The FTX fall from grace

by | Nov 14, 2022

It’s been a tough week for the industry, FTX / Alameda and SBF’s fall from grace has been spectacular and total, it has been extraordinary to watch it all play out live on Twitter.

For transparency I want to quickly note we moved trading assets held on FTX back to cold storage on 6 November, exited our FTT holding (<2% of portfolio) at US$23 on 7 November, however we did have an immaterial amount (<0.05% of portfolio) of Serum (SRM) locked on the platform.

If this saga highlights anything it is the need for regulation, a minimum standard for exchanges and custody services as a first step, after the collapse of Terra/Luna and 3AC earlier this year it’s disappointing that more progress hasn’t been made in this regard. With mid-terms winding up we are hopeful that a bi partisan issue like crypto is now top of the legislative agenda and the rest of the world can follow.

In the meantime, good exchange operators are publishing Proof-of-reserves. Proof-of-reserves are independent audits by third parties that aim to provide transparency and evidence that the assets it claims to own on behalf of its clients. Auditors then aggregate balances into a Merkle tree which entails all client balances. This might not give the full picture as liabilities are not covered but it is a good first step.

Contagion and liquidity constraints remain a real risk for the immediate future. It’s a real shame that we are focussed on this now as the macro environment shows signs of CPI easing and China announcing accommodative policy steps on Covid Zero and the real estate sector.

Reports suggest FTX execs are under the supervision of Bahamian authorities. Let’s hope they’re able to recover the assets that were moved off the exchange over the weekend and we can salvage something for the FTX users who couldn’t move their assets off the exchange in time.

It is also worth noting that it isn’t ‘crypto’ that failed here, it is a centralised organisation (fraud or poorly managed remains to be seen) that has failed, blockchain technology actually takes significant steps in negating the need to ‘trust’ centralised counterparties like FTX.

Our sincere thoughts are with our industry peers and anyone who has been impacted by this event. Feel free to contact us directly if you are among this cohort and would like to talk through your situation.