Crypto Industry Continues Balancing Contagion With Cleanup Post-FTX

Crypto continues battling through a historic shock to its system, while industry lessons accumulate.

In just the past two weeks alone, bitcoin (BTC) has risen 30% on the year hitting a multi-month high, former FTX US president Brett Harrison has returned to the industry with a new startup backed by one-time FTX partner Anthony Scaramucci, and industry hedge funds ended the year down 50%.

Additionally, Binance opened in Bahrain, and next generation banks like N26 and Bison Bank’s digital asset subsidiary have announced expansions of their crypto services, while crypto-focused banks like Silvergate are shuttering some of theirs. Coinbase bowed out of Japan, and FTX founder Sam Bankman-Fried has penned yet another blog post from his parents’ home.

Overall, the transformational shift suffered by the digital asset industry during the latter half of 2022 has drawn increasing attention to the pitfalls of significant over-leverage among trading platforms, and spurred broader industry cleanup and damage control efforts in the wake of several high-profile bankruptcies.

Crypto’s Post-FTX Landscape Still Entangled With FTX

As PYMNTS reported Tuesday (Jan. 17), the FTX Debtors group and restructuring committee have so far identified $5.5 billion in liquid cash and assets in the FTX estate, up from their previous estimate of $5 billion, but still a number that represents a “substantial shortfall of digital assets.”

The FTX Debtors are represented by Sullivan & Cromwell LLP as legal counsel, a firm that the cryptocurrency exchange’s former founder and one-time CEO Bankman-Fried continues to take issue with — blaming them for rushing his collapsed empire into Chapter 11 proceedings.

“S&C and the GC were the primary parties strong-arming and threatening me into naming the candidate they themselves chose as CEO of FTX… who then filed for Chapter 11 and chose S&C as counsel to the debtor entities,” Bankman-Fried wrote in a public blog post, alleging the firm was acting in their own interest and chasing lucrative fees.

Now, he is accusing the top-tier law firm of struggling to perform basic math calculations. A bit rich, given the well-documented accounting oversight and mismanaged liabilities that sank his own company.

As Bankman-Fried wrote in a blog post Tuesday night (Jan. 17) defending his own frequently made assertation that FTX US is solvent and customers should be made whole, “these claims by S&C are wrong, and contradicted by data later on in the same document. FTX US was and is solvent, likely with hundreds of millions of dollars in excess of customer balances.”

At the heart of the issue is a $428 million line item he claims the firm failed to list as an viable asset.

FTX US almost certainly remains solvent today, he wrote, adding, “a straightforward reading of S&C’s statements suggests they are making a large and basic mistake.”

This, as FTX Debtors have said that $415 million worth of crypto was collectively stolen from the exchange’s estate in hacks since its Nov. 11 bankruptcy filing.

The Crypto Banking Conundrum

The conversation around cryptocurrencies and their trustworthiness has become increasingly polarized.

Japan is now urging regulators around the globe to treat crypto actors as stringently as they do traditional banks and financial institutions, per a Bloomberg report.

“If you like to implement effective regulation, you have to do the same as you regulate and supervise traditional institutions,” Mamoru Yanase, deputy director-general of the Financial Services Agency’s Strategy Development and Management Bureau, said. “What’s brought about the latest scandal isn’t crypto technology itself, it is loose governance, lax internal controls and the absence of regulation and supervision.”

U.S.-based Silvergate Capital Corp., one of the go-to banks for crypto companies and an early provider of services catering to the industry, is finding this out the hard way.

On Tuesday, it announced a $1 billion loss for the fourth quarter of 2022. CEO Alan Lane said on a call with analysts announcing the results that the bank plans to stop offering certain cash management services, discontinue certain crypto custody services, and eliminate a portion of its digital-asset product portfolio.

As FTX collapsed, Silvergate’s customers withdrew roughly $8.1 billion in deposits in the last three months of 2022.

Elsewhere, German online bank N26 is expanding its cryptocurrency operations to include Germany, Switzerland, Belgium, Portugal and Ireland, as per Reuters. The next generation financial institution previously only offered digital asset services to some customers in Austria.

As reported by PYMNTS, Portuguese regulators have granted the country’s first central bank-issued crypto license to Bison Bank’s digital asset-focused subsidiary, Bison Digital Assets, making the bank the first ‘Virtual Asset Service Provider’ (VASP) to receive regulatory approval to enter the crypto marketplace in Portugal, and one of the few with such a license in all of Europe.

Meanwhile, Binance has been welcomed with open arms in Bahrain, and registered itself with Sweden’s financial watchdog — although the controls this places over the giant crypto exchange are few and far between outside of anti-money laundering reports.