Bankruptcy with consequences: What the bankruptcy of crypto trading platform FTX means for the industry

FTX bankruptcy: How could this happen?

One thing in advance: The FTX bankruptcy is not the first terrible news from the crypto industry this year. In spring 2022, the Terra stablecoin to the ground and burnt investor money in the amount of 50 billion dollars, a short time later, the Celsius Network Bankruptcy crypto platform on. And then in November, FTX filed for creditor protection and was finally declared bankrupt.

But how could that happen? A look back: The now 30-year-old Sam Bankman-Fried founded the FTX trading platform in April 2019 after initial successes in the crypto scene. Three years later, it had almost one million customers and its own cryptocurrency FTT. Using the FTX platform, users were able to trade cryptocurrencies such as Bitcoin and Ether, but also with far more complex financial products. It was used not only by private investors, but also by hedge funds and other institutional players.

But when competitor and market leader Binance announced in early November that it would divest itself of its FTT holdings, FTX came under pressure as investors withdrew funds from FTX on a large scale. For the crypto exchange, this was the meltdown, which aggravated the sell-off of Bitcoin & Co., which was taking place anyway. The precarious situation culminated in Binance wanting to take over the weakening FTX but withdrawing the offer after an audit. Some suspect this was a clever manoeuvre by Binance founder Changpeng Zhao to eliminate a competitor - he denies this.

According to court documents, a class action lawsuit has now been filed against Sam Bankman-Fried in Miami. The statement of claim states that the interest-bearing cryptocurrency accounts offered by FTX should not have been sold in the USA due to a lack of license.

There is also the assumption that the former “crypto prodigy” could have transferred many millions of dollars to various wallets after the FTX bankruptcy. Or: transferred client funds from FTX to his own trading company during his active period in order to trade them there. This is now being investigated by the US Department of Justice and the US Securities and Exchange Commission. The case is complicated because FTX operates a subsidiary in the USA, but the group is registered in Antigua and Barbuda and is headquartered in the Bahamas.

It is likely that some time will pass before the FTX case is fully investigated. However, it is already clear that the events surrounding FTX are a shock for affected investors and the entire crypto industry, which is in a delicate phase anyway. This is because rising interest rates worldwide are particularly damaging risky financial investments, including cryptocurrencies. As a result, Bitcoin, Ether and other crypto assets have come under further pressure. Last Thursday, the world's largest cryptocurrency Bitcoin temporarily fell below 16,000 dollars - in 2021, the price was still 68,000 dollars. Die Market capitalization of the entire crypto market plummeted from 1.05 trillion dollars to around 844 billion dollars in just one weekend.

What are the consequences of the FTX bankruptcy for the crypto industry?

The collapse of FTX is causing problems for more and more industry-related companies. On the one hand, FTX, led by Bankman-Fried, is also connected to the crypto brokerage firm Alameda Research. This conglomerate comprises around 140 companies that have filed for bankruptcy. Because a significant part of the crypto world was involved there in some way, this has a domino effect. On the other hand, the FTX bankruptcy is also likely to affect crypto companies that had invested part of their funds with FTX.

Crypto credit brokers are particularly affected by this. On the one hand, they use crypto coins as collateral for loans in real money or in other cryptocurrencies, and on the other hand as an interest-bearing deposit to make these coins available to third parties at interest. Interest is often paid out not in real money, but in self-issued cryptocurrencies, the value of which may expire. For example, the Cryptocurrency broker Genesis to stop granting new loans to ensure liquidity and to temporarily stop repayment.

It is still unclear what the liquidity of Genesis is doing, but the company is said to have stored 175 million dollars with FTX. The Genesis parent company Digital Currency Group had therefore already provided a payment of 140 million dollars to fill the gap.

It is currently not foreseeable what extent the FTX insolvency will still assume. However, it is clear that some industry representatives will probably be taken into kinship, that the crypto industry will suffer further damage to its image and that regulators could take further measures.

Calls for crypto regulation are getting louder

Following the FTX disaster, Binance CEO Changpeng “CZ” Zhao, for example, wants to found a group of industry representatives that will be in close contact with crypto regulators. At the recent G20 summit, he said: “We need some regulations, we need to get it right, we need to get it on solid footing.” The industry has the common task of protecting consumers. It is not the sole task of regulators.

But politicians, state institutions and supervisory authorities are already alarmed. For example, the US House of Representatives a hearing on FTX. In addition to Bankman-Fried, representatives from competitors such as Binance will also be heard. US Treasury Secretary Janet Yellen called for stronger monitoring of the market and the head of the German banking supervisory authority BaFin said in response to the FTX bankruptcy that the crypto industry needed a protective wall against the banking system or comprehensive regulation. France's central bank chief Francois Villeroy de Galhau also called for a global response from regulators.

At least in the EU, crypto regulation is already on the right track. In October 2022, the Economic Committee of the European Parliament adopted the MICA regulation (Markets in Crypto Assets) This is a bill that aims to create a uniform regulatory framework for cryptocurrencies across the 27 member states of the European Union, which could come into force in 2024.

The MICA regulation defines licensing processes for crypto service providers who want to operate in the EU. It includes requirements for risk management, the separation of client and company funds, regulatory requirements and the disclosure of conflicts of interest — all of which could possibly have prevented a debacle like that of FTX.

It remains to be seen whether MiCA could even serve as a blueprint for the USA and other nations and push ahead with global crypto regulation. However, the crisis is likely to result in new learnings and better regulatory standards, which will ultimately benefit the entire crypto industry and consumers.