The cryptocurrency industry — and the institutions and investors with billions wrapped up in it — are still coming to terms with the fallout from the collapse of FTX, once one of the largest crypto exchanges in the world.
In just the past week, the company has had a life preserver offered by a rival exchange ripped out from under it, locked clients out of attempts to cash out their crypto holdings, filed for bankruptcy, and had its CEO and founder resign — all before FTX announced its funds had been subject to “unauthorized transactions.”
Bitcoin lost more than a quarter of its value last week as the chaos unfolded, the latest fiasco in an already tumultuous year for cryptocurrencies.
Experts say the FTX story has “far-reaching” implications for the cryptocurrency industry and those with major stakes in the market, including some Canadian institutions.
Here’s what you need to know.
FTX — an abbreviation of Futures Exchange — is a cryptocurrency trading firm co-founded in 2019 by Sam Bankman-Fried and Gary Wang. At one time, it had been among the largest in the world, with experts who spoke to Global News putting it at No. 2 behind rival Binance.
While the cryptocurrency space has faced immense volatility in the past, Genevieve Roch-Decter, CEO of financial media platform Grit Capital, says the collapse of FTX is the “worst” she’s ever seen in the industry.
“Effectively what happened over the last 72 hours is you had the second-largest cryptocurrency exchange on the planet collapse, file for bankruptcy and get potentially hacked,” Roch-Decter tells Global News. “So the ramifications here are far-reaching.”
Customers fled the exchange over fears about whether FTX had sufficient capital, and it agreed to sell itself to Binance. But the deal fell through while Binance’s due diligence on FTX’s balance sheet was still pending.
Roch-Decter says that Binance would have found a major “hole” in FTX’s finances and backed out of the deal as a result.
The rush of customers trying to withdraw their crypto from the exchange created what amounted to a “bank run,” she says, an instance wherein an institution doesn’t have enough liquid cash on hand to meet the surge of withdrawal demands.
FTX had valued its assets between US$10 billion to US$50 billion and listed more than 130 affiliated companies around the world, according to its bankruptcy filing.
FTX and dozens of affiliated companies — including founder Bankman-Fried’s hedge fund, Alameda Research — filed the bankruptcy petition in Delaware on Friday.
Bankman-Fried, the 30-year-old luminary of the crypto space, also stepped down as CEO.
FTX had entered into a number of sports-related deals, some of which are crumbling. The NBA’s Miami Heat and Miami-Dade County decided Friday to terminate their relationship with FTX and will rename the team’s arena.
Earlier Friday, Mercedes said it would immediately remove FTX logos from its Formula One cars.
FTX confirmed Saturday there had been unauthorized access to its accounts, hours after the company filed for Chapter 11 bankruptcy protection.
A debate formed on social media about whether the exchange was hacked or a company insider had stolen funds — a possibility that cryptocurrency analysts couldn’t rule out.
“(FTX is) saying it was a hack, which means an illicit actor or somebody else was able to gain access to the private keys of the exchange and basically drained their wallets and put the funds into their own control,” says Stephen Sargeant, a Toronto-based crypto compliance and privacy expert.
He adds that it would be “hard to tell” if insider trading were to blame for the missing funds, especially as bankruptcy proceedings see other actors move into the exchange to go through FTX’s books and potentially access the wallets.
Exactly how much money is involved is unclear, but analytics firm Elliptic estimated Saturday that US$477 million was missing from the exchange.
FTX’s new CEO John Ray III said it was switching off the ability to trade or withdraw funds and taking steps to secure customers’ assets.
FTX said Saturday that it was moving as many digital assets as can be identified to a new “cold wallet custodian,” which is essentially a way of storing assets offline without allowing remote control.
Much of the case for using cryptocurrency as a financial asset is that the blockchain, the immutable record of transactions recorded on a decentralized ledger, helps to trace and circumvent illicit activity.
Roch-Decter notes that in this case, bitcoin or other major cryptocurrencies were not what would have been the subject of the alleged hack, but the exchange itself — similarly to anyone walking up to a teller and robbing a bank.
“It has nothing to do with the technology underpinning the individual, whether it’s bitcoin or Ethereum or the cryptocurrencies themselves, but instead the exchange and the technology behind the exchange,” she says.
Sargeant tells Global News there are also allegations about FTX using clients’ funds to back up its own trades and investments, which he says is a “huge no-no.”
The Royal Bahamas Police Force said Sunday it is investigating FTX, adding to the company’s woes.
The police force said in a statement Sunday it was working with Bahamas securities regulators to “investigate if any criminal misconduct occurred” involving the exchange, which had moved its headquarters to the Caribbean country last year.
Bankman-Fried and his company are also under investigation by the Department of Justice and the Securities and Exchange Commission, according to The Associated Press.
The fallout of FTX’s collapse is not limited to global crypto markets as multiple Canadian companies and investment funds also have business tied up in the platform.
The Ontario Teachers’ Pension Plan (OTPP), one of Canada’s biggest pension funds, has invested a total of US$95 million in FTX International and its U.S.-based entity across two funding rounds in October 2021 and January of this year.
In a statement released last week, the fund said it made the investments to gain “small-scale exposure to an emerging area in the financial technology sector.”
OTPP said there will be “limited impact” on the plan as a result of FTX’s downturn and chalked up the outcome to the nature of investing in higher risk, emerging technology companies.
“Naturally, not all of the investments in this early-stage asset class perform to expectations,” the statement read.
Also invested in FTX is WonderFi Technologies, the firm backed by entrepreneur Kevin O’Leary, and which operates Toronto-based crypto platforms Bitbuy and Coinberry.
WonderFi confirmed in a statement last week that it made a $617,650 investment in FTX Trading Ltd. last year, but the amount is not considered to be material to WonderFi.
FTX had also struck a deal with cryptocurrency platform Bitvo to acquire the Calgary-based company, but the agreement hadn’t closed, as the parties were still waiting on regulatory approval.
“It is business as usual for Bitvo in light of that,” CEO Pamela Draper told Global News in a statement Monday.
Global News reached out to the Communications Security Establishment (CSE) to hear whether any potential hack of FTX would have ramifications for Canadian customers.
A spokesperson with CSE’s Canadian Centre for Cyber Security said in a Nov. 12 statement that the organization was aware of the reports of “unauthorized transactions” but that it had nothing specific to add about the FTX situation.
The CSE statement did urge Canadians to “exercise strong caution” if they had any business with FTX and encouraged firms and individuals to “understand the risks and of fluctuating value and lack of regulatory governance” if engaging with the crypto space.
Cryptocurrency was the subject of political headlines earlier this year when Pierre Poilievre, now leader of the Conservative Party of Canada, floated crypto as a way for Canadians to hedge against inflation while campaigning for the top CPC job in the spring.
Deputy Prime Minister and Finance Minister Chrystia Freeland said in the House of Commons Monday that given the recent chaos and downturn facing bitcoin and other crypto assets over the past year, Canadians who followed Poilievre’s “terrible advice” could have seen their savings evaporate by now.
“The Conservatives should apologize today for this reckless policy and admit that investing in crypto would have bankrupted Canadians,” she said.
People who own bitcoin should be OK if they keep them off exchanges such as FTX, said Cory Klippsten, the CEO of financial services firm Swan Bitcoin.
“Any exchange is a security risk,” said Klippsten. Some are more reputable than others, but he said a better option is to take control of your digital assets.
“With bitcoin, you have the option to take self-custody and take your coins off the exchange,” he said.
Beyond the material impact of funds on FTX that likely won’t ever be recovered, both Sargeant and Roch-Decter agree that the exchange’s collapse sets back faith in the cryptocurrency space.
“The trust of the industry has been lost with regulators, with investors, and more importantly, consumer protection,” Sargeant says.
“Consumers feel that when they deposit funds on an exchange that they should be able to access it, especially when it’s such a large institution.”
He adds that when situations like this happen, there’s a flood of attention directed to regulators to ask why they didn’t protect consumers — attention that’s often missing when those in the industry are seeing massive returns on their investments.
Canada has numerous safeguards in place that would help prevent some of the alleged practices that went on at FTX, including the use of client funds for company trading, said Ryan Clements, chair in business law and regulation at the University of Calgary’s Faculty of Law.
“We actually have in this country quite a robust regulatory framework that was created after Quadriga,” said Clements, referring to the Canadian crypto exchange that collapsed in 2018, leading to $169-million in customer assets lost.
In a review compiled after Quadriga’s downfall, the Ontario Securities Commission found its founder had committed fraud and the company operated like a Ponzi scheme.
Roch-Decter says the crypto space has a lot of “growing up” to do and says that proper regulation will be a significant step towards that.
Until then, she doesn’t see institutional investors jumping back into the space en masse like the industry saw over the past two years. While the crypto space might be “speculative,” that doesn’t mean it should be unsafe for investors who are prepared to take calculated risks, Roch-Decter argues.
“I think it’s really going to sour the institutional community for a while until they get more clarity on the regulation side of things,” she says.
“They need to clarify all this to the investment community so that people can feel safe … at least know that if they put money into an exchange, they’ll be able to get it out.
This article was originally sourced from www.msn.com