FTX Collapse Could Trigger ‘Domino Effect’ for Crypto Exchanges, LatAm Industry Experts Say

Experts talk of ‘natural selection’ for crypto trading firms, in yet another chapter that could lead to investors fleeing risky assets

Sam Bankman-Fried, founder and chief executive officer of FTX Cryptocurrency Derivatives Exchange, during an interview on an episode of Bloomberg Wealth with David Rubenstein in New York, US, on Wednesday, Aug 17, 2022.

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Bloomberg Línea — Investors were liquidating cryptocurrencies on Friday amid another chapter of uncertainty for the assets, following the filing for bankruptcy by beleaguered crypto exchange FTX, and which could pull down other crypto exchanges, according to observers.

In early trading Friday, Bitcoin (BTC) fell 5.5% to $16,833.25 and Ethereum (XET) 4.5% to $1,262.09, and there is room for further downward movement, according to Reinaldo Rabelo, CEO of Brazilian SoftBank-backed Mercado Bitcoin, who said the entire market will feel FTX’s collapse, just as it has with other crises involving crypto companies.

“There will be both a reduction in asset prices and a reduction in confidence and participation in the industry,” Rabelo said in an interview with Bloomberg Línea. However, as the technology behind cryptocurrencies has not been affected, he expects the market to recover from the downturn.

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“It is possible that other companies end up breaking up, especially those global ones, which live leveraged on each other and with that there is more distrust in the market.”

For Mercado Bitcoin’s CEO, FTX’s collapse is not about problems in the ecosystem or the technology, but about a company that “operated without governance, risk analysis or any responsibility to its customers”.

FTX was considered a global leader and was the recipient of investments from celebrities such NFL player Tom Brady and his former partner, model Gisele Bundchen.

For Robson Gonçalves, economist and professor at the Getúlio Vargas Foundation, cryptocurrencies should be understood as “virtual commodities”, and therefore “the decline in the value of crypto and potential bankruptcies of institutions were already expected, as the Federal Reserve began the cycle of interest rate hikes”.

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“When there is a reduction in movement with cryptocurrencies, the most weakened institutions in the expansionary phase end up really suffering,” he said.

Binance has withdrawn from its FTX acquisition announced earlier this week. “Initially, our expectation was to be able to support FTX customers to provide liquidity, but the issues are beyond our control or ability to help,” the company founded by crypto billionaire Changpeng Zhao said in a statement.

“Every time a major player in an industry fails, retail consumers will suffer. We have seen in recent years that the cryptocurrency ecosystem is becoming more resilient and believe that over time, those who misuse users’ funds will be weeded out by the free market,” Binance said, adding that, “as regulatory frameworks are developed and the industry continues to evolve towards greater decentralization, the ecosystem will grow more robust.”

‘A difficult and sad moment’

FTX’s strategy of backing crypto transactions with its own issuance is very common at times of innovation in the financial market, according to Gonçalves, which creates a “false exuberance from the transactions themselves”.

Mexican unicorn Bitso, which like FTX has Tiger Global among its main investors, said via a statement that “this is a difficult and sad moment for the industry, and especially for those directly affected by the FTX collapse,” said Daniel Voguel, CEO of the company.

“Mindful of the fluid market conditions, we currently hold 100% of our clients’ Bitso+ funds at Bitso. Therefore, 0% of our clients’ funds have exposure, directly or indirectly, to FTX/Alameda or FTT,“ he said, adding that “we sacrifice faster growth to prioritize safety, a decision that comes with trade-offs.”

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Gonçalves explains that cryptocurrency should be understood as an innovation, and that there are times of contraction and expansion when you are innovating.

“Looking at the automotive sector, for example, there was a proliferation of automakers in the beginning, and then, in maturity, when there is a ‘winter’, you end up having this natural selection process.”

For him, the process of clearing and natural selection of crypto issuers will follow the line of the US interest rate hikes, and will affect companies that because of the regulatory vacuum have achieved potential but have seen “falsely exuberant” growth.

For his part, Guillermo Torrealba, CEO of Buda, told Bloomberg Línea that FTX represents a tough blow for the crypto sector because it increases doubts about “some centralized services”, such as the platform created by Sam Bankman-Fried.

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Torrealba said one of the failures of FTX was to maintain liquidity, a factor in which “it was expected not to fail”.

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A crypto platform, says Torrealba, “should not touch its clients’ money”, and clients should always be able to withdraw all their funds.

‘A tough blow’

“In the case of FTX, it was shown that they did not have custody. In other words, they were keeping the custody of their clients themselves and, in fact, they had apparently lent it to third parties. That is a very tough blow. We don’t know what will happen, now that they went bankrupt, probably their clients’ funds will be frozen for a period of time, which could be years, until the bankruptcy process is finished,” Torrealba said.

According to Typson Sánchez, co-founder of Panda and director of R&D at Athena Bitcoin, the complex crypto market landscape has affected many of the firm’s businesses, “some collapsed completely, and others are on standby waiting to see how the market behaves”.

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Sánchez added that “revenues are holding up, but have certain high points due to the high volatility”. However, he said that, despite this, “companies that have been in the industry for some time now know how to deal with this uncertainty”.

This situation is reflected in other companies in the industry in the region.

This is the case of Buda that, according to Torrealba, knows how to face these cycles. “These winters that happen (...) every four years (...) this does not affect us any more than it affects the ecosystem as a whole, so Buda’s volumes have decreased in the last 12 months, but we remain very stable and healthy”.