CEO says a lot of work is needed to rebuild trust among regulators and investing public
A few days after the collapse of FTX and the public humbling of its founder, Sam Bankman-Fried, the world is still sorting through the rubble.
The fuse was lit last week with a story from cryptocurrency news outlet CoinDesk based on a leaked balance sheet from Alameda Research, a sister firm of FTX, showing how deeply entangled the two companies were.
Among other findings, CoinDesk reported that FTX was lending cash to Alameda in exchange for large quantities of its token, FTT, which some have likened to borrowing money from a bank using its own shares as collateral. That sparked a stampede of withdrawals, plunging FTX into a liquidity crisis.
Rival exchange Binance offered a lifeline through a non-binding acquisition offer, which it quickly withdrew after discovering more serious problems with the doomed exchange. On Friday, Bankman-Fried – popularly known as SBF – filed for bankruptcy protection, and he now faces possible civil or criminal charges.
In the wake of further revelations and reports over the weekend, many now see FTX, once a bastion of trust in the embattled crypto industry, as a blow-up that was just waiting to happen.
“It’s hard to tell what are facts and what are rumours,” Brian Mosoff, CEO of Ether Capital, told Wealth Professional. “Some things are more concrete that we can lean on.”
‘All that trust is gone’
Based on reliable news reports, Mosoff says some crypto assets held by FTX were moved without the correct permissions after SBF’s bankruptcy filing. Who’s responsible and how those assets can be clawed back is still unclear, but another U.S. crypto exchange Kraken claims a number of accounts it hosts had interacted with the wallets concerned.
“Once FTX filed for bankruptcy, everything should have been frozen,” he says. “Users aren’t allowed to withdraw from their accounts on the exchange, even though the assets are technically theirs.”
The maelstrom of coverage around the exchange since Friday paints a picture of behind-the-scenes fraud and mismanagement, rather than systemic or structural issues with crypto, blockchain, or decentralized finance. But Mosoff is concerned the still-unfolding tragedy has eroded years of progress in crypto’s acceptance as an asset class of the future.
“FTX was engaging with regulators everywhere, and all that trust is gone,” he says. “SBF represents an entire industry. Will those regulators trust other genuinely good actors? I’m hopeful, but I can also respect that they’ve been burned multiple times.”
The affair also casts a wide shadow because of all the relationships FTX had. Aside from being a trading or holding venue for numerous companies, Mosoff says it was expected to invest or participate in funding raises over the next 12 to 18 months for many other firms that are fighting to survive the harsh crypto winter.
“We’re very lucky [at Ether Capital] because we have no counterparty risk here,” he says. “My heart goes out to a lot of businesses that are bleeding cash during this bear market.”
Questions ahead for the crypto space
Over the past few years, Canada’s securities regulators have taken steps to protect retail cryptocurrency investors. The Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada (IIROC) have issued guidance several times on how existing legislation should apply to crypto platforms.
In 2021, the Ontario Securities Commission (OSC) warned it would launch enforcement actions against crypto exchange platforms that fail to start registration discussions with it by April 19 that year. It has since sanctioned multiple entities including Kucoin, a global online crypto trading platform, which has been banned permanently from Ontario’s capital markets and ordered to pay a $2-million administrative penalty.
But Mosoff argues that by supporting a more competitive local crypto industry, Canada could be in an even better position to protect investors.
“The key thing is that if Canadian crypto platforms – which have more accountability in our jurisdiction – could be more competitive with their product offerings, Canadians shouldn’t have to seek out foreign unregistered exchanges,” Mosoff says. “That’s a loop that we still need to close.”
While he expects investors will continue to engage with crypto, Mosoff believes says businesses in the digital assets space will face more questions from their customers. Already, he’s seeing demands for proof of reserves, segregated accounts, and more transparency around governance, among other items.
“This situation should also remind investors that crypto assets were not intended to be locked up in these centralized exchanges,” he says. “I think a lot of newcomers to the space have forgotten that self-custody and transparency are the driving principles behind this asset class.”
While he agrees guardrails are vital, Mosoff stresses that the cryptocurrency space is continually evolving, with a long and growing list of nuances that need to be considered. Rather than implementing fine-point rules that might have unintended consequences, he believes the industry and regulators have to work toward ensuring proper education and disclosures for the investing public.
“It’s going to be painful for a lot of retail and institutional investors who bought into FTX, and it will set a lot of things back,” Mosoff says. “But it's important that people don't lose the plot of why this industry exists and what it's trying to achieve.”