Crypto Curious: How FTX and SBF have impacted the crypto industry

November 18th, 2022 | Biota Macdonald

Theranos, WeWork, Enron, and…FTX? Recent news about the dealings of FTX CEO Sam Bankman-Fried (SBF) has been nothing short of shocking. Just this summer after the collapse of Luna, SBF was the white knight who had saved other insolvent crypto companies with bailouts. He had built up a persona that was well-respected, known for his stance on effective altruism and committing to give away most of his wealth. He was everywhere, from supporting the growth of crypto startups to lobbying for pro-crypto legislation in DC. Months later, the world’s second-largest crypto exchange – with a $32 billion valuation on November 1st – filed Chapter 11 bankruptcy. 

What happened with FTX

Crypto exchanges serve as an intermediary between fiat and crypto but are not supposed to touch customer funds, since they make their money from trading fees. When the CEO of a rival exchange sent out a series of tweets that sparked panicked customers to withdraw their funds from the platform, FTX should have been able to honor all withdrawals without issue. But to the crypto community’s shock, FTX was unable to withstand what became a $6 billion bank run, having to halt withdrawals less than 48 hours later. For a short time, crypto exchange Binance even shared plans to acquire FTX and then walked away from the deal. Over the next few days, it appeared that SBF had lent out at least $10 billion in customer funds to struggling sister firm Alameda Research. This was only possible because SBF had programmed a secret backdoor in the accounting software that allowed him to send customer deposits without triggering any alarms to the internal compliance team and external auditors.

How SBF compounded the fallout

Unfortunately for crypto at large, FTX did too good of a job with a robust marketing strategy to bring brand awareness and crypto to the masses, spending upwards of $375 million on sports marketing, including $14 million on a Super Bowl ad, and $50.5 million on other ads this year alone, according to Comperemedia Omni. All of this notable marketing, including their Super Bowl ads and celebrity partnerships, just made the collapse all the more visible because of the brand recognition and the new onboarded users who they burned.

First-time users of crypto weren’t the only victims of SBF’s mismanagement. FTX’s involvement with investing in new projects was well-known, and many crypto venture capital funds and startups had stored their funds with the exchange because it was a condition of FTX’s support. Even FTX’s employees were blindsided; many had been encouraged to direct deposit their salaries into the platform and those living in countries with unstable financial systems had used FTX as a bank. What’s tragic for such a nascent industry is that FTX was regarded by many as a great crypto product on the front end compared to its competitors, heralded for its user-friendly design and being an early pioneer for derivatives trading.

On the policy side, SBF had been well-networked with key politicians, donating tens of millions to their campaigns, and heavily lobbying for crypto regulation that was suspected to benefit FTX and potentially disadvantage competitors. SBF was nothing if not thorough because transparency of customer funds was also a topic for which he lobbied in front of Congress, all while doing the exact opposite with his own business. FTX likely violated existing regulations in touching customer deposits, and it’s still a mystery how SBF was able to dupe so many, including multiple rounds of investors and the due diligence that should have entailed. 

There may be a fair perception that the crypto world is against regulation. Many in the crypto community would argue that moving more of the financial system onto the blockchain removes some of the need for regulation since the “rules” of the blockchain would remove the ability for companies to lie about their assets and liabilities, and the activity of lending out customer funds would be detectable and auditable through the public transparency that blockchains offer. Generally, crypto proponents would tend to accept smart regulation that protects consumers who use centralized exchanges and lending platforms, while remaining wary of heavy-handed regulation that would stifle innovation. The concern right now is that the visibility of FTX’s rapid failure will lead to more distrust and misunderstanding of crypto among politicians, who, in reaction to the situation, will be more likely to enact heavy-handed regulation.

What we think

The extent of SBF’s dealings is still unknown, the broader impacts on the crypto industry are unclear, and more will likely continue to come to light as the situation is investigated further. For crypto skeptics, the takeaway of all this reinforces the idea that crypto is a scam, but the irony is a centralized exchange secretly gambling away customer money is exactly the kind of problem that decentralized blockchains prevent. If FTX’s activity had been on-chain and they had published proof of reserves, they could never have gotten away with what they did. At this point in crypto adoption, centralized players in crypto are a necessary compromise to onboard new users, but the fact that bad actors have taken advantage of consumers and the lack of regulation is a serious problem with which the crypto space needs to contend.

Mintel consumer data from September showed that openness to crypto had been trending favorably, prior to this event. When presented with the statement, “I am more open to investing in cryptocurrency than I was a year ago,” 39% agreed, up 4% from the year prior. It remains to be seen what impact this event will have on consumer sentiment, but it’s likely to expect that this will damage consumer confidence, particularly in crypto-native companies. 

However, long-term interest in crypto will likely continue. The broken trust creates a whitespace, one which leaves consumers with few options while seeking out lower-risk engagement with this new asset class. Legacy finance brands have a big opportunity to offer crypto products that consumers will see as safe and more trustworthy and leverage the trust in their longstanding, well-regulated platforms. 

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Biota Macdonald

Biota Macdonald

Biota Li Macdonald is the Director of Marketing Strategy for Comperemedia, specializing in financial services and insurance trends particularly in the areas of health insurance, fintech, cryptocurrency, and global marketing implications.