The collapse of cryptocurrency exchange FTX has been like a boulder crashing into a lake, wiping out investors and sending ripples of distress across the whole financial sector, from the US to Asia.
Authorities in the US and the Bahamas, where FTX was based, are investigating allegations of fraud. At the centre of this crisis is the 30-year-old one-time multi-billionaire Sam Bankman-Fried, who had built up outsized influence in Washington and beyond through his philanthropy, lobbying and sponsorship of sports. He is said to be close to the Democratic Party and aimed to make crypto acceptable within the traditional sphere of Wall Street.
The scale of the contagion isn’t known but hedge funds and other investors in FTX have been hit to the tune of several billion dollars. Other cryptocurrency exchanges are under scrutiny for any fallout, as the prices of digital assets, including bitcoin and ether, tank.
One person said to me at Abu Dhabi Finance Week on Wednesday that it was already crypto winter for the markets before FTX failed and now it was thermonuclear winter.
There are parallels to the financial crisis of 2008. When investment bank Bear Stearns went under, it had at one time been worth $20 billion. FTX and hedge fund Alameda Research were at an even higher combined valuation before they imploded. It could also herald a similar spiral for the crypto industry and possibly the wider financial sector as investor confidence evaporates in the face of an expected economic slowdown, high inflation and the end of a long bull run for asset prices.
It was in many ways the seemingly unending rise of all asset classes, thanks in part to very cheap money and ridden by a new generation of day traders.
The returns on offer meant that every investor, no matter how disciplined, would eventually over extend. Borrowing to invest is always risky but its seems at FTX, Mr Bankman-Fried oversaw a culture of excessive risk taking, and possibly even criminal activity if it is proved that client funds were used illegally.
So far, so similar to Wall Street before legislation and regulatory scrutiny reined the banks in after they were bailed out by taxpayers in the US, Europe and elsewhere.
Changpeng Zhao, the chief executive of Binance, the world’s biggest cryptocurrency exchange, said he expects a similar crackdown on the industry in the wake of the FTX scandal.
“I don't think they're gonna forget about crypto. I think they're gonna put more focus on crypto,” he said in Abu Dhabi this week. “Crypto is a very small market compared to the traditional [financial] market … But given this instant, I think they will try to spend much more attention on crypto, so people [will] focus probably less on other traditional problems.”
The flood of criticism – some of it justified, some of it kneejerk – for crypto and the industry has already begun, too.
What has been different to a decade ago is that the FTX collapse, in its speed and severity, played out entirely in public.
Anyone on Twitter could have taken a front-row seat as Mr Bankman-Fried presided over the demise of his own company in a matter of days, as he and Mr Zhao and others openly communicated what was happening. The drama had edge, too, as Mr Zhao and Binance had been the target of repeated criticism from Mr Bankman-Fried who was opposed to his rival’s more purist attitude to decentralised finance.
Mr Zhao was even cynically seen by some as having orchestrated the whole mess as payback following a dramatic moment when it was revealed that Binance was exploring a rescue deal for FTX. That evaporated quickly, too, as the extent of the company’s problems became clearer and there was no more road left to run. Mr Zhao has said he was as surprised as anyone when Mr Bankman-Fried told him that FTX was insolvent during a call.
The open approach on Twitter probably accelerated the decline of FTX as Mr Bankman-Fried scrambled to get funds to save his businesses. People knew too much and were not willing to either risk funding it or even leaving their cash and assets with the exchange. The run on FTX resulted in $6bn being pulled out in a 72-hour period. Conversely, with traditional markets we cannot see who is buying or selling what, only the bank and brokers know. With crypto, every transaction is logged on the blockchain and anyone can see it. This is known as radical transparency. However, a more secretive or opaque culture did not save Bear Stearns or Lehman Brothers, or even Enron in 2001. It just meant there were potentially even more victims who might have saved themselves. At least with FTX many investors had the luxury of choice in advance to reduce their exposure. It didn’t help everyone and there are at least 100,000 creditors left sweating – perhaps even up to 1 million of them if recent reports are correct. But at least some got out when they could.
Mr Zhao also underlined the point to me in Abu Dhabi that it was the first time blockchain technology came into play this way to keep the public informed during a crisis. “With the blockchain technology, people can track funds that's happening on the blockchain and people can analyse,” he said.
“This is probably one of the first times where [on] Twitter, social media, people were able to follow what's happening. People can see the transfers between FTX and Alameda … we can disclose our cold wallet addresses and people can follow those. And people can see [if] there's questionable behaviour or not. So this technology increases transparency significantly. So, before, it was all done through banks, [and you] just have to trust the news. But now you can follow on the blockchain.”
Plenty of commentators – some previously inside FTX – have offered their analysis on Twitter of why the company collapsed and how Mr Bankman-Fried ran it into the ground. There has also been plenty of criticism for mainstream media for their supposedly overly kind coverage of Mr Bankman-Fried.
The more lasting legacy from this will probably be the expectation from investors of even higher levels of transparency from market players, and there will be a cost for not meeting this.