Insight & Analysis

FTX collapse confirms corporates’ crypto view

Published: Nov 2022

The collapse of the crypto exchange FTX and the accompanying downfall of its founder, the ‘King of Crypto’ Sam Bankman-Fried, has rocked the crypto world. For corporate treasurers, however, the drama serves only to reaffirm their existing views on the value of crypto assets.

In the world of crypto, the big corporate statements are made over Twitter directly from the founders. Unlike their financial institution counterparts, where the corporate statements are dressed up in legalese, for crypto firms the statements are more refreshing and direct.

After the recent failure of the FTX crypto exchange, its leader Sam Bankman-Fried tweeted that he had messed up. Well, he wrote words to that effect using more colourful language – the sort of language that you certainly wouldn’t see coming out of a traditional financial institution.

The 30-year-old founder’s apology after the platform’s collapse, however, didn’t change much. Customers who had money on the platform were unable to access their funds.

It was a dramatic fall from grace for ‘King of Crypto’ who had become something of a celebrity and had been compared (by Trump’s former spokesperson Anthony Scaramucci) to J. P. Morgan’s founder John Pierpont Morgan.

FTX was the world’s second-largest crypto exchange, a trading platform that – like a stock exchange – made it possible to buy and sell cryptocurrencies. The company had its main offices in Chicago and Miami and was headquartered in the Bahamas.

Prior to the meltdown there had been announcements that Binance – a rival crypto exchange – was in discussions to acquire FTX after it had suffered a serious liquidity crunch. However, the Binance leader Changpeng Zhao and Bankman-Fried entered into a public spat over Twitter. Zhao – widely known by his initials CZ in the crypto world – tweeted that Binance was withdrawing its investment in FTT (FTX’s crypto tokens) after “recent revelations” had come to light. Bankman-Fried – also known as SBF – tweeted back, “A competitor is trying to go after us with false rumours. FTX is fine. Assets are fine. FTX has enough to cover all client holdings…”

It turned out that FTX was not fine. And its customers certainly didn’t think so. The tweets, and Binance’s withdrawal of its FTT, triggered a run on deposits and FTX couldn’t meet the demand.

In fact, it was later revealed that FTX was highly leveraged and would never have been able to accommodate such withdrawals. The Financial Times reported that it had seen a copy of FTX’s balance sheet and that the exchange reportedly only had US$900m in assets to cover US$9bn of liabilities.

It has also since been revealed that FTX had moved US$10bn of customer funds – which should have been kept in custody – into Alameda Research, a hedge fund that is owned by Bankman-Fried and run by his reported girlfriend.

Depending on who you ask, Bankman-Fried is a criminal, the orchestrator of a Ponzi scheme, a puppet that has been controlled by other masters, or a victim of a rival’s takedown.

The drama, however, has threatened to impact other crypto firms and also damage the reputation of the wider crypto industry. For treasurers, however, the impact is limited. Some firms had reportedly invested in FTX and are unable to get their money back. The Ontario Teachers’ Pension Plan, for example, reportedly invested about US$400m.

For most, however, the attitude to crypto is still one of caution and such a collapse only serves to confirm the view they have of crypto as a risky and volatile asset class. Also, in a high-inflation environment, with higher interest rates, there is less of a need to go hunting for riskier assets to get a return.

This ties in with a forthcoming feature in the November/December issue of Treasury Today which finds that the attitudes of treasurers towards crypto have been largely unaffected by the ‘crypto winter’ and various scandals. The believers will continue to take a long-term view and they would argue that the current collapse is part of the sorting of the wheat from the chaff in a nascent industry. Meanwhile, the crypto sceptics will take the current events as confirmation of their existing beliefs.

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