy filing, obtained by CNBC. Approximately 130 additional affiliated companies are part of the proceedings.
The Wall Street Journal reported on November 11 that FTX had lent billions of dollars worth of customer assets to fund the investment activities of Alameda Research, a trading firm and sister company to FTX, citing a person familiar with the matter.
Internally, FTX is also probing a potential hack that saw more than US$600 million siphoned from its crypto wallets just hours after it filed for bankruptcy, CoinDesk reported on November 12.
“Now, regulators, rightfully, will scrutinize the industry much harder, which is probably a good thing,” Zhao said.
“Before, the regulation was much more focused on know-your-customer (KYC) and anti-money laundering (AML). We’ll come into much more scrutiny on [exchanges’ operations, business models, proof-of-reserves, where users’ funds are] … I think that’s going to be where the focus will be for a little while.”
The collapse of FTX, which was once valued at US$32 billion, comes on the heels of a prolonged “crypto winter” that has seen prices crash since the last months of 2021. Both bitcoin and ether have fallen more than 70% since their respective peak of US$65,000 and US$4,700 in November 2021. They are now trading at about US$17,000 for bitcoin and US$1,300 for ether, data from Coinmarketcap.com show.
This comes amid a series of highly publicized failures faced by the crypto industry this year, including the implosion of TerraUSD and its sister token Luna, as well as the collapse of crypto lender Celsius Network.
In a later tweet, CZ announced that Binance will be forming an industry recovery fund to reduce the cascading effects of FTX