FTX Blowup May Force Banks and VC to Retreat from Crypto Plans

The FTX blowup and bankruptcy will reshape the crypto industry. That much is certain.

It’s unclear where the next shoes will drop and whether the ripple effects will extend to the traditional financial sector.

The hit to banks’ and investment firms’ balance sheets may be limited; the hit to innovations and support for crypto — to bring digital coins more fully into mainstream commerce — may be incalculable.

Cascading Effects

Before FTX filed for Chapter 11, Bitcoin had bounced from its $15,680 lows this week to trade at a recent $17,360. FTT, the token native to FTX,  was 15% higher on the day to $3.28. No surprise: They’ve reversed and are now back in the red. And beyond the wild price swings, here are signals that FTX’s implosion will reverberate long and hard. In comments this morning reported in the Financial Times, Binance CEO Changpeng Zhao has hinted that the crypto industry could face a reckoning akin to the 2008 financial crisis — which he called an “accurate analogy,” adding that “with FTX going down, we will see cascading effects.  Especially for those close to the FTX ecosystem, they will be negatively affected.”

As for the ripple effects: Venture capital and PE firms like Sequoia have already marked their holdings in FTX down to zero. The firm noted that its $150 million cost basis in its FTX position accounts for less than 3% of capital committed in one fund, and a separate fund’s $63 million investment is less than 1% of committed capital. SoftBank, according to media reports, will see about a $100 million loss on its stakes.

There is no doubt will be a chilling effect among VCs, and a slowdown had already been in the cards. KPMG estimated that crypto-focused investments were $14.2 billion in the first half of the year. The pace of deals has declined, too, to 725 where it had been more than 1,580 throughout 2021.  Private sector money may well become even more cautious as they digest their losses and may face investor backlash of their own for being exposed to the space.

And as for the banks:

This past fall, the Basel Committee on Banking Supervision found that crypto-asset exposures reported by banks amount to approximately €9.4 billion (about $9.76 billion USD). That’s 0.14% of exposure, a minuscule amount. Most of the exposure, at 90% of the tally, is tied to either Bitcoin or Ether, or cryptos that use those two bellwethers as their underlying cryptoassets.

A full-scale run on cryptos, then, would not place these institutions in any real financial danger, but we note there might well be a freeze on banks’  current (and future) activity in the sector. The Basel report shows that custody/wallet/insurance and other services make up just about half of the reported crypto exposures, with the rest largely made up of clearing and market-making activities.

PYMNTS has noted that financial institutions (FIs) have not been putting crypto at the top of their roadmaps, and our research shows that only about 10% FIs that currently provide access to at least one form of cryptocurrency.

The slow adoption now looks prescient. The traditional players in the financial ecosystem may understandably take wait and see approach, in a classic case of once bitten, twice shy.

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