Experts say Binance’s rescue of FTX demonstrates that no cryptocurrency company is “too big to fail.”
According to industry experts, Binance’s agreement to save rival cryptocurrency exchange FTX from bankruptcy demonstrates how no one is immune to the chill of crypto winter.
According to CoinMarketCap data, FTX was the fourth-largest exchange prior to this week, processing billions of dollars in daily trading volumes. Its CEO, Sam Bankman-Fried, maintained a high profile in Washington, D.C., testifying before Congress about the future of the crypto industry and pledging millions in political donations.
Despite this, FTX was not immune to the digital asset downturn. Even Bankman-Fried recognized it, previously telling CNBC, “I don’t think we’re immune from it.”
And, sure enough, on Tuesday, his company signed an agreement to be acquired by Binance for an undisclosed sum after experiencing a “liquidity crunch.”
“It demonstrates that no one is too big to fail,” said Pascal Gauthier, CEO of Ledger, a crypto wallet company. “FTX appeared impenetrable.”
During the 2007-2008 financial crisis, the phrase “too big to fail” referred to regulators’ determination that certain institutions could not fail due to the risk such a result would pose to the broader financial system.
Following the 2008 collapse of Lehman Brothers, multiple financial institutions received taxpayer assistance.
What happened just now?
A lot can happen in a day, especially in the crypto world.
Bankman-Fried took to Twitter on Monday, in since-deleted tweets, to play down concerns that his crypto trading empire was in danger of collapsing.
FTX is “fine,” according to Bankman-Fried, and the exchange has enough assets to cover clients’ holdings if they decide to withdraw their funds from the platform.
His remarks followed a CoinDesk report that said Alameda Research, Bankman-quant Fried’s trading firm, had liabilities that outweighed its assets, most of which were reportedly in FTT, FTX’s native token.
A day later, the 32-year-old entrepreneur, who had positioned himself as a “lender of last resort” in the struggling cryptocurrency sector, announced that he would sell the exchange he co-founded three years ago to Binance, the world’s largest crypto exchange.
The disaster highlights something that economists have long warned about when it comes to cryptocurrency: While the industry is worth billions of dollars — CoinGecko once valued it at $3 trillion — it is not yet on a “systemic” scale where regulators would feel compelled to intervene if a company fails.
In addition, unlike the banking industry, which is heavily regulated, crypto is not yet regulated in the United States or other major countries, though this is expected to change soon as jurisdictions such as the European Union implemented new rules.
A ‘Lehman moment’ for cryptocurrency?
Whereas in the 2008 financial crisis, countries felt compelled to intervene to prevent the banking system from collapsing, with cryptocurrency, that duty has been delegated to private sector companies.
“Most of the activity in crypto remains trading and speculation, so the impact from any downside in crypto is also quite limited in a way, compared to banking and financial services in 2008, where the impact was much more entrenched and widespread,” Vijay Ayyar, head of international at crypto exchange Luno, told CNBC via email.
Asked whether this was crypto’s “Lehman moment,” Ledger’s Gauthier said this had played out previously with the collapse of players like Three Arrows Capital and Celsius: “I think what we’re witnessing right now is somewhat the ripple effects of what happened in [the first half] in our industry.”
The debacle highlights how the crypto industry is becoming more centralized and straying from its decentralized roots, according to Gauthier. Bitcoin
and other digital coins are “designed to be decentralized and not rely on a middleman,” he said.
“FTX is a huge warning for everyone,” Gauthier said on CNBC’s “Squawk Box Europe” on Wednesday. “You can’t simply sit back and wait for the next value proposition to fail.”
What could happen next?
FTX is not the first company to face financial difficulties, and it is unlikely to be the last.
Celsius, a crypto lending company, declared bankruptcy earlier this year after the value of its tokens terra and luna plummeted, rendering it unable to process customer withdrawals.
Following that, crypto fund manager Three Arrows Capital and broker Voyager Digital declared bankruptcy, highlighting the interconnectedness of various players who owed money to one another.
Some traders are concerned that Solana, a blockchain platform competing with Ethereum, will be the next crypto player to be put to the test by the market downturn. Solana’s sol token fell more than 30% on Wednesday amid concerns about its relationship with Alameda Research. According to CoinDesk, Alameda owns more than $1 billion in sol.
“Is this the end of [the crypto contagion], or will more dominoes fall?” “It’s anyone’s guess,” Gauthier said. “People should not wait to learn.”
On whether Binance itself is vulnerable to collapse, Gauthier believes people should be “reasonably concerned,” but that the company has a “relatively solid value proposition.”
According to Ayyar, the FTX situation will likely add more impetus for the largely unregulated cryptocurrency to be regulated.
“In terms of usage and utility, cryptocurrency has been growing, and regulators will continue to be forced to take a more active stance on ensuring that platforms follow some rules and structure,” he told CNBC.