How the bankruptcy of a $32 billion company threatens the future of cryptocurrencies. What happened to FTX? – Gift

 How the bankruptcy of a $32 billion company threatens the future of cryptocurrencies.  What happened to FTX?  - Gift

Cryptocurrency platform FTX announced today that it has resorted to the protections of the US bankruptcy law and has reported that its founder, Sam Bankman-Fried, has resigned from his position.

“FTX Trading (…) and approximately 130 FTX Group affiliates have initiated the voluntary ‘Chapter 11’ procedure” of the Bankruptcy Act in the United States to “value their assets,” FTX announced in a statement. published in the Twitterer.

This legal mechanism allows companies to reorganize themselves in difficult times without direct pressure from creditors.

But what is a cryptocurrency platform?

It is a medium through which people can buy and sell these digital goods. All cryptocurrencies, as explained here the guard, are based on the same original currency, bitcoin. This works like a default currency, but control over its value is decentralized.

For this financial ecosystem, platforms like FTX are important because they can handle most cryptocurrency transactions in the world – they act as a space where this virtual money can be deposited.

Despite being headquartered in the Bahamas, FTX is managed from the US and therefore operates under US regulations. The problem is that this is almost non-existent, so most of this virtual money is circulating without major legal restrictions.

But what happened to FTX?

Ironically, he was the victim of speculation – his own and that of others. It all started with an article from a specialist website, CoinDesk, which warned that the balance sheet of Alameda – a crypto investment fund owned by Sam Bankman-Fried – contains FTT, FTX’s own cryptocurrency, worth billions of dollars.

The problem is that this cryptocurrency was used as collateral in future Alameda loans. That is, if it devalued, it would hurt both this fund and FTX since they had the same owner.

Now the problem is that the FTT had no practical value: this was based on FTX’s promise to buy other cryptocurrencies for $22 per token (i.e., the unit of a cryptocurrency).

And then?

It was just supposed to cause panic. Changpeng Zhao, owner of FTX’s main rival, the Binance platform, wrote on Twitter that his company would sell its assets in FTT worth $500 million due to “recent disclosures”.

As in other historic stock market cases, the sequence was linear: the FTT saw its value collapse, causing massive withdrawals. FTX, which was worth $32 billion at the start of the year, has lost $6 billion worth of cryptocurrencies in just three days.

With his rival on his knees, Changpeng Zhao offered to buy FTX, but there was another turnaround. It is not certain whether the owner of Binance wanted to weaken FTX to acquire it or if this was never part of the plans. What is known is that he signed a pre-agreement to buy the platform on November 8 and withdrew from the transaction the following day.

After auditing FTX’s operations, “we have decided not to proceed with the acquisition of,” Binance explained on Twitter, citing press releases about customer fund mismanagement and investigations opened by US authorities. .

“In the beginning, we hoped to help FTX customers provide liquidity, but the issues are beyond our control or beyond our ability to help,” the platform assured.

And now?

Returning to the beginning of this text, FTX declared bankruptcy, extending “Chapter 11” protection to the exchange platforms in the United States and in the rest of the world, as well as the investment fund Alameda Research , issued by Bankman-Fried before FTX.

Once seen as a savior when he proposed to rescue companies like BlockFi and Voyager Digital in June, or when he campaigned for greater regulation of this sector of the foreign exchange market in Washington, Bankman-Fried walked out on the small door and was replaced by John J. Ray III.

“The Chapter 11 regime is appropriate to allow FTX Group to assess the situation and initiate maximum recovery for investors,” Ray said.

What does this mean for cryptocurrencies?

In the immediate, it means devaluation. The New York Stock Exchange kicked off the session today with bitcoin’s loss of more than 6% to $16,458. In the longer term, it is yet another worrying sign for the cryptocurrency sector.

After the fiasco in May of the Terra virtual currency, which followed the evolution of the US dollar, and the fall, weeks later, of the Celsius platform, what happened to FTX is “another industry failure”. evaluated David Holt, a cryptocurrency expert at consulting firm CFRA.

FTX’s problems “show that liquidity on cryptocurrency platforms is very variable,” emphasized Dan Dolev, an analyst at Mizuho, ​​and added that “there is very little capital” behind it as collateral. The rapid decline of FTX “is a warning sign” for another platform, for example Coinbase.

Supporters of crypto and blockchain technologies are used to boom periods followed by problems since the rise of bitcoin in 2009. Cryptocurrency market capitalization reached $3 billion last November, before falling to less than $1 billion by June 2022.

In any case, it is too early to assess the impact of what happened to FTX on the competition and the potential contagion of the entire industry, says Jamiel Sheikh, founder of several companies in the crypto world. “The accounts of decentralized platforms (such as FTX) are opaque and it is impossible to determine which platform can withstand a liquidity leak,” he said.

But if it’s opaque, shouldn’t there be more regulation?

That is the question that follows. It is possible that this episode “accelerates the regulation of the North American market” of cryptocurrencies, as Kevin March, co-founder of the Floating Point Group platform, says.

There is a “real need for clear rules on transparency” on platforms and a sensible procedure for violations.

Sam Lessin, of venture capital firm Slow Ventures, told broadcaster CNBC that the shenanigans of FTX and Binance also have a silver lining: In the crypto world, companies can face fierce competition, but they also want the ecosystem to survive and help each other. “, if there are problems.

Anyway, for this expert, the crypto planet is like the “Wild West”, “full of aberrations, volatility, fraud and at the same time many innovations and projects that have real value in the future”.

*with AFP