The FTX collapse: Updates on recent market activity

Firstly, we would like to let you know that if you hold assets with Zerocap, they are safe. Zerocap had zero exposure to the FTT token and limited exposure to FTX.

2022 has been a wild year for all markets, but particularly for crypto. We’ve seen everything from the multi-billion dollar LUNA token crash, to the credit failures of Celsius and associated firms, and now most recently FTX and Alameda Research, one of the largest crypto exchanges and prop trading firms in the world.

Zerocap has always fought for good and fair regulation to protect assets and the industry against these kinds of events. The fall of Celsius and FTX are examples of what can happen in unregulated markets, when moral hazard begins to creep in. 

The safety of our clients’ assets is a top priority and our institutional approach to counterparty risk has ensured that Zerocap was not affected by the decline of FTX, Alameda Research, associated entities and partners.

Customer assets in custody are segregated on-chain and you can verify this (please ask us how if you’re unsure). Our Prime Agreement clearly states that these are the client’s assets; there is no change in legal ownership. Those clients who use our yield products face Zerocap directly as a counterparty, and again, our exposure to other counterparties has been very limited, by design.

As an Australian-based crypto firm we are trusted by top-tier institutions such as ANZ and ASX, and backed by one of Australia’s premier family offices, the Victor Smorgon Group. Being that Zerocap are one of the few digital asset firms in the region that carries out both unregulated and regulated activities, we hold ourselves to an extremely high standard of compliance and governance, and are helping shape the industry by engaging with regulators and central banks in and out of Australia, Treasury and Parliament.

How have we put protections into practice in our business?

1. We’ve actively pursued regulatory oversight from ASIC to offer financial services and products, and voluntarily subject ourselves to all manner of audits from accounting to SOC 2 (InfoSec) and cybersecurity (pen tests).
2. We are one of the only firms that provides each of our customers with a real, segregated on-chain wallet address when they custody with us. You can look up your assets on a public blockchain, and confirm that they are actually there. Furthermore, our Prime Agreement clearly states that customers who hold their assets in our custody solution have the rights to those assets.
3. We have a market-leading insurance policy for assets in custody (it is our policy: Zerocap is named as the insured).
4. We source our trading liquidity with large over-the-counter, institutional counterparties – many of which provide us with credit lines, further reducing the need for us to hold assets outside our ecosystem on unregulated exchanges.

How will FTX and Alameda Research affect the crypto market?

FTX has declared bankruptcy along with its sister trading company Alameda Research, and around 130 subsidiaries. This was sparked by a Coindesk article questioning the solvency of FTX on the back of a balance sheet leak that showed a substantial portion of its net equity buoyed by “FTT”, the exchange’s native token. As the FTT token’s value declined, this led to a run on FTX from customers, causing a spiral that has led to bankruptcy proceedings.

The lack of separation between an agency-driven exchange (FTX) and an aggressive proprietary trading firm (Alameda Research) is concerning, and would not happen in stable and regulated markets. The blockchain pundits are using this as a reason to show that decentralisation is the way forward – because in a decentralised finance platform, assets would’ve been liquidated before any defaults, whilst the traditional market participants are coming out the woodwork calling for more regulation and an end to the Wild West. The answer, like many things in life, will likely sit somewhere in between. 

With chaos comes opportunity?

Looking back to the GFC – the bottom was formed when the market was the most torched. We are (arguably) getting closer to this GFC-esque moment in crypto. It’s important to keep a clear head during times of turmoil, and focus on the longer-term picture. 

Institutional adoption is at full pace. HSBC are launching a tokenised bond platform, Israel is testing government-issued tokenised bonds, Standard Chartered is working on tokenised trade finance, and CBDC trials across the world are in full swing. We expect, and are advocating for a healthy ecosystem that is interoperable with the main crypto assets – and when sentiment eventually turns around, we could be looking back at bitcoin here at the US$16K level, wondering how more investors didn’t grab this opportunity. The steadfast, contrarian investors with a longer-term view may be rewarded.

The most active trade we are seeing from our sophisticated wholesale clients at the moment is by harvesting volatility premiums via Structured Products as a way to earn yields whilst accumulating positions. Volatility is the only sure thing right now, and it makes sense to take advantage of it. 

For clients who prefer buying spot over a period of time, we are assisting them by slowly entering into positions to dollar cost average positions, with custody provided through our market-leading and secure infrastructure.

Next steps

We understand that market events such as this can be distressing and we are here to assist if you need further information on the situation. We recommend talking to your Zerocap representative about the institutional approach to managing assets in crypto.

If you would like some trade ideas or wish to take advantage of prices and volatility at these levels contact one of our team members.

About Zerocap

Zerocap provides digital asset investment and digital asset custodial services to forward-thinking investors and institutions globally. For frictionless access to digital assets with industry-leading security, contact our team at [email protected] or visit our website www.zerocap.com

This material is intended for illustrative purposes and general information only. It does not constitute financial advice nor does it take into account your investment objectives, financial situation or particular needs. You should consider the information in light of your objectives, financial situation and needs before making any decision about whether to acquire or dispose of any digital asset. Investments in digital assets can be risky and you may lose your investment. Past performance is no indication of future performance.

FAQs

What led to the collapse of FTX and Alameda Research?

The collapse of FTX and Alameda Research was triggered by a balance sheet leak that showed a substantial portion of its net equity was buoyed by “FTT”, the exchange’s native token. As the value of the FTT token declined, customers started withdrawing their assets from FTX, leading to a downward spiral that resulted in bankruptcy proceedings.

How did Zerocap protect its clients’ assets during the FTX and Alameda Research downfall?

Zerocap had zero exposure to the FTT token and limited exposure to FTX, ensuring the safety of its clients’ assets. The assets in custody are segregated on-chain, and Zerocap’s Prime Agreement clearly states that these are the client’s assets; there is no change in legal ownership. Zerocap also has a market-leading insurance policy for assets in custody.

What is the potential impact of the FTX and Alameda Research collapse on the crypto market?

The collapse of FTX and Alameda Research, one of the largest crypto exchanges and prop trading firms, could lead to significant changes in the crypto market. It has sparked discussions about the need for more regulation and the benefits of decentralisation. The incident could also lead to a shift towards a more balanced approach between decentralisation and regulation.

What opportunities might arise from the current turmoil in the crypto market?

Despite the current turmoil, there are potential opportunities. Institutional adoption of crypto is at full pace with HSBC launching a tokenised bond platform, Israel testing government-issued tokenised bonds, and Standard Chartered working on tokenised trade finance. When sentiment eventually turns around, the current prices could be seen as a missed opportunity.

What strategies are sophisticated wholesale clients using in the current volatile crypto market?

Sophisticated wholesale clients are currently harvesting volatility premiums via Structured Products as a way to earn yields while accumulating positions. Volatility is the only sure thing right now, and it makes sense to take advantage of it. For clients who prefer buying spot over a period of time, Zerocap is assisting them by slowly entering into positions to dollar cost average positions, with custody provided through their market-leading and secure infrastructure.