Opinions
21.11.2022

The collapse of FTX as an opportunity for the Swiss financial centre

In the past few weeks, events in the “digital assets” ecosystem have once again come to a head. The demise of the “FTX” crypto exchange will have far-reaching consequences for small investors, players in the “digital asset” industry and even institutional investors from the traditional financial sector. Reactions from politicians and authorities are pre-programmed. For the Swiss financial centre, however, these developments also represent an opportunity.

Revelations, the FTX liquidity crisis and a cancelled deal

Revelations by an industry portal, a cancelled deal with competitor Binance and upstream distortions rapidly led to a liquidity crisis and the subsequent collapse of the world’s third-largest crypto exchange. It is now emerging that basic corporate governance considerations were ignored within the FTX group of about 130 companies and that FTX allegedly misappropriated client funds.

The financial consequences of insolvency should not be underestimated

A broader crisis of confidence for the crypto industry is already visible today. Bitcoin, for example, experienced a massive loss in value last week. Other cryptocurrencies such as Solana, which were significantly co-financed by the FTX venture capital arm “FTX Ventures”, were hit even harder. Often touted as the “Ethereum killer”, the SOL token saw its price plunge by more than 50 percent, making it one of the biggest losers in the debacle. SOL was also the second-largest holding of Alameda Research, and had been intensively promoted by Sam Bankman-Fried, FTX’s CEO. According to another report by “CoinDesk”, Alameda Research held around USD 1 billion in SOL tokens on its own balance sheet.

But it is not only crypto companies and retail investors trading via FTX that are suffering massive damage from these events. Among the backers of FTX, which was valued at around USD 18 billion in the last venture capital round, were financial giants such as BlackRock or Seqouia Capital. This last company, for example, completely wrote off its FTX investments totalling around USD 213 million. The Singapore government had also invested in FTX via the Temasek Holding. According to relevant sources, the depreciation of its investment amounts to about USD 205 million. Another investor, the “Ontario Teachers’ Pension Plan” (a pension fund for teachers from the Canadian province), has probably written off USD 75 million by now.

The regulatory situation will also intensify

In the wake of the collapse, companies in the “digital assets” environment around the world feel compelled to reassure their clients and distance themselves from FTX as much as possible. Swiss industry giants have in turn assured their stakeholders that assets are safe with Switzerland’s fully regulated institutions, and that banks and providers subject to other Swiss regulations follow a fundamentally different business model than the now insolvent FTX.

National and international regulators such as the BCBS, FSB, IOSCO or FINMA will draw their own conclusions from recent events and possibly enforce stricter regulation of crypto exchanges and other virtual asset service providers. The fact that many of these exchanges (including FTX) provide their services to a global clientèle makes regulation difficult, but not impossible. Measures ranging from stricter investor protection to exclusion from the “FIAT gateways”, i.e. access to dollar or euro payment systems, are conceivable. The tarnished credibility of the sector and the foreseeable regulatory consequences will severely reduce both compliance costs and margins in the digital asset business. Not only has the crypto industry’s reputation with the general public been damaged, but its reputation with traditional financial institutions will also have suffered. As a result of FTX’s demise, FTX competitor Binance now controls a significant portion (if not the majority) of the global crypto trading volume. In light of recent events, this is an extremely poor starting position for the necessary rebuilding of trust in the crypto markets.

An excellent opportunity for the Swiss financial centre

From the point of view of financial intermediaries in Switzerland, this episode will prompt very little change in the attitude towards digital assets as an asset class. A number of budding innovations continue to emerge that promise to increase efficiency in traditional financial markets and enable the tokenisation of both bankable and non-bankable assets. In conjunction with the research around digital currencies, both by central banks and the private sector, there is good reason to be optimistic about the future of a consolidated and reliably regulated “digital asset” industry. In future, regulated players and Swiss banks in particular will be able to stand out all the more clearly from the unregulated and unsupervised competition and carry the basic principles of Swiss banking into the world of digital assets for the benefit of clients – on the basis of forward-looking regulation and strict enforcement of investor protection regulations and international standards on money laundering and terrorist financing in Switzerland.

The Swiss Bankers Association will continue to accompany its members in shaping optimal framework conditions – both nationally and internationally – and support them through the ongoing “mainstreaming” of digital assets, as  previously described. For the financial centre as a whole, the events surrounding FTX now provide an opportunity to press ahead with the further development of the digital asset ecosystem and to consolidate Switzerland’s position as a global centre for the secure and trustworthy management and safekeeping of traditional and non-traditional assets.

Authors

Andrea Luca Aerni
Research Associate Digitalisation
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