The epic crisis that many observers dreaded in crypto has seemingly come to pass.
Right now, there’s mass confusion over who’s exposed to FTX’s spectacular collapse, how far the damage may spread and what will happen on the regulatory front.
“It’s crazy after all these years that we would still be seeing these kinds of events,” he added.
FTX’s demise has been playing out over time and had been telegraphed by a series of collapses, a roster that includes Terraform Labs’s UST stablecoin, the Celsius Network (which FTX passed on buying) and Voyager Digital (with which FTX struck a deal to buy that bankrupt firm’s assets).
Pair noted that there had been reports of links between all of those firms, as they all had FTT tokens on their balance sheets, and FTX allegedly had to step in to buy them and keep those tokens from flooding the market (and driving down the tokens’ prices).
This week, questions about FTX’s and sister company Alameda Research’s balance sheet exposure to the illiquid FTT token (and used as collateral by Alameda) sparked a massive and swift decline in FTT’s value. Now there are allegations of funds misused by FTX in an attempt to stave off liquidity crunches and what wound up being an unavoidable collapse.
Management, said Pair, “made some bad decisions to try and dig themselves out of that hole — that’s the way it looks from the outside,” adding that “we didn’t know the full extent of the contagion.” Binance, which backed out of talks to buy FTX, wanted no part of it. Much of what’s circulating in the press is still a bit speculative, and it will take time to find out what happened.
Swift Comedown for SBF
It’s a swift comedown for Sam Bankman-Fried, the now-former FTX CEO who once boasted that he might buy Goldman Sachs. He was a high-profile donor to political campaigns and had a host of celebrity “ambassadors” hawking FTX.
It didn’t have to be this way, Pair said, who added that Bankman-Fried’s downfall came partly because “people get themselves into a hole and they don’t want to admit it … that’s how … implosions like this can happen. ”
No matter what happens to FTX as a company, the ripple effects are already being felt beyond crypto’s shores, touching traditional financial players.
Robinhood, noted Pair, has seen its stock price take a hit; FTX took a 7.6% stake in the platform earlier this year.
Elsewhere, high-profile investors like Sequoia have written down their investments in FTX — worth hundreds of millions of dollars — to zero. The wild gyrations of bitcoin and other digital coins may be a result of forced selling, as FTX and others have had to raise funds to cover withdrawals and margin calls and raise capital. BitPay, Pair told Webster, has had no exposure to FTX.
“A lot of people — investors in particular — are going to be a lot more cautious and a lot more skittish about making investments in this space,” he predicted.
Of FTX, he said: “I don’t think there’s going to be any bailout coming here.”
It’s unclear what will happen on the regulatory front, at least for the moment. Pair noted that there have already been regulatory frameworks in place governing FTX. The firm had been incorporated in Antigua and Barbuda and headquartered in the Bahamas.
Those regulations govern how customers’ funds and assets are held and how they can be traded.
“But these regulations, even in the legacy financial world, don’t necessarily stop big events like this from happening,” Pair said. Regulators will need to go back to the original intent of various rules and update them to be crypto-specific, he said.
Beyond the frameworks, a number of factors, taken at a company-wide level, would have prevented the downfall of FTX and can prevent future FTX-like events from occurring. Those include having a CFO, a board of directors and a risk department actively working within the firm to keep an eye on things. Investors should be fully engaged, demanding audits and financials. Investors will certainly demand this kind of governance in the future, Pair said.
Looking back on FTX’s potential sale that never was and then slide into bankruptcy, Pair said, “it’s stunning how quickly it all happened — and we may not know, for a while, what kind of knock-on effects there will be.”