When FTX experienced a “run” on its assets and declared bankruptcy one could have believed that it was simply another overleveraged crypto business that became vulnerable due to the crypto winter. Certainly FTX was a large and seemingly healthy crypto business so one might have anticipated some degree of fallout with folks doing business with them. What was not anticipated was the width and breadth of the FTX fallout as described by folks like The New York Times. The FTX fallout continues and is spreading into unexpected corners.
How Far Does the FTX Fallout Extend?
As crypto gained legitimacy the mix of investors came to include folks like the Ontario Teachers’ Pension fund that recently wrote down its $95 million loss with FTX and Singapore’s Temasek state-backed fund that just wrote down $275 million in losses. Add to these folks, Softbank in Japan and Sequoia Capital in Silicon Valley. The list goes on and on and includes Genesis Capital that makes loans to crypto hedge funds. What makes things seem worse at this point is that the accounting for FTX, described by its former CEO as “messy” may better be described as nonexistent. We previously noted that bank collapses in the 1930s came to mind but now it is starting to sound like the Bernie Madoff Ponzi scheme that ran to about $64 billion.
Coinbase, the US publicly traded crypto exchange, has seen its share price fall by about a third and Bitcoin has fallen by $3,500 to what appears to be its next price plateau in the $16,000 range. The crypto business is so interconnected, like FTX with more than a hundred subsidiaries, that trouble in one corner of the crypto world quickly spreads to the rest of the crypto realm. Shares in companies like Grayscale Bitcoin with no direct connection to FTX were already down this year but fell another 20% in recent weeks since the news about FTX spread. Gemini crypto exchange owned by the Winklevoss twins halted withdrawals recently as well.
Pending Lawsuits Include Celebrities Who Promoted FTX
As those who lost money in FTX lick their wounds they are also retaining attorneys to sue for damages. Since there may well be little left of FTX they are looking for anyone with money who is even remotely connected to FTX. Some of these folks include Steph Curry, Tom Brady, and the comedian Larry David. We have written about not believing celebrities who promote crypto and celebrities who ran afoul of the law for their promotions. Now the trial lawyers will be tracking down anyone who said anything good about FTX and received money or favor for their endorsements.
Crypto regulation has been gaining steam and the FTX mess has only added fuel to the fire. Janet Yellen, Secretary of the Treasury, voiced concern that crypto is now more strongly linked to the broader financial system and, as such, needs tighter regulation. The House Financial Services Committee will be looking at the FTX issue in their hearings in December. An interesting dilemma for many in Congress is that they had close relationships with the former FTX CEO which may make specific regulations related too closely to FTX embarrassing. Another issue that may impede the development of more regulations will be the split in political power in Congress with the Republicans taking control of the House of Representatives in 2023. As with most issues when there is a divided government, crypto regulation laws will emerge from a fight in Congress rather than a happy consensus. Lawsuits by those damaged by the FTX mess may have a greater effect on how the crypto world runs its business than governmental regulation.
FTX Fallout Continues – SlideShare Version