Investors Unlikely to See Returns From FTX Bankruptcy as Gov May Move to Regulate Crypto Exchanges
© AP Photo / Kin Cheung
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WASHINGTON (Sputnik) - Neither individual nor institutional investors are expected to get anything back in the cryptocurrency exchange FTX’s bankruptcy proceedings, financial services firm Sovereign Wealth Management CEO Gary Korolev told Sputnik.
“Crypto exchanges are not backed by any government insurance programs in case of market crashes and margin calls, meaning investors who have their crypto on the platform are technically creditors to that platform,” Korolev said.
“Once the smoke clears so to speak, we will be able to ascertain just how deep FTX is in the hole that will help understand how much money depositors could lose. Nobody expects equity investors, or companies that actually invested in FTX itself to get anything back."
Earlier on Friday, the cryptocurrency exchange FTX announced it commenced voluntary bankruptcy proceedings to begin the review and monetization of assets after competitor Binance backed out of plans to acquire it.
“If we're talking about depositors, when an exchange pools their money and loans it out to a hedge fund like Alameda, depending on the contract FTX had with its depositors, those loan funds may not be considered property of those individual investors for the purpose of the bankruptcy,” Korolev said.
The Sovereign Wealth Management CEO explained that the funds may be considered loans to FTX and liabilities for the depositors.
“Therefore, depositors at FTX stand to lose potentially a large sum of money although it cannot be said with any accuracy what that sum would be at this point,” he said.
11 November 2022, 17:31 GMT
Korolev emphasized it is important to differentiate in this case that FTX and the financial data exchange FDX US are separate entities, and that a third entity - BlockFi - that was bought out by FTX several months ago has recently stopped withdrawals. Such a decision by BlockFi is likely because of the fact it had provided loans to Alameda - the hedge fund related to former FTX CEO Sam Bankman-Fried that brought down the exchange.
When asked whether the FTX bankruptcy will affect investments in the crypto currencies market, Korolev said: "Crypto is already down 75% from its highs so the market at this point is just waiting for the final flush out before institutional investors, long term investors, and short term traders can feel like they can start adding more to their positions."
Korolev pointed out that such a development can be expected as long as the macro liquidity picture shows signs of at least slight improvement as well.
Korolev said the cryptocurrency Ethereum surprisingly did not decrease to a new low despite the news that the FTX bankruptcy is a situation similar to the bankruptcy of the global investment firm Lehman Brothers in 2008 that caused the financial crash and the Great Recession.
“This may be quite telling,” he said. "However, Bitcoin did break to a new low and Bitcoin is supposed to be the less volatile of the two. The riskier asset, which is Ethereum, is behaving better than the relatively more conservative crypto asset, which is Bitcoin, and for me this would be overall a somewhat positive sign.”
Korolev said he would not give any price predictions, but the asset class is so routed at present that it would be hard to see a downside beyond $12,000 on Bitcoin as that has been the previous level of resistance for a long time and it now makes it somewhat of a floor.
"However, the cryptocurrency market at this point has been institutionalized and therefore it behaves like other risk assets,” he said.
“It is strongly affected by and correlated to general macro trends, in this case liquidity. As long as the general macro trend is toward tight money, higher interest rates and lower liquidity, as it continues to be the case, it is unlikely that crypto will go up consistently. Even though it may have a few bear market rallies along the way.”
Governments Likely to Closely Regulate Crypto Exchanges After FTX Bankruptcy
Korolev also noted that governments would likely begin to closely regulate cryptocurrency exchanges in light of FTX's Chapter 11 filing on Friday.
"Government agencies are always eager to expand power and they will certainly not let this crisis go to waste," Korolev said. "We can expect crypto exchanges to start to be regulated closely similar to how already existing traditional exchanges, like the New York Stock Exchange and others, are regulated."
11 November 2022, 01:29 GMT
Just as the announcement came of FTX's filing, John Ray III was appointed as the firm's new chief executive officer to replace Sam Bankman-Fried after he resigned. However, Bankman-Fried will assist the company management during the proceedings, the release added.
