A meltdown in crypto is taking shape and it’s not just FTX’s fault

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Updated to clarify that the State Street interview took place last week.

Hi, there: its Mark DeCambre, Editor in Chief MarketWatch, subbing in for our crypto reporter, Frances Yue, in this installment of Distributed Ledger.

And what an illuminating several weeks it has been for the crypto world. Well break down the continued dominoes falling in the aftermath of FTX Groups meteoric fall and gather some intelligence on whats ahead for the sector at large.

You can still find Frances on Twitter at@FrancesYue_but you also find me on @mdecambre.

Please reach out to share your thoughts and stories on the market, as we aim to unpack the latest developments in the digital-asset world.

emperor has no clothes

For the past three years or so, Sam Bankman-Fried has operated with little to no oversight and accounting protocol and few, if any, backers or stakeholders in his firm conducted a rigorous check of his business practices.

The new CEO of FTX John J. Ray, who is tasked with overseeing the companys bankruptcy (whether it be in the Bahamas or Delaware), perhaps, said it most aptly:

Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here. From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented.

That statements coming from an executive who presided over the restructuring of energy giant Enron.

On Wednesday, Vox published a damning exchange between Sam-Bankman Fried and reporter Kelsey Piper, where he acknowledges that he put on an ethical, upstanding persona to build trust.

Its what reputations are made of, to some extent, he wrote, according to the Vox article. I feel bad for those who got fucked by it.

But this isn’t just about Bankman-Fried, but also the apparatus that enabled his charade, including journalists here, there and elsewhere.

It also speaks to a lack of regulation around an industry that is seen as promising but vulnerable to corruption, fraud and other malfeasance, perhaps, partly because it is seen as an arcane segment of the financial world.

There are lessons to be learned from this episode and they will continue to play out in the weeks and months to come. Well all get a better sense of that next month when the FTX founder likely heads to Washington, DC

On Wednesday, leaders of the US House Financial Services Committee said they planned to hold a hearing in December focused on the collapse of FTX and the broader consequences for the digital asset ecosystem.

Crypto in a snap

Bitcoin BTCUSD, +1.28% has gained a tad, up 0.1% during the past week, and was trading at around $16,700 on Thursday, according to FactSet.

FactSet

Etherwas up 1.9% over the same stretch to around $1,211, FactSet data show.

FactSet

Meanwhile, FTX native coins, known as FTT tokens, were down nearly 28% over the past seven days, trading at $1.59, according to data provider CoinGecko.

Crypto metrics Biggest Gainers Price 7-day return% Trust Wallet $2.14 105.3 GMX $39.75 50.5 Chiliz $0.23585 49.1 Lido Ado $1.22 34.7 The Open Network $1.75 28.7 Source: CoinGecko as of Nov. 17 Biggest Losers Price 7-day return% Tokenize Xchange $7.08 22.9 WhiteBit Token $5.42 21.2 Huobi $4.66 20.3 Cronos $0.069460 13.4 Near Protocol $1.85 7.8 The ripples

Earlier, Frances chatted with Evgeny Gaevoy, CEO of Wintermute, a company which has about $55 million stuck on FTX.coms platform currently.

Gaevoy had some interesting thoughts on Bankman-Fried, and, perhaps, unsurprisingly, he was as shocked as anyone to discover the level of disfunction at play at FTX:

“He was obviously like, not an ordinary person. But he didnt strike me, in the few conversations that we had personally, he never struck me as somebody [who[ could defraud the whole industry.”

Evgeny Gaevoy

Gaevoy said hes particularly stunned by the magnitude of the losses at FTX, estimating it to be somewhere in the order of $10 billion. That said, he thinks that the damage is contained, even within the realm of crypto.

I guess what we are looking primarily on our side is if any other centralized exchanges can be affected, he said. And also we know that a lot of exchanges kept some of their balances on FTX as well to basically access liquidity or maybe even to use it as a custodian of sorts, he said.

Some entities, however, are showing cracks: Crypto financial services firm Genesis Global Tradings lending arm is pausing redemptions and new loan obligations.

The unit, Genesis Global Capital, is also the lending partner at crypto exchange Geminis Earn program. And Gemini, a crypto exchange launched by Winklevoss brothers Cameron and Tyler, reportedly saw $485 million in outflows, amid fears of spillover from FTX.

State Street custody

Although the effects of the FTX collapse may be felt for months and years, the sentiment out of State Street, suggests that the crypto industry is resilient.

Our institutional clients are still focused on crypto and digital assets, Jay Biancamano, head of a digital asset arm of State Street, told MarketWatch in an interview last Tuesday, before FTX filed for bankruptcy.

He said he expected further contraction in the volatile industry but characterized it as fairly typical for the nascent sector. He said it is worth pointing out that the roughly 14-year-old crypto industry is in retrenchment mode as well as traditional sectors.

I think its always good for a market to pause, Biancamano said. And I dont like to use the term crypto winter because if you look at the equities market, certainly and other markets, theyre contracting as well, he said.

State Street, one of the biggest custodial banks in the world, has been among vanguard of traditional institutions looking to offer financial services to clients interested in owning crypto.

So, I think really our clients are looking for us not only to move into the [crypto] business, but be able to support, you know, ancillary services, such as lending and and thats what were preparing to do. We want to be a full service provider to our clients, he said.

He said theres more in the works at State Street as it builds out its offerings.

Crypto companies, funds

Shares of Coinbase Global Inc. COIN, -0.08% are down 2.8% for the week to around $48.84. MicroStrategy Inc. MSTR, +2.62% is off 6.2% at $170.59, thus far on the week.

Mining company Riot Blockchain Inc. is off 11.2% at $4.62, as of Thursday evening. Shares of rival Marathon Digital Holdings Inc. MARA, -3.37% was down over 18% at $8.02, over the past week. Another miner, Ebang International Holdings Inc. EBON, -2.69% shed nearly 10% over the past week as of Thursday and was trading at 28 cents.

Overstock.com Inc. shares OSTK, -1.52% lost 6.9% to $22.95, over the week.

Shares of Block Inc. SQ, -2.24%, formerly known as Square, rose 4.5% to $67.47 for the week, thus far. Tesla Inc. shares TSLA, -2.01% slipped 0.5% to $182.80.

PayPal Holdings Inc. PYPL, -1.61% rose 2.5% to trade at around $86, over the stretch. Nvidia Corp. NVDA, -1.46% rose 6.3% at $156.38 for the past week.

Advanced Micro Devices Inc. shares AMD, +1.65% surged over 14% to $73.47 for the week, as of Thursday evening.

Among crypto funds, ProShares Bitcoin Strategy BITO, +1.60% edged up 0.4% to $10.15 Thursday, while its Short Bitcoin Strategy ETF BITI, -1.16% lost 3.3% to $41.61. Valkyrie Bitcoin Strategy ETF BTF, +1.44% picked up 0.5% to $6.36, while VanEck Bitcoin Strategy ETF XBTF, +1.76% lost 0.2% to $16.23.

Grayscale Bitcoin Trust GBTC, -4.89% declined 3.3% to $8.75.

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