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Token2049: Experts Discuss Distressed Crypto Assets

The past year has not been great for crypto.

First, the Terra-Luna ecosystem collapsed, bringing down one of the largest stablecoin projects in existence. Other projects began to collapse, mostly citing their exposure to Luna, or being impacted when their creditors were exposed to Luna. Then, 3 Arrows Capital, one of the most successful hedge funds in crypto, shuttered their offices, having taken a large loss on their exposure to Luna as well.

Then in November, FTX collapsed. The company was seen as a cornerstone company in one of the most important industries for crypto- that of crypto exchanges.

So to no-one’s surprise, the state of distressed crypto assets was a hot topic at this year’s Token2049 conference in Singapore, with experts including lawyers and founders being invited to weigh in on the issue.

The fallout from FTX

Wassie Lawyer, a consultant at Allen and Overy GVRN, pointed out that part of the reason why the fallout from FTX was so widespread was that SBF had, prior to the crisis, been seen as a saviour figure by many people in the industry.

After all, as the fallout from the Luna crash spread like wildfire, SBF was busy bailing out companies and speaking to regulators. So when FTX was found to be insolvent, it came as a shock to many.

“I was getting calls from very pissed off people every day. And the difficult part was that FTX came at a point where people thought that the industry was recovering. The Luna and 3 Arrows Capital was blowing over, and FTX was bailing people out. Then out of nowhere, FTX itself was found to be insolvent, when it had been portraying itself as compliant with regulation.

SBF was a trusted figure, and people trusted what he said. But nine months on, everyone now sees him as a fraud. The main result of these was to destroy a lot of consumer trust in the industry. If Luna hadn’t crashed, we might not have had FTX as well.”

Khing Oei, a senior advisor for crypto at Attestor, also pointed out the irony that while crypto was supposed to be a trustless system, the global ecosystem is not quite there yet, since much of the fallout that ensued from the Luna and FTX was due to an excess of trust in the ecosystem, especially with regards to the rampant practice of providing unsecured loans to companies or individuals that seemed to be in a good financial position.

There is a severe lack of trust in the system

While it should come as no surprise that people in the crypto space do not necessarily have high trust for those outside of it, and vice versa, this can be problematic when it comes to dealing with distressed crypto assets.

Asher Genoot, co-founder and president of the US Bitcoin Corp, which forms part of the Fahrenheit Consortium that is now dealing with the aftermath of the Celsius bankruptcy, pointed to the mismatch between crypto native founders and bankruptcy lawyers, and the fact that very often, it is consumers and customers who suffer from it.

“The people who understand crypto are not the same people who understand bankruptcy, and the people who understand bankruptcy are often not the same people who understand crypto. And to make things worse, these two groups of people don’t trust each other at all! Their priorities are often misaligned from each other, and that creates problems.

People who understand crypto would most of the time like to take what’s left after a collapse and put it back out onto the market, while creditors would often rather just accept the drawdown and withdraw what’s left of their investment.”

Additionally, Genoot argued that while FTX’s new management has done a decent job with the exchange since SBF’s resignation, rebooting the exchange might still prove to be a monumental task. The company still needs to rebuild its reputation, and find someone who is capable of rebuilding and managing the exchange if it does intend to reboot.

The light at the end of the tunnel

Genoot also called for a greater degree of checks and balances in the industry given what has happened over the past year, a proposition that the panellists all agreed was necessary.

Lawyer, in particular, criticised the practices and attitudes that were present during the previous bull market, saying that during the time “everyone was rushing to buy in, and people were betting life savings on Luna despite the warnings.”

“Projects would raise funds quickly and without due diligence being done because investors wanting to do their due diligence was almost immediately a dealbreaker. And the next investor waiting outside the door who was willing to invest without the due diligence being done would be up 5x on their investment, while you would be sitting there without a deal and without any profit.”

Now, he says, the industry is more cautious about the projects that they invest in. Lawyer notes that nowadays, companies are expected to agree to due diligence checks, and have to ensure proper internal controls and corporate governance.

However, he cautions that not everyone is on board with this, and that there may still be remnants of the industry’s old flaws lurking.

“Crypto guys are used to fast yields, and we always want to find the fastest growing projects. These aren’t always going to be the ones with the best corporate governance, and in fact quite often the fastest growing companies are the unregulated ones with loose governance. Companies like 3AC and Terraform Labs are key examples.

I was asking my friend how Anchor Protocol works, and how it actually manages to generate 20 per cent interest. And his answer was that it doesn’t work and that no one knows where the yields come from. But 3AC is backing the project, so are you really going to go and bet against 3AC?”

As such, the panellists noted that the caution that is currently present within crypto should not be taken for granted, if the industry hopes to avoid future collapses like Luna, 3AC, and FTX.

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