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Moneyfarm calls for more regulation in the crypto industry following the near collapse of FTX

This week we’ve seen a lot of volatility in the markets, especially in the world of crypto. The reason for this is down to the near-collapse of the FTX exchange and what led up to it. The story involves social media slinging matches and the actions of panicked investors. So, what has led to FTX’s downfall?

FTX, led by Sam Bankman-Fried, was one of the largest cryptocurrency exchanges in the world with a valuation of $25 billion (£21.97 billion). It was initially going well for the exchange which was potentially in line to be acquired by rival Binance. 

FTX was worth billions and has institutional investors like investment management firm BlackRock, venture capital firm Sequoia and one of the largest pension plans in the world – the Ontario Teachers’ Pension Plan as investors. According to the Daily Mail, celebrities like Tom Brady and Gisele Bundchen are also said to be invested in FTX.

A suspension of withdrawals

However, this week chaos ensued as FTX suspended customer withdrawals following a sudden rush on the exchange. FTX had been struggling with a surge in withdrawals after CEO of Binance, Changpeng Zhao (who also goes by the name CZ), made a tweet about selling FTT, FTX’s utility token, and revealed on Twitter a few days later that Binance had asked for a bail out.

On 6 November, CZ tweeted: “As part of Binance’s exit from FTX equity last year, Binance received roughly $2.1 billion USD equivalent in cash (BUSD and FTT). Due to recent revelations that have come to light, we have decided to liquidate any remaining FTT on our books.”

A few days later, On 8 November, he tweeted: “This afternoon, FTX asked for our help. There is a significant liquidity crunch. To protect users we signed a non-binding Lol, intending to fully acquire and help cover the liquidity crunch. We will be conducting a full DD in the coming days.”

The tweets didn’t only affect FTX. It also affected hedge fund Alameda Research, also owned by Bankman-Fried, which earlier this year bought a large amount of FTT.

The near collapse of FTX resulted in downward pressure on this token’s price and both businesses folded in less than 48 hours. This led to the founder of FTX, who had what many in the financial services industry would consider a good reputation, losing $16 billion (£13.70 billion) according to Bloomberg.

Understandably, Crypto markets (outside of these two exchanges) reacted negatively to these events. At the time of writing, Bitcoin and Ethereum (the two largest cryptocurrencies) are down over 15%. The near collapse of FTX has resulted in every holder of cryptocurrencies losing out.

Some claim CZ’s tweet was a hostile takeover attempt and strategic masterstroke. If the aim was to make life more difficult for the competition, he’s certainly achieved this. FTX is now, after all, worth less and clients can’t withdraw their money.

But if FTX didn’t meet Binance’s due diligence process, and if allegations in the media are true about FTX mishandling customer funds, then perhaps it can be argued that FTX’s downfall was of its own making and that Binance simply played ‘whistleblower’. Unless we get a good glimpse of what Binance’s investigations uncovered, we’ll never know the full truth.

Is it time to regulate the crypto industry?

In our view, it looks doubtful that regulators will want to touch crypto for some time. FTX were known for making a big push with regulators – with the aim of bringing the crypto ecosystem into the mainstream.

Little is known about Binance and its senior management team. Regulators and institutional investors don’t like this sort of uncertainty. FTX’s losses may well have pushed mainstream crypto acceptance back years or stymied it entirely. 

So, where does this leave crypto holders and FTX clients? In short – in a bad place. FTX clients can’t withdraw their funds from the exchange. Any holders of even the smallest amount of cryptocurrency likely saw 15% or more wiped off its value. Ultimately, in a world with no regulator, it will be difficult for clients to get any recourse on cryptocurrency losses. 

What’s Moneyfarm’s view on crypto?

Overall, we believe that investing in crypto is a big risk. The FTX debacle demonstrates how – even among the big players – your money isn’t always secure. 

Crypto land has a strange ecosystem. While most financial institutions (such as Moneyfarm) and their trades are regulated, crypto companies conduct trades on non-regulated exchanges, which are often based in low tax and even low regulation jurisdictions like The Bahamas or Dubai. This has led to the proliferation of trading exotic, complex and often leveraged products on these exchanges. 

With a lack of oversight from regulators, like the Financial Conduct Authority (FCA) in the UK, comes risk. We’re not saying traditional financial institutions are immune to failure, but in the crypto industry the frequency and magnitude of booms and busts seems to be much higher, at least relative to the total size of the market.

The crypto industry has none of the protection that saves consumers’ money invested in traditional financial institutions (like banks and asset managers). In the UK people are protected by the Financial Services Compensation Scheme (FSCS), which gives people compensation in various situations. If, for example, a bank, building society, pension provider or credit union fails, investors can be compensated by up to £85,000 that they have with a single institution.  

All investments carry risk, and no investment product or firm can guarantee returns. However, there are advantages to investing money with accredited professionals and investment products such as what we offer at Moneyfarm.

Moneyfarm is required to comply with the rules of the FCA which requires that all our customers’ assets are held securely and separately from Moneyfarm’s assets.

Moneyfarm has processes and controls which ensure these rules are followed. Our specialist team performs a series of daily reconciliations to ensure the total value of cash and investments held by us matches the total value due to our customers. Any discrepancies or shortfalls are investigated and resolved in a timely manner.

Moneyfarm overlays these daily controls and reconciliations with an internal governance process to ensure appropriate management oversight. Finally, an independent audit of these arrangements is performed annually by a specialist firm, the results of which are sent to the FCA.

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