Markets
Resurgent Crypto Prices Must Not Overshadow FTX Lessons
Optimistic sentiment should not overshadow 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 largest institutional adoption to date, there are several reasons for investors and advocates to be optimistic. One of the most surprising headlines, which is at least partially a result of the resurgence in prices, new innovations and increased adoption, was the recently released news related to the bankruptcy of FTX. Even as Bankman-Fried is in prison, beginning his long sentence, and the regulatory landscape (and regulators) are struggling to overcome the failures and embarrassment that this collapse and associated crimes have caused, a positive story has emerged. In May 2024, it was announced that the bankruptcy estate managing the recovery and eventual liquidation of FTX had managed to recover sufficient funds to fully reimburse investors, with some estimates going as high as 140% recovery.
Leaving aside some comments claiming that this absolves Bankman-Fried and his former colleagues of criminal activities – of which Bankman-Fried was found guilty in court and some former colleagues are still awaiting sentencing – there are several important lessons that all interested parties in the the crypto space must be aware moving forward. The facts remain that criminal charges were brought against these individuals and that, although the 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 the markets for any asset has heard some version of Warren Buffet’s quote that savvy investors only come into their own during bear markets; this is also the case with FTX. Positive headlines regarding the bankruptcy estate’s ability to repay investors tend to obscure an important point; These reimbursement ratios and metrics are based on crypto prices as of November 2021. The 2024 bull market has greatly increased the price of all crypto assets, including those held on FTX’s balance sheet, leading to much higher levels of available assets . When combined with the cash recoveries that were possible through property repossessions and sales, the picture of the repayment process becomes clearer.
The fact that FTX, on paper, has the ability to recover investors 18 months after filing for bankruptcy should not obscure the fact that this is an incomplete presentation of the facts. Illiquidity is good and portfolio managers deal with this trade-off between risk and reward every day, but that is no excuse for the mixing of funds, wire fraud and other financial crimes committed at FTX.
Repayment plans expose the need for faster settlement
For an asset class that can and does move as quickly as crypto assets can, FTX’s bankruptcy recovery updates are another example of the need for more timely legal processing. It is encouraging and noteworthy that established bankruptcy practices have apparently worked as intended during this process, but that is no reason to stop looking for improvements. In contrast to the United States, customers of FTX Japan managed to regain access to funds long before the US bankruptcy case announced this recent news. Issues that have been raised regarding FTX’s bankruptcy and eventual liquidation include, but are not limited to, issues related to crypto remortgaging, private key management, succession planning for key personnel at crypto exchanges, and exactly how much disclosure and transparency should be demanded from the crypto broker. resellers.
Given the rapid acceleration of cryptoassets and blockchain-based applications, legal and financial complications are inevitable. 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 protections needed
In May 2024, in a rare show of bipartisan agreement, the US Congress (both chambers) voted to repeal the controversial SAB 121 which had been issued by the SEC. In addition to these votes serving as yet another rebuke to Chairman Gensler and his campaign to regulate all cryptoassets like equity securities, it illustrated a fact that crypto advocates and investors have known for years; clear and concise regulatory frameworks are needed. Bitcoin ETFs have attracted tens of billions of inflows since inception, and TradFi institutions continue to develop and deploy blockchain and native crypto assets, but the regulatory environment in the US remains unclear.
Protecting investors, as well as maintaining liquid and transparent markets, should be a key priority for both US regulators and policymakers, but this should not impede much-needed innovation. Especially as stablecoins and the implications of tokenized transactions appear to be attracting attention and investment from TradFi institutions, it would be advisable for policymakers to conduct productive conversations on these topics rather than scoring political points.
FTX continues to cast a long shadow over the crypto space, but it also offers crypto advocates, investors, and policymakers an opportunity to learn – and implement – important lessons.