Don't let bullish sentiment obscure the lessons to be learned from FTX
With the crypto market continuing to be in the midst of a bull market and with the most institutional adoptions to date, there are multiple reasons for investors and supporters to be optimistic. One of the more surprising headlines, at least partially a result of the recovery in prices, new innovations, and growing adoption, was the recently published news related to the bankruptcy of FTX. While Mr. Bankman Fried sits in prison and begins a long sentence, and the regulatory environment (and the regulators) struggle to overcome the failures and embarrassments caused by this breakdown and the associated crimes, there is a positive narrative. surfaced. In May 2024, it was announced that the bankruptcy estate managing FTX's recovery and eventual decommissioning had recovered enough funds to fully repay investors, with some estimates putting the recovery rate at 140%.
Apart from comments that this absolves Mr. Bankman-Fried and his former colleagues of any criminal conduct (Mr. Bankman-Fried has been convicted in court and some of his former colleagues are still awaiting sentencing) ), there are several important lessons for all parties involved with this legislation. We should be aware that the crypto space is moving forward. Although criminal charges have been filed against these individuals and their sentences may be reduced at any time in the future, the fact that these charges and crimes exist remains.
All boats become more expensive due to rising prices.
Any investor who has studied the market history of any asset has heard Warren Buffett say, “Smart investors emerge only in bear markets.” This also applies to FTX. Positive headlines about a bankruptcy estate's ability to repay investors tend to obscure one important point. These repayment ratios and metrics are based on cryptocurrency prices in November 2022. The 2024 bull market saw a significant increase in the price of all crypto assets, including those held on FTX's balance sheet, and a significant increase in the level of available assets. When combined with cash recovery from clawbacks and property sales, the overall picture of the repayment process becomes clearer.
The fact that on paper FTX has the ability to fully bail out investors within 18 months of filing for bankruptcy should not obscure the fact that this is an incomplete presentation of the facts. Illiquidity is fine and portfolio managers deal with that risk-reward trade-off on a daily basis, but it is no excuse for commingling funds, wire fraud, and other financial crimes committed on FTX. not.
Repayment plans reveal the need for faster liquidation
For an asset class that can move as quickly as crypto assets, FTX's recovery update from the bankruptcy estate is another example of the need for more timely legal action. It is encouraging and noteworthy that established insolvency practices appear to be working as intended in this process, but that is no reason to stop pursuing improvements. In contrast to the US, FTX Japan customers were able to regain access to their funds long before the US bankruptcy case made this recent news. Questions raised regarding FTX's bankruptcy and eventual liquidation include the rehypothecation of cryptocurrencies, private key management, succession planning for key personnel at crypto exchanges, and the extent to which disclosure and transparency is required for crypto brokers. These include, but are not limited to, questions such as whether exactly gender should be required. dealer.
Given the rapid acceleration of crypto assets and blockchain-based applications, it is inevitable that complex issues will arise, not only in financial reporting but also in legal aspects. While it remains true that all cryptoassets, including Bitcoin, are financial products, the rapid development of institutional products aligned with the interests of individual investors has led to the development of at least some cryptocurrency-specific frameworks and It is clear that rules are needed.
Regulatory guardrails needed
In May 2024, in an unusual display of bipartisan agreement, the U.S. Congress (both chambers) voted to repeal the controversial SAB 121 issued by the SEC. These votes were another rebuke to Chairman Gensler and his campaign to regulate all crypto assets as stocks, something crypto advocates and investors have known for years. showed the facts. We need a clear and concise regulatory framework. Bitcoin ETFs have attracted tens of billions of dollars in inflows since their inception, and TradFi institutions continue to develop and deploy blockchain and crypto-native assets, but the US regulatory environment remains uncertain.
Protecting investors and maintaining liquid and transparent markets should be a key priority for both U.S. regulators and policymakers, but this is hindering much-needed innovation. Shouldn't. In particular, stablecoins and their associated tokenized transactions seem to be attracting attention and investment from TradFi institutions, so policymakers are encouraged to have productive conversations about these topics rather than score political points. We strongly recommend that you do so.
While FTX continues to cast a long shadow over the cryptocurrency industry, it also provides an opportunity for cryptocurrency advocates, investors, and policymakers to learn and implement important lessons.
