Crypto Contagion Sends Coins and Companies Tumbling

FTX continues to be an industry “market maker” from beyond the grave, as the realities of entangled counterparty risk rear their heads throughout the cryptocurrency industry, while stoking fears over which companies might also now be in distress following FTX’s collapse.

These budding contagion concerns are also remarkable given that only months ago cryptos were being positioned to change the way consumers would pay for goods and trade financial assets. Today, that thesis of disruption looks to have unraveled almost as rapidly as FTX and founder Sam Bankman-Fried (SBF).

The Enron-style meltdown of one of the higher valued and more successful companies in the cryptocurrency space is leading for calls for crypto regulation. The United States government is holding a hearing on FTX next month, and the company’s own bankruptcy hearing starts Tuesday (Nov. 22). Both cases are likely to result in legislative repercussions throughout the crypto landscape.

Customers Losing Money

The adverse effects of FTX’s insolvency continue to spread from one company to another, as those actors with assets tied up in the failed platform find themselves, like the exchange’s reputed million-plus retail users, with little to no recourse to recover their deposits.

Since FTX filed for bankruptcy Nov. 11, industry peers like crypto prime broker Genesis and digital asset lender BlockFi have gone public with the operational stresses, up to and including bankruptcy, that they’re facing as a result of their exposure to FTX and its affiliates, including FTX US and Alameda Research.

Genesis announced that it is pausing withdrawals from its lending arm as a result of “unprecedented market turmoil.” The cryptocurrency brokerage’s trading arm, Genesis Trading, disclosed that it has $175 million in funds locked in its FTX trading account. As reported by The Wall Street Journal (WSJ), the lender was seeking a fresh capital injection of nearly $1 billion for its lending unit in order to help weather the turmoil of FTX’s demise.

“Our #1 priority is to serve our clients and preserve their assets. Therefore, in consultation with our professional financial advisors and counsel, we have taken the difficult decision to temporarily suspend redemptions and new loan originations in the lending business,” the company wrote on Twitter.

Our #1 priority is to serve our clients and preserve their assets. Therefore, in consultation with our professional financial advisors and counsel, we have taken the difficult decision to temporarily suspend redemptions and new loan originations in the lending business.

— Genesis (@GenesisTrading) November 16, 2022

The parent company of Genesis, Digital Currency Group (DCG), stepped in to provide Genesis with $140 million in equity, as reported by Bloomberg. It remains unclear whether Genesis customers have “lost” their money a la FTX or if it is just temporarily locked up.

The FTX-induced struggles at Genesis are having further knock-on effects at the Winklevoss-owned Gemini cryptocurrency exchange, where it is the lending partner for Gemini’s Earn program. As a result of Genesis pausing withdrawals, the company can no longer meet requests for redemptions from Gemini Earn customers within the promised five business-day window.

At last count, there was an estimated $700 million of customer funds tied up in the Gemini Earn platform, the future of which has now been left in limbo.

Additionally, as PYMNTS reported last week, the bitcoin and crypto securities firm Bnk to the Future cited fallout from the FTX bankruptcy for its decision to back out of the acquisition of crypto industry lending platform Salt Lending. Perhaps ironically, the deal aimed to create a regulatory-compliant solution for customers impacted by the crypto lending crisis.

At the same time, crypto exchange platform Liquid Global has also disclosed that post-FTX’s implosion, it is not as liquid as its name implies and has halted withdrawals on its platform as well as paused all forms of trading as it “assesses the situation.”

Popular crypto lender BlockFi was bailed out by FTX earlier this year and has significant exposure to the exchange and its associated entities like Alameda Research and FTX US as a result of that lifeline. It is reported to be planning to lay off a portion of its workforce and is indicating it may also explore a bankruptcy filing itself, WSJ reported.

Coins Losing Their Appeal

While FTX’s undoing was the result of widespread financial mismanagement, with FTX itself not operating its business on-chain, the culture and values of crypto had a central role in the exchange’s rise and the establishment of its oft-lauded CEO, SBF, as an industry spokesperson.

It’s a combination that makes the disaster of its collapse a difficult narrative for crypto proponents to easily explain away.

The exchange’s failure has also seen the historically volatile cryptocurrency market trading lower, although some market trackers hope that a “bear rally” is coming soon to reverse the downward trend.

The contagion risk may also be borne by actors beyond those just financially exposed to the exchange’s operations. For example, entrepreneurs may now shy away from creating Web3 companies, and investor appetite for funding moonshot-style bets in the space could be severely limited going forward.

For all PYMNTS crypto coverage, subscribe to the daily Crypto Newsletter.