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Renowned Crypto Leaders Worried About Aftermath of FTX Collapse

Cardano founder Charles Hoskinson says that if FTX fails Binance’s due diligence process, the effects on the crypto market could be catastrophic.

Hoskinson said in a vlog post that there is a non-zero chance that FTX due diligence could fail and go into liquidation because due diligence often reveals the true depth of a company’s financial distress. Hoskinson’s worst-case scenario could become a reality after unconfirmed reports surfaced that Binance is unlikely to go ahead with the FTX deal. This bomb comes through the exchange after less than 24 hours of due diligence.

FTX CEO’s political ties a concern

If the recent rumors of Binance’s reluctance turn out to be true, FTX’s failure could ripple through the industry, similar to how the failure of Lehman Brothers in 2008 rippled through the global economy. The resulting collapses could then trigger negative scrutiny from the political allies of FTX’s CEO, Sam Bankman. Fried recently tried to campaign.

Bankman-Fried contributed at least $27 million to a Protect Our Future Political Action Committee in the run-up to the 2022 US midterm elections. The PAC, in turn, splashed more than $11 million on Democratic candidate Carrick Flynn, who lost the Oregon primary.

Bankman-Fried also sought to support Republican alliances, contributing thousands to John Boozman of Arkansas and John Hoeven of North Dakota.

In an ironic twist, these and other politicians could impose draconian laws on the industry if the Binance deal fails, Hoskinson said.

Binance CEO Changpeng ‘CZ’ Zhao echoed this sentiment in a note to Binance employees. He emphasized that the failure of FTX was not a victory for Binance.

“Regulators will scrutinize exchanges even more. Licenses around the world will be harder to get,” he said.

Already former SEC Commissioner Jay Clayton said that “we need coordinated action across the federal government. People are going to test whether the capital problems surrounding this exchange have been resolved.”

Eventually, he said, creditors to Lehman Brothers were paid off, even though the institution did not have enough liquidity at the time. With FTX standing proxy for Lehman Brothers, such a scenario is not guaranteed in the less regulated crypto industry.

Speaking of regulation, a recent Bloomberg report reveals that the Securities and Exchange Commission and the Commodities and Futures Trading Commission are investigating FTX’s handling of client funds. They are also investigating links between FTX, its US sister company FTX.US and Bankman-Fried’s quantum trading firm Alameda Research.

CZ promises greater transparency

In preparation for investigation, CZ also tweeted today that Binance would begin doing Merkle-tree Proof-of-Reserves.

In step with Binance, several other exchanges, including KuCoin, OKX, Poloniex and Huobi, have announced that they will adopt the measure.

A Merkle tree is a computer science construct that summarizes all transactions in a blockchain transaction block. It produces a fingerprint of transactions in a block that makes it easy to identify whether a particular transaction has taken place. So Merkle proof-of-reserves tree may indicate a method of verifying reserves using blockchain transaction data.

FTX investors are trying to cut their losses

For now, however, several high-profile firms will likely have to write down their FTX investments, collectively worth $32 billion. Companies likely to lose their investments include Softbank, Sequoia Capital and Tiger Global. According to CNBC, Binance will probably buy FTX for “pennies on the dollar.” The embattled exchange also made a high profile investments of his own. Invest in the likes of Yuga Labs, Circle and SkyBridge.

Circle CEO Jeremy Allaire pointed out in a CNBC interview with Andrew Ross Sorkin that the sharp drop in the price of FTX’s native token, FTT, could cause problems for lenders who have accepted it as collateral for loans.

At press time, FTT had recovered to around $3.93 after previously falling to $3.12 in the past 24 hours.

Source: TradingView

In a parting shot, Zhao warned Binance employees not to sell or buy FTT.

For Being[In] Crypto’s latest Bitcoin (BTC) analysis, click here.


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