The FTX collapse has been the latest in a series of failures to hit the crypto industry in 2022, precipitated in part by the fall in crypto prices.

1. FTX Fallout Calls for ‘Reset’ of Crypto Industry
The FTX meltdown has been the latest in a series of failures to have hit the
crypto world in 2022, precipitated in part by the indiscriminate fall in crypto
prices. While on the face, the series of collapses seem to put the future of
cryptos as an emerging asset class in grave doubt, a deeper analysis shows
an urgent need for formulating regulatory guardrails and accounting rules
and standards aimed at cryptocurrencies and companies. Furthermore, the
unraveling of FTX is yet another reminder for private market investors to
enforce adherence to more rigorous due diligence.
Figure 1: Series of Crypto Meltdowns in 2022

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While the dust is yet to settle on the FTX saga, the preliminary analysis
reveals (1) a glaring saga of lack of transparency, (2)
concentration of power in the hands of a select few, (3) inappropriate
rehypothecation of assets, (4) and above all a gross financial misconduct
supported by an absence of even basic corporate governance – FTX
reportedly didn't have an in-house accounting department. The collapse is
being investigated by multiple regulatory bodies, including the SEC.
"Never in my career have I witnessed such a complete failure of corporate
controls along with the absence of trustworthy financial information as
occurred here," new FTX CEO John Ray III, overseeing company liquidation.
Figure 2: Crypto Industry Reels under the impact of FTX
Implosion
Source: CNBC
Such was the state of play that Alameda Research, Sam Bankman-Fried
(SBF) 's crypto hedge fund, loaned $1 billion to SBF before going bankrupt.
Previously, FTX rescued BlockFi to seemingly gain control over customer
funds and moved $10 billion to Alameda to cover its thin balance sheet.
The shady financials spooked Binance, which attempted to bail out FTX. Just
over 24 hours after agreeing to buy its troubled rival FTX, crypto exchange
Binance backed out. The fallout led to FTX, which was valued by private

3. investors at $32 billion in January despite turbulent markets,
filing for bankruptcy and its FTT token close to rock bottom.
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in 2022
More Oversight Required to Re-establish
Trust
Private market investors are increasingly favoring entry and exit timing or
chance instead of proper audit/due diligence. For instance, while multiple
investors lost billions in the Terra/luna collapse, some investors, including
Pantera Capital, had spectacular returns earning nearly 100x on their $1.7
million investment.
Sequoia, one of the leading venture capital firms with the tagline "We help
the daring build legendary enterprises," is a major investor in the firm. The
fallout has hurt both its reputation and financials. It had published a
eulogical 14,000 words article on SBF, which has now been taken off the
site. The VC firm has had to write off over $210 million in investment in FTX.
Similarly, the Ontario Teachers' Pension Plan has written off a $95 million
investment in FTX.
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4. Figure 3: FTX's Investors
Source: Crunchbase
While these may be minuscule amounts of the total AUM for these
investors, the larger concern is the erosion of trust in crypto companies that
the ensuing saga could trigger. Particularly at a time when digital assets
were progressively emerging as an alternative inflation-proof investment
class with a potential for high returns and little correlation to other asset
classes. Positive perception of cryptos had grown by six percentage points
per a Fidelity Digital Assets survey of institutional investors.
Going ahead, in addition to regulations, the broadening cohort of private
market investors will have to get back to basics in terms of due diligence.
Growing competition for promising start-ups notwithstanding, private
market investors just can't afford to have an outsourced due diligence
process anymore when its LPs' and customers' trust that is increasingly at
stake. First-hand verification of operational and financial metrics should
outweigh other factors, including getting influenced by the names of other
investors on the cap table. Above all, private investors will have to shoulder
the responsibility of bringing credibility to the start-up ecosystem by
bringing tighter oversight and enforcing stricter corporate governance,
especially in the wake of Theranos and FTX wreckage.
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5. How it Will Impact the Crypto Industry
The fast-moving FTX-Binance saga has shaken market sentiment for retail
investors and is a serious setback to crypto's journey toward becoming a
legitimate asset class. That said, it is unlikely to impact venture investment
in the crypto space in the long run as VCs' investment horizon is long
enough to brush aside the impact of such fallouts. Regardless, the collapse,
along with a slew of previous insolvency events such as that of Terraform
Labs, Three Arrows Capital, and Celsius Network, will set off a series of
changes in the crypto industry.
Multiple centralized and opaque crypto lending platforms will likely vanish
away as consumer trust erodes. The event, which marks the stunning fall of
SBF's vast crypto empire, is also likely to bring in more opportunities in
decentralized finance and leaves an opportunity for companies working on
sustainably building real value.

6. Investors are likely going to gravitate toward Defi, which appears to be the
future with logic embedded in the code, as highlighted by John Wu of Ava
Labs. In that sense, the debacle could ultimately prove to be a silver lining
for the industry as it ushers in the maturation of the industry with frothy
players succumbing to market realities. Additionally, the crisis could
underline the importance of blockchain intelligence companies detecting
crypto-related fraud and financial crime, with digital assets and the
mainstream financial system becoming increasingly intertwined.
Most importantly, there is an urgent need for more regulation of
centralized crypto platforms. Additionally, the onus also lies on surviving
crypto firms such as Binance to proactively adopt tighter financial and
regulatory controls to regain lost investor and customer trust.
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7. Ref: https://www.sganalytics.com/blog/ftx-fallout-calls-for-
reset-of-crypto-industry/