In November 2022, cryptocurrency exchange FTX collapsed over a period of roughly 10 days. Following a report by Coindesk that suggested potential leverage and solvency concerns, the exchange faced a run on its FTT token that led to a liquidity crisis. There was also an attempt to negotiate a bailout from rival exchange Binance that quickly fell through.
FTX, which was once valued at $32 billion, has since seen it assets frozen, its enigmatic CEO Sam Bankman Fried resign, and the exchange file for bankruptcy.
Along with the thousands of FTX’s retail customers — who likely thought their money was being safely held and not, as it has since been revealed, used for speculation — some very big institutional investors have also taken a hit.
Singapore’s sovereign investor Temasak has since written off an investment of $210 million for a minority stake of around 1% in FTX International, and a $65 million investment for a minority stake of around 1.5% in FTX US.
Similarly, the Ontario Teachers’ Pension Plan has now written off $95 million in total investments into FTX International and FTX US.
The implications for the future of FTX and the broader cryptocurrency industry are ongoing and difficult to assess. However, while it may be difficult to see, the dark cloud of capitulating centralised crypto exchanges throughout 2022 has produced a very bright silver lining for the original concept behind Bitcoin and crypto: decentralisation.
BAD ACTORS, NOT ASSETS
“Recent reports suggest potential fraud conducted at FTX, which is deeply concerning for all parties. We fully support the efforts of regulators and others to review the risks and causes of failure for this business,” read a statement from the Ontario Teachers’.
The details regarding FTX’s collapse are complicated, surrounded by double-dealings and creative bookkeeping, but suffice to say that the larger scheme has the appearances of an old-fashioned scam: one that is only possible when there are bad actors at the helm.
“When you talk about crypto, it's really hard for people to differentiate crypto assets and decentralised platforms from some of the bad actors that have established centralised entities within the crypto space,” a senior portfolio manager at an asset management firm told AsianInvestor.
Sam Bankman Fried was a compelling figure whom people came to trust, as he spoke the language of financial regulators, big investors, and lawmakers — but he ultimately appeared to enact a Ponzi scheme on FTX, which is a centralised exchange, they said.
“That doesn't really negate the underlying assets, Bitcoin and cryptocurrencies, which have continued to function as they should,” they said. “The really fascinating [thing] throughout all the turmoil this year is that all the decentralised applications and cryptocurrencies have continued to work just fine, as they are controlled by protocols and not corrupt people.”
In fact, the only failings of the cryptocurrency industry this year have been due to centralised entities and businesses that were mismanaged or took unquantified risks.
“Celsius, Babel, Voyager, Three Arrows Capital, Genesis, Alameda, all those centralised entities were essentially taking bets that didn't play out and ended up losing everything due to price movements,” they said.
While the volatility of the crypto markets this year has caused a good deal of stress, particularly for retail investors, the washing out of weak players or inappropriate actors can ultimately be viewed as healthy — and perhaps the end of the beginning for the nascent sector, they said.
“The decentralised assets and platforms have continued on just fine, and these blow-ups are really just indicating that centralised entities need a lot more regulation. In the wake of these bad actors trying to make ludicrous gains, perhaps investors should also be looking at cryptocurrency with a renewed focus on what this technology was supposed to be: a trustless and tamper-proof form of digital money."