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Crypto.com and Binance reassure customers that their investments are safe following FTX collapse

FTX seemed to be everywhere. From stadiums to ads to even as a sponsor of the MLB and Formula 1. It was a household name that many trusted and saw as a safe, user-friendly platform to trade and sell crypto.

With the price of cryptocurrencies falling in 2022, the so-called “Crypto Winter” is in full swing. While other companies in the industry faltered, Sam Bankman-Fried was handing out bailout cash in the hundreds of millions. Asked why he was trying to prop up failing crypto firms, he told CNBC: “It’s not going to be good long-term if we have real pain and real blow outs. And it’s not fair to customers.” He also claimed, in the same interview, to have $2bn in reserve that he could use to help failing crypto companies. But last week, he was going around the same industry himself, trying to raise money to save his own company, FTX and customers. Questions about the real financial stability of FTX began swirling after an article on the CoinDesk website suggested that much of Mr Bankman-Fried’s trading giant Alameda Research rests on a foundation largely made up of a coin that a sister company of FTX invented, not an independent asset.

Further accusations that Alameda Research used FTX’s customer deposits as loans for trading were made in the Wall Street Journal. The beginning of the end came though when FTX’s main competitor – Binance – publicly sold off all its crypto tokens FTT that were linked to FTX a few days later.

Binance chief executive Changpeng Zhao (‘CZ’) told his 7.5 million followers his company would be selling off the holdings “in light of recent revelations”. Following the shocking news and downfall of FTX this past week, the CEO of Crypto.com Kris Marszalek along with CZ have rushed to assure customers that their investments and cryptocurrencies are safe within their platforms. After withdraws were suspended on FTX and FTX US, customers rushed to withdraw their money from Crypto.com, Binance with fear of a similar outcome to what occurred with FTX.

The CEO of Crypto.com took to YouTube Monday to reassure users of his platform after the stunning collapse of rival firm FTX sparked fears of a market contagion. In an “AMA” (ask me anything) on YouTube, Marszalek said that his cocmpany had a “tremendously strong balance sheet” and that it wasn’t engaged in the kinds of practices that led to the downfall of Sam Bankman-Fried’s FTX last week.

Over the past week, Crypto.com’s CRO token has dropped almost 45% on concerns the Singapore-based exchange will be the next to face a liquidity crisis. The exchange’s daily volume has collapsed from last year’s highs of around $4 billion to about $284 million this past October, according to data from Nomics, and withdrawals are on their way back up as users and investors remove their funds from the platform.

In the interview, Marszalek reiterated that the exchange has a strong balance sheet and said its exposure to FTX was limited to $10 million, down from a possible $1 billion in business the two exchanges had together earlier. “We recovered $990 million from FTX,” Marszalek said, pointing out that fund flows between exchanges are a necessary part of the business. He also said that 20% of Crypto.com’s reserves are in Shibu Inu coin because that’s what the customers trade, and everything in its reserves is backed 1-to-1 versus customer crypto deposits. An audit of Crypto.com is underway, but it will take some time. Audit firms “don’t work at crypto speed,” he said, emphasizing that Crypto.com and the industry both need full transparency to move forward.

Binance issued similar statements, with CZ going further to add that “We do need some regulations, we do need to do this properly, we do need to do this in a stable way.” But crypto companies also had responsibilities, Mr Zhao said. “The industry collectively has a role to protect consumers, to protect everybody. So it’s not just regulators,” he said. In many countries, crypto assets are lightly regulated compared with other financial sectors, with few protections for consumers. The UK government has previously announced plans to regulate stablecoins, which, as the name suggests, are designed to have a stable value linked to traditional currencies or assets such as gold. Mr Zhao said the recovery fund – for otherwise strong companies unable to find enough cash, or assets that can be easily converted into cash, to cover their immediate needs – would reduce the risk of “cascading negative effects” following FTX’s bankruptcy.

Sources:

  • https://www.cnbc.com/2022/11/14/cryptocom-ceo-says-will-prove-naysayers-wrong-amid-ftx-contagion-fears.html
  • https://www.bbc.com/news/technology-63624890
  • https://www.bbc.com/news/technology-63612489
  • https://www.coindesk.com/business/2022/11/14/cryptocom-ceo-dismisses-speculation-of-financial-trouble-says-ftx-exposure-is-minimal/
  • https://www.theverge.com/2022/11/14/23457819/binance-crypto-dot-com-investors-ama-ftx-flops