Markets
The recovery in cryptocurrency prices should not overshadow FTX’s lessons
Bullish sentiment should not overshadow the lessons to be learned from FTX
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As cryptocurrency markets continue to be in the midst of a bull market, combined with the most institutional adoption to date, there are multiple reasons for investors and advocates to be optimistic. One of the most surprising headlines, which is at least a partial result of the recovery in prices, new innovations and increased adoption, was the recently released news regarding the bankruptcy of FTX. Even as Bankman-Fried sits in prison, at the beginning of his long sentence, and the regulatory landscape (and regulators) struggle to overcome the failures and embarrassment caused by this collapse and associated crimes, a positive story has emerged. In May 2024 it was announced that the bankruptcy estate handling the reorganization and eventual liquidation of FTX was able to recover sufficient funds to repay investors in full, with some estimates going as high as 140% recovery..
Setting aside some comments that this absolves Bankman-Fried and his former colleagues of criminal activity – of which Bankman-Fried was found guilty in court and for which some former colleagues are still awaiting sentencing – there are several important lessons that all stakeholders in the crypto space should be aware moving forward. The fact remains that criminal charges have been brought against these individuals and that, while sentences can always be reduced in the future, these charges and crimes exist.
Rising prices lift all boats
Any investor who has studied the history of markets for any asset has heard from Warren Buffet a version of the phrase that savvy investors only reveal themselves during bear markets; this is also the case with FTX. Positive headlines about the bankruptcy estate’s ability to repay investors tend to overshadow an important point; these ratios and redemption parameters are based on cryptocurrency prices as of November 2022. The 2024 bull market significantly increased the price of all cryptoassets, including those held on FTX’s balance sheet, leading to much higher levels of available assets. If you add up the cash recoveries possible through the repossession and sale of real estate, the picture of the repayment process becomes clearer.
The fact that FTX, on paper, has the ability to make investors whole 18 months after filing for bankruptcy should not obscure the fact that this is an incomplete presentation of the facts. Illiquidity is fine and portfolio managers face this risk/return tradeoff daily, but this is no excuse for fund commingling, wire fraud and other financial crimes committed at FTX.
Repayment plans expose the need for faster settlement
For an asset class that can and do move as quickly as cryptoassets, updates on FTX’s bankruptcy recovery are another example of the need for more timely legal processing. It is encouraging and worth noting that established failure practices have apparently worked as intended during this process, but this is no reason to stop looking for improvements. In contrast to the United States, customers of FTX Japan they managed to regain access to the funds long before the US bankruptcy case heralded this recent news. Questions that have been raised regarding FTX’s bankruptcy and eventual liquidation include, but are not limited to, issues related to cryptocurrency re-hypothecation, private key management, succession planning for key personnel of cryptocurrency exchanges and exactly how much disclosure and transparency should be required from the cryptocurrency broker. retailers.
Given the rapid acceleration of cryptoassets and blockchain-based applications, it is inevitable that legal and financial complications will arise. While it remains true that all cryptoassets, including bitcoin, are financial instruments, it should be evident that the rapid development of institutional products coupled with interest from individual investors indicates that at least some cryptocurrency-specific frameworks and rules are needed.
Regulatory guardrails are needed
In May 2024, in a rare display of bipartisan agreement, the United States Congress (both houses) voted to repeal the controversial SAT 121 the one issued by the SEC. In addition to these votes serving as another rebuke to President Gensler and his campaign to regulate all cryptoassets as stocks, this illustrates a fact that cryptocurrency advocates and investors have known for years; clear and concise regulatory frameworks are needed. Bitcoin ETFs have attracted tens of billions in inflows since their inception, and TradFi institutions continue to develop and deploy blockchain and crypto-native assets, but the regulatory environment in the United States remains murky.
Protecting investors, as well as maintaining liquid and transparent markets, should be a key priority of both US regulators and policymakers, but this should not stand in the way of much-needed innovation. Especially since stablecoins, and the implications of tokenized transactions, appear to be attracting the attention and investment of TradFi institutions, politicians would be wise to have productive conversations on these topics instead of scoring political points.
FTX continues to cast a long shadow over the crypto space, but it also offers cryptocurrency advocates, investors and policymakers the opportunity to learn – and implement – important lessons.