Crypto in a Post-FTX World

The year 2022 was a difficult time for the crypto industry but the bottom was probably reached in November when the FTX drama started to unveil. Ever since then, the community has been struggling to deal with the numerous consequences of these events. Just recently it has been announced that the hedge fund Galois Capital closes due to financial losses associated with the FTX collapse.

We have already covered in detail what happened to FTX. In this article, we have a look at what the Crypto World is like several months later and what we might expect in the future.

What is FTX up to now?

In December 2022, former CEO of the company Sam Bankman-Fried was arrested and extradited to the US where he faced eight serious charges and could potentially be sentenced to 115 years in prison if found guilty. Unlike Caroline Ellison, the former CEO of Alameda Research, he pleaded not guilty.

On December 22, SBF was released thanks to a $250 million bond paid by his parents; after that, he was under home arrest. Interestingly enough, soon after the bail, some independent researchers came to the conclusion that funds (more than a million dollars) were moved through the wallets associated with FTX and Alameda to Seychelles. Bankman-Fried denied his involvement with this. Bankman-Fried denied his involvement with this:

Meanwhile, the new FTX CEO John Ray said he was exploring the possibility of relaunching the exchange. The price of FTX’s token, FTT started to increase on January 10, 2023, and it soared over 42% on January, 16. The views of the community are divided on whether this is an actual comeback or a fake pump.

One of the consequences will be the upcoming regulations in the sphere of crypto. While this is not a quick process by any means, we can observe that the FTX situation has changed the rhetorics of many politicians from cautiously optimistic to quite restricting.

The post-FTX crypto market

Besides FTT, which obviously suffered from the company’s bankruptcy, the events also affected many other tokens. For example, the BTC price fell more than 20% in just one day after the news began to unfold on November 7, 2022. It persisted for quite a long time but then starting from January 13, 2023, it went up and has stayed above $20,000 for over a week.

We could observe a similar situation for Ethereum which decreased in price by almost a third from November, 6 to November 10, 2022. In January 2023 the token also saw a return to the pre-November value. You can learn more about what will happen to the ETH price in this article.

Solana was also a coin that suffered a lot; in the first half of November, its value fell from almost $37 on the 6th to about $14 on the 10th. However, SOL price also received good news in January 2023 with a significant increase – its cost went a little above the $24 mark.

Which crypto companies suffered from the FTX collapse?

Even though it is too early now to finalize the list of those crypto companies that had negative consequences, we can revisit some of the biggest cases to date. In addition to Hedge Fund Galois Capital also affected:

1. Genesis. The crypto lending company was one of the FTX’s largest unsecured creditors – the debt accounted for over $226 million. After struggling to find financing, it filed for bankruptcy on January 20, 2023. 
2. BlockFi. This crypto firm had given out a $275 million loan to FTX US. First, BlockFi halted customers’ withdrawals on November 11, 2022, when FTX filed for bankruptcy, and then had to do the same thing by the end of that month.
3. Auros Global. The crypto trading firm had to opt for provisional liquidation and restructuration because, after the FTX’s collapse, it had $20 million frozen and did not have enough liquidity to pay its lenders.

Aside from strictly the crypto sphere, the events also had an effect on the financial sector in general. FTX creditor list which was disclosed on January 25, 2023, included over a hundred names and revealed that the company owed to Apple, Netflix, The New York Times, CoinDesk, and lots of other entities.

What do other crypto companies do to keep users’ trust?

The FTX events proved that credibility is key when it comes to crypto which led to attempts to prove it by the big market players. This could even be seen as the silver lining. One of the main ways of increasing transparency is publishing the results of audits and Merkle trees.

What is more, large exchanges have found a solution to maintain user confidence through the Proof-of-Reserves algorithm (POR). Proof-of-Reserves is based on blockchain technology and verifies public wallets of centralized exchanges. For a higher quality of the audit and its transparency, it is additionally required to involve third-party – independent auditors who check the resources owned by exchanges to maintain liquidity.

1. For example, Binance, the largest crypto exchange, has implemented Merkle tree technology. On December 7, 2022, the audit results were published; they revealed that the asset and liability report of the exchange is in line with the POR, and almost all funds of Binance users are secured by assets owned by the exchange. 
2. BitMEX exchange allows its users to independently check the reserves through the Bitcoin Core program code. Each user can check the set of obligations in full. The exchange also regularly publishes snapshots of its reserves. According to the general report, reserves against liabilities are 101%.
3. Kraken exchange also uses “Merkle tree” technology and provides third-party audit companies with a report for verification. Each user can make sure that the balance of the account matches the reserves of the exchange; they see the date and name of the organization that conducted the audit.

This form of reporting of crypto exchanges has faced a lot of criticism from the SEC regulator and the crypto community. Gary Gensler, head of the SEC regulator, said this form of reporting did not meet official disclosure requirements generally accepted to protect investor funds. Large audit companies hastened to abandon the audit of reports from crypto companies due to regular disapproval of their reports from market participants.

In conclusion, we probably have not witnessed all of the aftermaths of the FTX collapse. Whether the effect is long-term or not, let's hope we will benefit from a more significant degree of transparency which is now a must.