“There are companies that are basically too far gone and it’s not convenient to save them for reasons such as a substantial balance sheet hole, regulatory issues or because there isn’t much left to save.” Signed Sam Bankman-Fried, 30 years old, crypto billionaire and now also a lifesaver for smaller crypto companies than his own lucrative trading platform FTX and crypto trading house Alameda. The message of ‘SBF’ in conversation with business magazine Forbes was clear: there are currently a lot of bad apples in the crypto market that are practically already bankrupt behind the scenes and therefore do not have to count on his money. The FTX CEO made his statements after providing rescue credit to the ailing American crypto companies BlockFi and Voyager Digital, for a total of 750 million dollars (about 738 million euros). Those two companies are in financial trouble after they lent money to Singaporean crypto hedge fund Three Arrows Capital (3AC), which went bankrupt in late June after the crash of Terra, a target stablecoin the value of which would theoretically be backed by ‘real’ dollars, and on which 3AC had bet heavily.
“Several parties have run into problems, and there may be more,” says ING economist and cryptocurrency specialist Teunis Brosens. According to him, larger parties, including Bankman-Fried, do not simply extend a helping hand. “As a rule, this type of credit is not given out of charity. For example, the rescuer wants to gain control over the company.” In addition, the reputation of the sector probably also plays a role, says Brosens. “When crypto companies fail, their customers often take losses. But this is also bad for the reputation of the crypto sector as a whole.” That acquired control indicates a form of consolidation: successful crypto companies survive, while failing platforms are swallowed up or disappear from the scene. “The parties that are now collapsing are mainly lending platforms and hedge funds that have taken too much risk and now have to pay for it,” says Bert Slagter of crypto knowledge platform LekkerCryptisch. “Among lending platforms, consolidation is likely. Companies are taken over or customers leave for companies that operate more transparently and cautiously.” According to Slagter, there is considerably less going on with crypto trading platforms (exchanges). “Bankman-Fried said there could be some small exchanges in trouble, but I don’t expect rapid, large-scale consolidation. Although a severe recession and stricter regulations will eventually also allow crypto exchanges to merge and take over.”
The question is whether the investor himself is of any use at the moment. Will they be saved too? Or will they (partly) lose their money invested with smaller crypto trading platforms due to the problems that have arisen in the turbulent crypto market? It may take months before some bankruptcy procedures are completed and some of the money may still become available. Crypto broker Voyager Digital, which according to FT has more than one hundred thousand creditors, went into suspension of payments on Wednesday despite SBF’s emergency loan.
Slagter considers it ‘quite possible’ that customers with some lending platforms will not get their full credit back. He points out the importance of trading on a crypto exchange that keeps customers’ funds one-on-one in the vault, and does not lend them out. According to the crypto expert, this applies to most parties in the Netherlands.
Brosens: “The fact that crypto companies have always evaded regulation and supervision is a major disadvantage for customers. Regulations often impose limits on the type and degree of risks that companies are allowed to take. In crypto, there is none of this.”
A version of this article also appeared in the newspaper of 11 July 2022