The collapse of the FTX exchange has shocked crypto investors. Here’s a look at the implications for the different players in the industry. Crypto.com customers also panicked in recent days, but fortunately, this proved to be a false alarm. Is Proof of Reserves a tool to restore the reputation of cryptocurrency exchanges? DeFi, wallet makers, and Nordic exchanges will emerge from this chaos as winners.
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The crash of FTX shocked the crypto market
The collapse of the FTX exchange has shocked the industry for the past week. It is a very confusing chain of events, which we will not discuss in detail in this article. You can read all about the event from this in-depth guide.
Two weeks ago, FTX was still one of the largest cryptocurrency exchanges in the world. Now all that remains are smoking ruins and potentially tens of billions of dollars in losses. It still seems absolutely incredible how quickly Sam Bankman-Fried’s empire collapsed.
At the moment, there are still a lot of unanswered questions. FTX filed for bankruptcy late last week, along with 133 other companies. Several different subsidiaries of Alameda Research are in the same bundle.
The most interesting question of all is: why did it all happen? Why was there a gap of up to billions of dollars in the FTX balance sheet? This question is likely to be answered in forthcoming court cases. The tweet below has an unconfirmed theory, but it seems very likely.
UNCONFIRMED: An insider's account of the all-hands meeting where Caroline explained how Alameda lost its money. pic.twitter.com/cwcIx7a4DL
— Autism Capital 🧩 (@AutismCapital) November 15, 2022
The single most important cause of the FTX collapse was Alameda Research, a hedge fund founded by Sam Bankman-Fried, which has been a close partner of FTX since its inception.
The theory is that FTX spent money recklessly on advertising, luxury apartments, and investments made by FTX Ventures. It received money from Alameda, which made a high return on its trusts and had itself taken out huge loans. FTX provided illiquid FTT tokens as collateral for the loans.
This house of cards collapsed in the aftermath of Terra Luna about six months ago. In the wake of Terra, hedge funds such as 3AC and lending service Celsius collapsed. This caused many companies to get into trouble and demand repayment of all loans.
Alameda Research would have collapsed in June, but FTX stepped in and filled the huge gap with client funds. But how was this operation possible inside FTX without anyone noticing? The explanation can be found in the tweet below.
Can confirm that this was the case. The system – which Alameda/SBF used for years – effectively allowed Alameda to borrow from FTX an unlimited amount. Basically, if a user deposited $1m, then Alameda could draw a $1m line of credit from FTX. https://t.co/2D9f64T7Pg
— Frank Chaparro (@fintechfrank) November 12, 2022
Apparently, Sam Bankman-Fried would have installed a backdoor into FTX’s accounting systems, allowing him to transfer funds to Alameda.
The exact sequence of events is unclear at this stage. However, it looks pretty likely that the FTX collapse was caused by the actions of Alameda. Did Alameda lose its balance sheet to the collapse of Terra? Was FTX’s reckless spending to blame?
What is most surprising is the size of the losses of FTX and Alameda. Many believe that the explanations given so far cannot possibly cover a hole of up to USD 10 billion in the balance sheet. We are likely to receive further information in the near future.
What’s creepy is that the house of cards would have remained hidden without the bank run.
The impact of FTX on the crypto market
Let’s continue with FTX-related news. The chain of events is a topic of interest to everyone right now. In addition, investors are eager about another important question: what impact will the failure of FTX have on the crypto market as a whole?
Every crypto investor will remember the collapse of Terra Luna and the resulting bankruptcies of 3AC and Celsius. These inflicted huge losses on dozens of companies in the industry and caused many bankruptcies. FTX is many orders of magnitude worse. Unfortunately.
In terms of numbers, the largest group is the couple of million FTX customers. Among these were also a surprising number of crypto-veterans who suffered huge losses because they trusted the SBF empire. Many FTX employees had also invested their assets in the exchange and lost them – in addition to their jobs.
Sam Bankman-Fried was popular on Wall Street and in Silicon Valley. Many of the best-known companies in the industry had invested in the FTX. Kevin O’Leary of Shark Tank fame, for example, considered the FTX the safest exchange in the industry. Even Blackrock, the world’s largest investment firm, was on board.
The effects will also radiate to many cryptocurrency projects.
Not looking good. If you have exposure to any of these you are probably taking more risk than necessary, particularly now.
Stay safe. pic.twitter.com/RtIySamE98
— Duo Nine | discord.gg/ycc (@DU09BTC) November 11, 2022
The picture above shows many familiar names from the world of smart platforms and DeFi. FTX was a major investor in many projects through its FTX Ventures company.
Projects never receive the amount of money promised by investors all at once. Funding is distributed at a rate of X dollars per month or per year so that investors can monitor how the money is being spent. Funding for many projects for 2023 is now at risk.
One of the first victims was the loan service BlockFi. It closed its doors immediately after the FTX filed for bankruptcy. Last night, the company published a fresh update on its situation. BlockFi would have collapsed in the wake of 3AC and Celsius back in the summer, but FTX came to its rescue. Now that lifeline has sunk.
We will see reports of financial difficulties for crypto projects, huge losses for hedge funds, and bankruptcies for various services in the coming weeks. The damage will be very widespread. It is estimated to be in the range of 10-50 billion dollars.
Will Proof of Reserves save the reputation of crypto exchanges?
The collapse of the FTX exchange has had one serious consequence for the industry as a whole. It is a total PR disaster. And not just a PR disaster, because FTX has also destroyed investor confidence.
Founder Sam Bankman-Fried has recently been caught in a series of lies. He publicly said everything was fine on Monday last week, even though 24 hours later the company’s withdrawals stopped. Moreover, key people at FTX and Alameda had known about the use of client funds for months.
Celsius founder Alex Mashinsky openly accused users on Twitter of spreading FUD less than 24 hours before the company stopped withdrawals. Let’s not forget the promises of Do Kwon. It is clear that investors will no longer trust the CEO’s word.
Is the solution to the problem Proof of Reserves?
JUST IN: Exchanges OKX, KuCoin, Poloniex and Huobi to do proof of reserves, letting users verify whether their #Bitcoin funds are actually there 🙌
— Bitcoin Magazine (@BitcoinMagazine) November 9, 2022
As the tweet above shows, many of the best-known exchanges in the industry have started publishing information about their wallets and cryptocurrency reserves. The topic was first addressed by Changpeng Zhao, founder of Binance. These reserves can be explored on sites such as Defillama.
Unfortunately, we agree with Vinny Lingham and many other pioneers in the field. Proof of Reserves is just a nice idea and a way to create a more transparent image of the company. However, it is completely useless on its own.
The problem is that the reserves are counterbalanced by liabilities, which means that Proof of Liabilities would also be needed. For example, FTX would have looked really good on the Proof of Reserves because it had lots of client assets.
However, mere assets are not proof of anything if the company has at the same time agreed loans that are larger than the assets. Such agreements will never be made public, as they often contain confidential information about the parties.
Fully complete data on reserves and liabilities can only be obtained from a decentralized environment. The solution is therefore DeFi. For example, every deposit and loan made by a loan service such as AAVE is continuously verifiable from the blockchain.
Crypto.com customers panicking
This week’s fourth news item is partly related to the FTX exchange. The collapse has got all investors on edge, with a historic amount of money being withdrawn from the exchanges over the past week. According to Glassnode, both retail investors and whales are in the process of withdrawing.
The popular exchange Crypto.com has been in the news in recent days. Thousands of investors have withdrawn their funds from the exchange. What happened? Rumors of problems started circulating on Sunday. Reports emerged that Crypto.com had accidentally sent $400 million worth of Ethereum to the wrong address.
To make matters worse, this false address was on the Gate.io exchange, where the funds had been transferred just in time for the company’s audit of the funds. This led to rumors and suspicions about Crypto.com. The company had also previously admitted that it had suffered losses of around $10 million from the FTX crash.
Crypto.com’s Kris Marszalek had to convince investors carefully.
The ETH transfers that generated so much FUD & speculation on Twitter today were made over three weeks ago, on October 21st to https://t.co/pFc4Pz9nFR’s whitelisted corporate account at https://t.co/Mr9GCkL2gV.
— Kris | Crypto.com (@kris) November 13, 2022
Apparently, the situation is now over, and there was nothing fishy about the transfer. The snapshot taken for the Gate.io exchange audit was taken before the Crypto.com incident, so it had no effect. Crypto.com also passed the stress test with flying colors. The withdrawals of panicked investors were processed and no major bank run occurred.
Fortunately, it was a false alarm. The crypto industry does not need another bankruptcy right now.
Are there any winners in the FTX chaos?
The fifth news item of the week is also related to FTX, as were all the events of the previous week. The collapse of FTX has undoubtedly caused a huge loss of money and PR damage. But, amidst this chaos, are there any winners?
We already mentioned the DeFi sector in the Proof of Reserves news. Many investors have suddenly woken up to the fact that decentralized exchanges offer the opportunity to treasure without third-party risk. No wonder trading volumes on DEXs have exploded in the past week.
Decentralized exchanges still have many limitations and cannot replace centralized services. However, they give you the option to be in charge of your own funds all the time. You can easily perform all your Ethereum token trades on Uniswap. Especially now that the costs are really low.
The collapse of the FTX has also boosted the popularity of wallets. A record number of investors have learned the meaning of the “not your keys, not your coins” slogan in recent days. In addition to the popular free wallets (TrustWallet, Exodus), Ledger has certainly received a lot of orders.
Many beginners don’t know how or dare to use Ledger Nano or other personal wallets. Where do you dare to store your funds in that case? If you want to sleep well at night, open an account with the Finnish Northcrypto at this link.
Northcrypto is strictly regulated by the Finnish Financial Supervisory Authority. Customer funds are always kept separate from the company’s assets. As a result, both your euros and your cryptocurrency are always safe.
Many Nordic people have probably come to appreciate the safety and reliability of domestic services in a completely different way. The year 2022 has seen an unfortunate number of bankruptcies in the sector. Millions of customers will suffer.
These bankruptcies have been possible because companies have used customers’ deposits for risky investments. This is not the case with Finnish service providers. Customer funds are always segregated from the company’s assets, so customers are always safe – even in the event of bankruptcy.