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The collapse of FTX: the worst crisis of this bearish period

There are still many unanswered questions in the collapse of Sam Bankman Fried‘s popular cryptocurrency exchange, FTX. This episode, however, has seriously dented confidence in the industry and encouraged authorities to new regulations and take drastic action on the sector.

The collapse of FTX represents a watershed moment for the crypto industry

Sam Bankman Fried’s popular exchange platform, FTX, was one of the biggest players in the digital asset market. 

Last Friday, however, FTX filed for bankruptcy using the Chapter 11 method. For those who do not know Chapter 11, is a procedure in the bankruptcy code foreseeing a reorganization involving a corporation or partnership. A Chapter 11 debtor usually proposes a plan of reorganization to keep his or her business alive and pay creditors over time.

This move came soon after Binance, the largest exchange platform, stepped back. Binance had intended to acquire FTX after a crisis stemming from a lack of liquidity, but at the last minute CEO Changpeng Zhao reconsidered, a wise and most likely strategic move. 

Meanwhile, Sam Bankman Fried, founder of FTX, has stepped down as CEO, leaving the position to John J. Ray III. 

The new CEO had this to say about the platform’s current situation: 

“Immediate Chapter 11 relief is appropriate to provide the FTX group with an opportunity to assess its situation and develop a process to maximize recoveries for interessed.”

The sad comparison to Lehman Brothers

If one major exchange platform calls bankruptcy, the entire crypto sector is shaken. The hard truth is that this new event threatens to put the entire market in serious danger, causing a so-called domino effect. Some have compared the affair to the bankruptcy crisis of Lehman Brothers bank, which triggered the subprime mortgage crisis in 2008. 

In the hours following the news, the two largest cryptocurrencies by capitalization, Bitcoin and Ethereum, lost 15% and 24% of their value in a matter of hours, respectively. Not to mention the bearish period in which the entire industry has been traveling for more than a year now. 

Its now former CEO, SBF, had recently entered Forbes’ top 100 richest men in the world with his $26 billion in assets. The founder himself, now replaced as CEO by John J. Ray III, reportedly lost 96% of his wealth.

On the other hand, FTX, like other companies in the industry, was under the eye of the US Securities and Exchange Commission. For a long time, the SEC has been calling for more oversight and the Senate for more, or at least clearer, regulation of the cryptocurrency industry. 

In the case of FTX, the company was acting without authorization to trade derivatives. In fact, the company’s registered office was in Hong Kong and the Bahamas, hoping to evade scrutiny by US and European authorities. 

An attempt by Binance’s CEO to increase transparency in the industry

Changpeng Zhao, CEO of Binance, has clear ideas about how the crypto industry should be. Indeed, Zhao said that, together with Ethereum creator Vitalik Buterin, they are attempting to create a Proof of Reserve protocol that will use Binance as a guinea pig. We are talking about a real association, composed of the biggest players and platforms in the crypto universe, to work side by side with policymakers and regulators around the world.

Undoubtedly, after an event of this magnitude, the market needs more protection for savers, who unsuspectingly leave the management of their funds in the wrong hands.

Indeed, according to the Wall Street Journal, Alameda Research was also involved in insider trading practices, where it still managed to generate large losses:

But this is only one of the most striking examples. 

During a Twitter Space, with more than 40,000 listeners listening, Zhao stated: 

“The association will try to maintain communication with regulators and also maintain best practices in the industry, including proof of reserves, transparency.”

Leading the association of course will be him, the CEO of Binance, who has always advocated for greater transparency in the industry. His goal is precisely that, and he has been speaking out in this way for years. 

According to CZ, in order for the industry to grow more, it needs to be transparent and safe for those who are in control, but more importantly for those who invest.

At the moment, it is difficult to make wild predictions about the future of the crypto market. The reality of the ecosystem is divided: on the one hand, there are those who prefer to entrust their investments to stablecoins for the time being, and on the other hand, there are those who see investment opportunities. 

On the one hand, there are those who think that the digital currency industry needs more specific and broad regulation, so as to make the industry safer. On another there are those who believe that more regulation, may put limits and barriers on the industry, increasing the crisis even more. 

Nothing is certain at the moment. The only certainty is that the failure of FTX has really put the industry and investors in crisis.