Less than two weeks ago, Bahamas-based crypto exchange FTX was regarded as one of the most respected companies in the industry.
It has now filed for bankruptcy, and as liquidators scramble to classify assets, its collapse has delivered a knock-on effect across the entire ecosystem.
FTX’s crumble last week severely eroded confidence in the sector and will likely trigger greater scrutiny from regulators, crypto leaders say. Although many Latin American companies claim they have little exposure to FTX’s digital token, a widespread loss of conviction in crypto poses a significant risk.
Over the past few days, local exchanges and crypto wallets have rushed to alleviate customers. “We once again reinforce that no assets of the company and our users are exposed to FTX/Alameda, or the $FTT token,” Buenbit, an Argentine exchange, tweeted.
Along those lines, Mexico’s Bitso founder Daniel Vogel said, “all of our client’s funds are in our custody and safe from any liquidity or credit risk, even if we see a spread of contagion in the industry.”
Companies rush to calm clients
The haste to soothe customers comes as traders have been yanked funds out of the market globally. To mollify this, Binance, the world’s biggest crypto trading venue, has vowed to publish proof that they hold sufficient reserves to match their liabilities to customers.
In Latin America, however, exposure from local exchanges or clients to FTX is not as significant, according to local media and regional industry leaders.
FTX’s liquidity crisis was sparked after a journalistic investigation revealed that reserves backing liabilities were shaky. According to the Financial Times, FTX had less than $1 billion in easily sellable assets against $9 billion in liabilities before it went bankrupt last week.
For Manuel Beaudroit, CEO and co-founder at cryptocurrency firm Belo, a domino effect will follow. “Some players are going to fall if they haven’t already,” he said to Fintech Nexus. “Apart from the obvious impact on users, regulators will surely raise the issue going forward motivated by FTX’s bad practices.”
A new blow to the crisis
The crisis is the latest blow to the crypto industry, which has faced dramatic adversity in the past few quarters as a massive drop in the value of digital assets led to sharp downsizing.
“The collapse of FTX is significant and a real black eye to the industry. It is a truly horrendous event where users of a platform find themselves trapped and have funds entrusted to a custodian lost,” analytics firm Glassnode said in a note.
30-year-old Sam Bankman-Fried stepped down as chief executive officer and now must be investigated in the United States for how he managed the company’s finances. “I’m really sorry, again, that we ended up here,” he tweeted.
Proof of reserves
The concept of proof of reserve is building among crypto founders, an attempt to tout transparency to clients and investors in the face of enormous skepticism.
“We are working on a Proof of Reserve with an external audit to show both assets and liabilities transparently,” Marcelo Cavazzoli, CEO at Lemon, an Argentine crypto exchange with operations in Brazil, said on social media.
Belo’s Beaudroit nonetheless argued that more is needed to overcome distrust. “Proof of reserve sometimes does not adequately reflect what is actually in the balance sheet,” he said.
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But there could be a silver lining to the crisis. “Some standards will likely be implemented,” Beaudroit said. “This is positive because all the players begin to acquire rules of conduct that ensure much more security at the operational level.”
Other executives shared his view. Bitso’s Vogel said now was the time to reinforce transparency and risk management in the industry. “Although it is a huge misstep for the industry, cryptocurrencies will be fine,” he said.