The latest glass shattering titanic-like implosion is FTX — the world’s fourth largest crypto exchange —which until early November was reputed as an industry juggernaut.

Following news of a liquidity crunch, FTX, its sister firm Alameda Research and 130 closely linked firms under the bracket of FTX Group, filed for bankruptcy. This has sent shock waves across the crypto markets which have seen investors losing billions of dollars over the past nine months. This once again makes a case for the urgent need to tighten the grip on the world of crypto by means of firmer regulations across the world.

Bitcoin, the world’s most famous crypto-currency, has plummeted circa 65% so far this year. It was trading at about US$16 500 on Monday with indications  it could plunge to below US$10 000. Ether, the world’s second most valuable crypto-currency, was trading at about US$1 230 on Monday, having tanked over 20% over the last week, CoinDesk data showed.

Backdrop

FTX, a crypto exchange was valued at US$32 billion only a few months ago. The crypto empire once comprised of FTX and investing firm Alameda Research, with the purpose of Alameda Research being  to act as a liquidity provider for FTX. Until now, FTX had managed to avoid the liquidity crisis that plagued crypto earlier in 2022 after a wave of contagion rocked the market in the wake of the US$60 billion collapse of stablecoin TerraUSD.

Bankman-Fried offered emergency liquidity to crypto companies caught up in the catastrophe.

Designed as an magnanimous saviour with the acronym SBF, Bankman-Fried’s Alameda stepped in as a lender of last resort to crypto firms such as Voyager Digital and Celsius, went down the drain and threatened to take huge parts of the crypto market along with them. Similar to several other exchanges, FTX propped up its own crypto token, FTT, architectured to support its various projects. According to forbes.com: “Owners of FTT could use the token to obtain discounts on trading FTX trading fees or for staking to earn income from their holdings. It’s not an uncommon strategy — Binance, for example, offers two native tokens, Binance Coin (BNB) and Binance USD (BUSD).”

Customers fled the exchange over fears about whether FTX had sufficient capital, and it agreed to sell itself to rival crypto exchange Binance. But the deal fell through while Binance’s due diligence on FTX’s balance sheet was still pending.

Ignored FTX red flags

A recent statement issued by  Orthogonal Credit, formerly a lender to Alameda Research on why it severed its relationship with Alameda earlier in the year, perfectly summarises the ignored red flags on FTX: “During our Alameda due diligence earlier this year, the team identified a number of key weaknesses: a) declining asset quality; b) unclear capital policy; c) less than robust operational and business practices; and d) an increasingly byzantine corporate structure ... We considered these key weaknesses and made a commercial decision to sever our institutional lending relationship.”

Perhaps FTX had deliberately built an excellent relationship with the media and the US Congress, one so strong that both the media and authorities overlooked the fragility of the enterprise web.  At the same time; it’s trendy to compare the recent troubles at the crypto-currency exchange FTX with Lehman Brothers’ epic fall, which sent shivers across the financial services sector in 2008 and helped ignite a systemic crisis.

Regulation?

Central banks across the world have over the past 18 months been investigating ctypto-currencies with the intention of regulating the sector and creating safety nets for investors funds. Some jurisdictions have banned trade in crypto, like China while others have set up or are in the process of setting up CBDCs  (Central Bank Digital Currencies). Sooner rather than later, crypto markets must be reined in to prevent further carnage.

Mabunda is an analyst and TV anchor at Equity Axis, a leading financial research firm in Zimbabwe. — ebenm@equityaxis.net