Industry insiders and financial experts are referring to the FTX crash as crypto's "Lehman moment" and believe that the road ahead is long and winding.
The FTX crash has put the cryptoverse into a state of shock. Last week's liquidity crisis has left a $6 billion hole in the exchange's balance sheet, forcing the company to initiate Chapter 11 bankruptcy proceedings on November 11. A short while later, FTX founder, Sam Bankman-Fried (SBF), announced his resignation, leaving new CEO John J. Ray III in charge of operations.
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These recent events have caused widespread fear, uncertainty, and doubt. How will it affect the rest of the market, what are the recovery plans, and can the crypto industry even bounce back from such an event? These are just some of the questions doing the rounds among investors.
Keeping this in mind, SBF took to Twitter to reassure the community and said he would give users a recovery update ASAP. "I'm piecing together all of the details, but I was shocked to see things unravel the way they did earlier this week. I will soon, write up a more complete post on the play-by-play, but I want to make sure that I get it right when I do." SBF said in a tweet.
However, industry insiders and financial experts are referring to the FTX crash as crypto's "Lehman moment" and believe that the road ahead is long and winding. "This was one of the most trusted entities in the crypto space, so it will take some time to recover," said Jay Jog, co-founder of Sei Labs, a blockchain startup based out of California.
Also Read: Binance halts FTX token deposits, CEO says
What will happen to investor funds?
FTX was valued at $32 billion in its latest funding round in Jan this year. However, fears of insolvency sparked a massive sell-off last week, causing a $6 billion to $10 billion shortfall in the exchange's coffers. This forced FTX to pause withdrawals and file for bankruptcy.
However, bankruptcy proceedings do not guarantee that all creditors will be repaid. Earlier this year, crypto lender and exchange Voyager Digital also went bankrupt. Millions of its customers were designated as "impaired" claimants, meaning they were not entitled to get all their crypto back.
"Investors are wiped out. Those with dollars, coins, or tokens on the platform may or may not get their assets back. Lawsuits will be flying, and the only winners will be the lawyers," said Ric Edelman, founder of the Digital Assets Council of Financial Professionals, in an email to fortune.
Investors will have to play the waiting game, and it could take months, if not years, to settle the matter. "As customers have seen from Celsius, which filed in July and is not a near conclusion, bankruptcy takes time," Daniel Besikof, a partner at Loeb & Loeb, told Blockworks.
The rest of the crypto market
The broader crypto market is also reeling from FTX's rapid fall from grace. Bitcoin touched a two-year low over the weekend, and the global crypto market cap dipped to $800 billion. Most experts believe it will take a while to recover, and investors could be in for more pain in the coming days. According to Edelman, "the incident will exacerbate the Crypto Winter" and delay the "crypto market's recovery by many months."
However, Pablo Bonjour, a managing partner at restructuring firm Macco, said that this could also offer an opportunity for other exchanges. "Crypto prices will continue to go lower with another wave of selling, but this opens the opportunity for other big exchanges to swoop in and pick up FTX US and other entities at discounted prices," said Bonjour.
What's next for SBF and FTX?
Once regarded as a wunderkind, SBF is now at the centre of one of the biggest black swan events in crypto history. As such, he is under investigation by several enforcement agencies worldwide. Authorities in the Bahamas, where FTX was headquartered, have already started an investigation into the platform's collapse.
On November 9, a report by The Wall Street Journal suggested that the US Department of Justice (DoJ) and the Securities and Exchange Commission (SEC) are also investigating the collapse of the crypto exchange. The next day, California's Department of Financial Protection and Innovation (DFPI) also launched an investigation into the "apparent failure" of the exchange.
Following these developments, rumours about SBF's current whereabouts came thick and fast. Some sources say he has fled to Dubai or Argentina, while others say that he has been detained by authorities and placed in Albany Tower — a luxury resort in the Bahamas.
As for FTX, the future looks bleak. So far, three firms have tried to rescue the beleaguered exchange, but to no avail. Firstly, Binance pulled out of the bailout, stating that it was beyond their "control or ability to help" the struggling exchange. After that, TRON founder Justin Sun emerged as a possible saviour, but nothing concrete has materialised so far.
Finally, a "potential deal" was discussed between Kraken and FTX. However, even this looks far from fruition, with Kraken co-founder and CEO Jesse Powell stating that he had seen several "red flags" in FTX's business.
With the current crypto winter further worsened by the FTX crash, it may be out of reach for other firms to extend a helping hand. "The number of entities with stronger balance sheets able to rescue those with low capital and high leverage is shrinking within the crypto ecosystem," said JPMorgan strategists in a client note this week.
The FTX crash is a relatively recent development, and it will take some time for the dust to settle. Until then, investors will have to wait and watch, with the fate of their funds hanging in the balance. The only positive is that spurred on by FTX's collapse, lawmakers and enforcement agencies will quickly implement regulations that protect investors from similar events in the future.
First Published: IST