Markets
Crypto price resurgence shouldn’t overshadow lessons from FTX
Bullish sentiment should not obscure the lessons to be learned from FTX
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As crypto markets continue to be in the midst of a bull market, combined with the most institutional adoption yet, investors and advocates have multiple reasons to be optimistic. One of the most surprising headlines, at least a partial result of resurgent prices, new innovations and greater adoption, was the recently released news regarding the bankruptcy of FTX. Even as Bankman-Fried sits in prison, beginning his long sentence, and the regulatory landscape (and regulators) struggle to overcome the failures and embarrassment wrought by this collapse and associated crimes, a positive story has emerged. In May 2024, it was announced that the bankruptcy estate managing the recovery and eventual liquidation of FTX had been able to recover enough funds to fully reimburse investors, with some estimates going up to 140% recovery.
Aside from some comments that this absolves Bankman-Fried and his former colleagues of criminal activities – for which Bankman-Fried was found guilty in court and of which some former colleagues are still awaiting sentencing – there are several important lessons that All interested parties in the crypto space must be aware moving forward. The fact remains that criminal charges have been brought against these individuals and while the sentences may always be reduced in the future, these charges and these crimes exist.
Rising prices lift all boats
Any investor who has studied the history of the markets for any asset has heard some version of Warren Buffet’s phrase that wise investors only reveal themselves during bear markets; this is also the case for FTX. Positive headlines about the bankruptcy estate’s ability to repay investors tend to overshadow an important point: These repayment ratios and metrics are based on cryptocurrency prices in November 2022. The 2024 bull market has significantly increased the price of all cryptoassets, including those on FTX’s balance sheet, leading to much higher levels of available assets. Combined with the cash recoveries possible through repossessions and property sales, the picture of the repayment process becomes clearer.
The fact that FTX, on paper, has the ability to cure investors 18 months after filing for bankruptcy should not distract from the fact that this is an incomplete presentation of the facts. Illiquidity is a good thing, and portfolio managers face this risk/reward tradeoff every day, but that is no excuse for the commingling, wire fraud, and other financial crimes committed at FTX.
Repayment plans expose need for faster liquidation
For an asset class that can move as quickly as cryptoassets, FTX’s bankruptcy estate recovery updates are another example of the need for faster legal processing. It is encouraging and worth noting that established bankruptcy practices have apparently worked as intended during this process, but that is no reason to stop seeking to improve them. Unlike the United States, customers of FTX Japan were able to regain access to funds well before the US bankruptcy filing announced this recent news. Questions that have been raised regarding FTX’s bankruptcy and possible liquidation include, but are not limited to, issues related to crypto remortgaging, private key management, succession planning for key exchange personnel of crypto and the exact degree of disclosure and transparency that should be required of the crypto broker. resellers.
Given the rapid acceleration of crypto-assets and blockchain-based applications, it is inevitable that complications will arise when it comes to legal and financial reporting. While it remains true that all cryptoassets, including bitcoin, are financial instruments, it is evident that the rapid development of institutional products alongside individual investor interest indicates that at least some frameworks and rules specific to cryptocurrencies are necessary.
Regulatory safeguards are necessary
In May 2024, in a rare show of bipartisan agreement, the US Congress (both houses) voted to repeal the controversial law. SAB 121 which had been issued by the SEC. Along with these votes being yet another rebuke to Chairman Gensler and his campaign to regulate all cryptoassets as equity securities, this illustrates a fact that crypto advocates and investors have known for years; clear and concise regulatory frameworks are necessary. Bitcoin ETFs have attracted tens of billions of flows since their inception, and TradFi institutions continue to develop and deploy native blockchain and crypto assets, but the regulatory environment in the United States remains murky.
Protecting investors and maintaining liquid and transparent markets should be a key priority for U.S. regulators and policymakers, but it should not stand in the way of much-needed innovation. Especially as stablecoins and the implications of tokenized transactions appear to be attracting attention and investment from TradFi institutions, policymakers would do well to lead productive conversations on these topics rather than score political points.
FTX continues to cast a shadow over the crypto space, but also provides an opportunity for crypto advocates, investors, and policymakers to learn – and implement – important lessons.