What has been happening around Blockchain Technology and Cryptocurrencies this week? The most relevant local and international developments as well as appealing background reports in a pointed and compact weekly review.
Selected articles of the week:
The FTX case is shaking the entire crypto industry and more and more details are coming to light. The incident is undoubtedly the biggest scandal the sector has ever seen. In addition to aggrieved clients, counterparties and investors, it also leaves a very bitter aftertaste regarding the circumstances that led to the collapse. The bankruptcy of what was once the second largest crypto trading exchange is marked by ignorance, massive debt and ultimately fraud on a billion-dollar scale. Misappropriation of customer funds, market manipulation, accounting shenanigans and a lack of separation of powers are rounded off by an unequally treated withdrawal of deposits and a “hack” worth several hundred millions. Generous political donations from FTX founder Sam Bankman Fried and his connections to the top management of the U.S. regulator SEC are also raising skepticism. The aftermath of the misery will be felt for a long time to come, while the entire industry will have to painstakingly restore the loss of trust that has occurred. In addition to a needed expansion of transparency from centralized crypto service providers, the debacle will drive the main use of cryptocurrencies: The unrestricted self-custody of digital assets.
To gain an overview of the insolvent FTX-Alameda construct, including its 130 subsidiary companies, none other than bankruptcy administrator John Ray was appointed interim CEO. The lawyer and insolvency expert helped to cope with the aftermath of some of the largest corporate collapses in history, including the 2001 collapse of energy trading giant Enron. Ray’s document filing with the Delaware bankruptcy court provides insights into the workings within the FTX web of companies. In doing so, the insolvency expert stated that he had never seen such “comprehensive failure of corporate controls and such complete lack of reliable financial information” in his career. An astonishing statement to make about a company that has been dogged by regulators and investors and was recently worth $32 billion. According to the interim CEO, Sam Bankman-Fried and his co-founder Gary Wang had complete control over the digital assets of FTX Group’s main businesses. Initial findings point to unaudited mingling of funds within the web of companies, internal procedures for obscuring the abuse of customer funds, and overfavorable trading rules for the in-house hedge fund Alameda Research.
One of the consequences of the FTX scandal are so-called collateral damages, which affect companies that had business relationships with the crypto exchange or its subsidiaries and are now also in the vortex due to write-offs. For example, Genesis Global Capital, the lending arm of cryptocurrency broker Genesis, is stopping disbursements and new lending as of now. As the subsequent announcement of a financing round by parent company Digital Currency Group (DCG) shows, the hole amounts to around $1 billion.
But it’s not just centralized crypto service providers that are struggling in the current environment. Despite recent events, the Bitcoin mining market is approaching one of the toughest times in crypto history. Due to falling BTC prices, their revenues are currently at the lowest level in years, and rising energy prices are further affecting already slim margins. The tense situation in the capital markets does not make things any easier, and therefore the question arises as to whether a wave of capitulation of Bitcoin miners is already looming.
One more effect can be observed due to the FTX-Alameda scandal: The failure of one of the largest market makers in the cryptocurrency industry leads to a rapid reduction in liquidity across broader cryptocurrency markets. Market analysis from crypto data provider Kaiko details how the absence of billions of dollars in liquidity is impacting various currency pairs.