In the wake of the news that crypto exchange FTX is on the brink of collapse, please find below a comment from Matt Smith, CEO and co-founder of compliance technology and data analytics firm, SteelEye, about the part Binance played in FTX’s fall from grace:
“The digital assets market has been rocked – once again – by the near collapse of one of the sector’s leading players, FTX. Despite huge inflows of investment, FTX was reckoning with a “liquidity crunch”. Surging withdrawals – reportedly amounting to $6 billion in just three days – plummeted the crypto exchange’s valuation, and FTT, FTX’s native coin, collapsed by 72% in just 24 hours.
“Six days before the collapse, CoinDesk reported a leaked balance sheet highlighting FTX’s dependence on its FTT token. Two days after that, the CEO of the world’s largest crypto exchange and main competitor to FTX, Binance, announced on Twitter that Binance would liquidate its holdings in FTT due to unspecified “recent revelations”.
“Once again, Twitter has played a role in influencing financial markets. Not unlike Elon Musk shifting Tesla’s share price via tweets from his personal profile, a likely driver for the fall in the currency was Binance CEO, Changpeng Zhao’s Tweet about Binance’s sale of its FTT holdings. This is a clear case of cause and effect. Though Binance’s official statement is “Every time a major player in an industry fails, retail consumers will suffer”, Zhao’s influence is undeniable, posing questions around how a CEO can plummet a competitor with a simple Tweet.
“FTX’s bankruptcy would send shockwaves through the crypto ecosystem, triggering huge financial losses, heightened scrutiny of the crypto market and its regulation, price volatility, and more. The consequences are grave for retail investors, many of which have already lost significant funds. Too many crypto companies have created a game-like experience for users, which detracts from the high risks involved. In the words of Jim Chanos: “You’re not investing, you’re gambling in a less-than-zero-sum game.”
“This is yet another wake-up call for the industry. If we do not introduce more rigorous and clear regulations, for the crypto ecosystem as a whole, but also the use of social media in influencing financial markets, this type of online activity will only become more prolific. The finance sector is heavily regulated and there are stringent rules in place to prevent market manipulation, but this is proof of a gaping hole in the framework. It is time for regulators to intervene before too much damage is done.