How far will FTX's tentacles reach after its collapse?

Retail customers may end up bearing the deepest wounds in the bankruptcy process

FTX’s FTT token has tumbled roughly 85 per cent in the past week alone. Reuters
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The bankruptcy of Sam Bankman-Fried’s put an end to questions about its survival and opened a panoply of new ones, most urgently: how far will the influence of its collapse reach?

Overstating FTX’s heft in the cryptosphere is difficult. From blue-chip venture investors to celebrity endorsements, from Silicon Valley to Washington, from lenders to yield farmers and market makers, the three-year-old company cut a wide swath through online commerce.

Getting a handle on the repercussions of its demise is apt to take months.

“The big fear right now, that indeed seems to be materialising, is a contagion effect,” said Greg Magadini, director of derivatives at Amberdata, a blockchain data provider.

Painfully, the least sophisticated of FTX’s constituencies — people who put money on the exchange to trade or even just to save — may end up bearing the deepest wounds.

Bankruptcies like the one it filed on Friday in Delaware are notoriously slow-moving processes in which claims on a company's remains are judged against a host of stakeholders.

It’s likely a judge will decide what happens to the everyday traders who had money on the platform, according to Owen Lau, an analyst at Oppenheimer & Co.

“We don’t have precedents,” said Mr Lau.

According to Mr Lau, a court could rule that retail customers could be treated like general unsecured creditors, meaning that their priority for getting money back would fall below creditors, most of whom are institutional players.

In that case, average folks who traded on the platform would, simply, lose their money.

Individual dabblers are taking a simultaneous bath in the crypto market itself, where shock waves from the filing have sent the price of coins reeling.

Market bellwether Bitcoin plunged about 20 per cent this week, bringing its decline from last year’s record high of almost $69,000 to around 75 per cent.

Ether, the second-largest token, and altcoins sunk alongside it.

FTX’s FTT token has tumbled roughly 85 per cent in the past week alone.

Beyond those lie what many fear to be a teeming underbelly of exposed institutions, great and small, who may have lent money to, traded with or otherwise linked their fortunes to the disgraced exchange.

Already the casualty list is growing: BlockFi, the troubled digital-asset lender that Mr Bankman-Fried’s company was partially bailing out, paused client withdrawals.

Genesis Trading reported that its derivatives business had about $175 million “in locked funds” on an FTX trading account.

Billionaire Michael Novogratz told CNBC that his company, Galaxy Digital Holdings, will likely not be able to recover its $77m exposure to FTX.

Meanwhile, FTX Ventures, the investment arm of the crypto exchange, has funnelled money into nearly 50 projects, according to PitchBook data.

Like so much else, it’s unclear what the impact will be for these companies, which include Helium, Aptos Labs, NEAR Protocol, and Mysten Labs.

“Portfolio companies might be OK, depending where they kept their assets,” Mr Magadini wrote.

“If portfolio companies kept some investments at FTX itself, those funds are likely going to be unusable going forward.”

Alameda Research, a crypto trading company that was also co-founded by Mr Bankman-Fried, offered a $485m loan to Voyager Digital that failed to save the crypto brokerage from bankruptcy.

FTX.US later won an auction for Voyager Digital’s assets.

Updated: November 13, 2022, 4:00 AM