Crypto: What’s next as FTX collapse triggers ‘Lehman moment’?

London
CNN Business
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The stunning downfall of the FTX exchange, one of the biggest and most reputable players in the market for digital assets, is sparking alarm among people who own cryptocurrencies as investors run for cover.

There are still many unanswered questions. But two big ones loom: How far will the damage spread? And can the beaten-down crypto industry bounce back?

Industry insiders are debating whether to call the implosion of FTX, which filed for bankruptcy on Friday, a “Lehman moment,” referring to the 2008 collapse of the investment bank that sent shockwaves around the world. Many think it’s an apt comparison.

What’s clear is that the fallout from the FTX crisis injects significant volatility into the crypto ecosystem. The episode has destroyed confidence and emboldened regulators, which are now on high alert.

“This was one of the most trusted entities in the crypto space, so it will take some time to recover,” said Jay Jog, co-founder of the blockchain startup Sei Labs, which is based in California.

“Sh*tstorm.” “Insane.” “Chaos.”

Those are terms crypto investors and pundits have used to describe the failure of FTX, which was launched in 2019 by Sam Bankman-Fried, a 30-year-old wunderkind once hailed as a modern-day J.P. Morgan.

The company was valued at $32 billion in its latest funding round, and had recruited high-profile backers including SoftBank, Tiger Global, Singapore’s Temasek, as well as celebrities like Tom Brady, Gisele Bündchen and Naomi Osaka. Its name is on the arena where the Miami Heat play.

This week, investor Sequoia Capital said it had marked the value of its FTX stake down to $0. The exchange — said to be short between $8 billion and $10 billion — was unable to meet customers’ withdrawal demands. Bankman-Fried resigned Friday and FTX filed for bankruptcy protection in the United States after a bailout from rival Binance fell through.

“Everyone’s a little bit in shock,” said Shan Jun Fok, co-founder of Moonvault Partners, a crypto investment firm based in Hong Kong. “A lot of people trusted FTX as the gold standard.”

He compared the collapse of FTX to Enron, the 2001 corporate fraud scandal that resulted in the surprise bankruptcy of the US energy company.

The situation is still developing quickly. But one concern is how it could ripple throughout the entire crypto sector, which was worth more than $1 trillion in August.

Over the summer, as digital assets tumbled in value, Bankman-Fried put up about $1 billion to bail out firms and shore up assets to try to keep the entire industry afloat. Now, few white knights are left to rescue FTX and others in distress.

“The number of entities with stronger balance sheets able to rescue those with low capital and high leverage is shrinking within the crypto ecosystem,” strategists at JPMorgan said in a note to clients this…