The collapse of FTX, one of the largest cryptocurrency exchanges in the world, last week will boost the information exchanges will disclose and drive the rollout of regulations to protect consumers, according to a major exchange-traded fund provider.
BetaShares head of digital assets Justin Arzadon said the collapse of FTX, with potential liabilities of US$8.8 billion, would have a direct and indirect impact on cryptocurrency investments, but it would take some time for them to become evident.
FTX collapsed after a leaked report on 2 November claimed trading firm Alameda Research, founded by FTX chief executive Sam Bankman-Fried, held US$5.8 billion of the US$14.6 billion of FTX exchange token assets called FTTs, leading to questions about the relationship between the two firms.
Within a few days, another large exchange stated it would liquidate its FTT holdings, creating a market run on FTX and a subsequent liquidity crunch of more than US$8 billion.
By 11 November, FTX and 130 affiliated companies had filed for bankruptcy protection in the United States and on 16 November, the Australian Securities and Investments Commission suspended the financial services licence of FTX Australia until 15 May 2023 and appointed KordaMentha as voluntary administrator.
Arzadon said while the full details were yet to emerge, “FTX appears to have lent customer assets to – or otherwise invested them with – its affiliated trading arm, Alameda Research, which may have then engaged in risky and/or illiquid trades”.
“Still to be seen is how many companies were impacted by last week’s events, how many more will go bankrupt and how long will it take for the industry to move forward from this and regain customer confidence,” he added.
“There are companies that have exposure to FTX and/or affiliated FTX companies. Those exposures will have to be written down and could impact company valuations and profitability.”
According to Arazadon the collapse would place pressure on other cryptocurrency exchanges to restore trust and confidence in those who use them.
“A handful of exchanges are already stepping forward to show proof of what they hold and what they are doing with customer funds,” he explained.
“Questions are being asked about what may not have been disclosed, what they are doing with the crypto they are supposed to be holding for clients in custody and whether they can show proof of reserves.
“The positive from this is that regulation is coming. Institutions, corporates and retail have been waiting for regulation to get clarity on what can and can’t be done. The public are disappointed and this should be impetus for regulators to move swiftly.
“The Wild West days of crypto are coming to an end and crypto should see more guard rails, strict risk control systems and audits to ensure transparency to the public.”
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